In a Globe and Mail column last year, Rob Carrick took parents to task for not saving enough for their kids’ education. He said that parents talk a good game – 82 percent want their children to attend University – but the numbers suggest they’re not backing it up with financial support.
In a survey of 1,538 young people aged 15-33, 60 percent said they received nothing from RESPs. That’s a shame because RESPs are the second best deal going today (the first being an employer-matching RRSP).
Where else can you get a guaranteed 20 percent return on your money? That’s right, the government kicks-in 20 cents for every dollar saved in an RESP, to a maximum of $500 per year – or $2,500 saved – with a program called the Canada Education Savings Grant (CESG).
Think of RESPs as insurance – protection from the chance that your debt-ridden adult children will have to move back home after graduation because they can’t afford rent.
I get it – there are a lot of competing priorities for parents and so putting your child’s future education needs ahead of present needs such as mortgage payments, transportation costs, daycare expenses, not to mention your own retirement savings can be a difficult choice.
But too many parents have the mindset of, “I didn’t have any help and I turned out just fine.” If you have the means to help your children – not just with a blank cheque but also with guidance and support – then why not give them a leg up?
Summer jobs don’t pay nearly enough to cover the cost of tuition, books, and room & board if you’re living away from home. And, sure, you can work part-time during school, but expect to struggle a bit more in the classroom.
Here’s what it costs to attend University in Lethbridge, Alberta for just one year (two semesters, eight months).
- Tuition and Fees (10 courses per year) – $5,300
- Medical and Dental Plan – $250
- Books and Supplies – $1,250
- Living Expenses – $3,800 to $8,000
- Total – $10,600 – $14,800
At the top-end, a four-year degree costs close to $60,000 in today’s dollars. In 18 years, expect those costs to exceed $100,000!
So how can parents help? If you have the means to put away $200 per month from the time your child is born until he or she turns 18 you’ll end up with $83,808 saved. That assumes 5 percent annual growth, plus the $480 CESG that you’ll get from the government each year.
Related: How to get your RESP account started
I realize that saving $200 per child per month is no small sacrifice for most families. Heck, I’m not even putting that much away yet for my kids’ RESPs. The good news is that you can catch up one year of contributions each year, even after your kids get older. For example, in a few years I might want to contribute $5,000 per year into an RESP and then I’ll get $1,000 worth of matching grants. The lifetime CESG grant maximum is $7,200 per child.
Mr. Carrick suggests that parents put their own retirement savings on hold for a while so they can build up some RESPs for their kids. I say that it’s okay to start small with RESPs – $50 or $100 per month as soon as your child is born. Use the money that you get from the Universal Child Care Benefit to start an education savings plan and then add to it as your budget allows.
When our first child was born in 2009, we immediately opened an RESP for her and began saving $50 per month. We bumped that up to $100 per month the following year and then, when our second child was born in 2012, started saving a total of $200 per month.
This year, with the new enhanced Universal Child Care Benefit, we’re getting an additional $120 per month ($60 per child) and so we’ve decided to increase our total RESP contribution to $300 per month.
How is our plan working out so far? We invest the RESP contributions in TD e-Series funds and today the account is worth just over $14,000:
|GIC / Term deposit||$2,694.11|
|Canadian index (TDB900)||$3,573.51|
|U.S. index (TDB902)||$3,987.81|
|International index (TDB911)||$4,018.36|
If we continue at this contribution rate, and we assume 5 percent annual growth, the RESP portfolio will be worth close to $97,000 in the year that our oldest child turns 18. While that may not be enough to cover the full cost of education and expenses (for two) in 2027 dollars, it’ll be enough to give our children options when it comes to choosing their post-secondary opportunities.
Parents – the most important step is the first one: open an RESP account and start off with small monthly contributions. You’ll get access to the Canada Education Savings Grant and Canada Learning Bond (other provincial grants may also apply).
Bump up your contributions as your income affords it, but don’t feel you need to max out your contributions ($2500 annually, per child) in order to make a difference. As my example above shows, even $100 or $150 per month adds up to big savings over 15 – 20 years.
Finally, avoid group RESPs and Scholarship Trusts – they’re loaded with restrictions and fees. These types of education savings plans are frequently sold at trade shows and aggressively marketed over the phone and door-to-door. Do yourself a favour and set-up an RESP plan through your bank.