Happy Father’s Day! Today seems like a good day to talk about the changes I plan on making to reboot our kids’ RESP portfolio.
For years, I’ve invested our RESP contributions into TD’s e-Series funds – contributing $416.66 per month and then buying one of four e-Series funds (Canadian, US, or International equities, plus Canadian bonds). Rather than rebalancing, I’d simply buy the fund that was lagging my target asset mix. This kept the portfolio in balance and relatively easy to manage.
I’ve often considered RESPs to be like a practice run for managing your retirement accounts. You’ve got a condensed timeline to contribute (17 years or so). You need to consider de-risking the portfolio as you get closer to accessing the funds. And, you need to manage withdrawals over a period of, say, four to 10 years.
That means making difficult decisions around market timing, changing asset mixes, and tax efficient withdrawals. It’s not easy.
Further complicating things is that we have one family RESP portfolio with two beneficiaries of different ages. Our oldest daughter’s share of the pot should be a bit more conservative than my youngest daughter’s, but all of the funds are lumped together.
A lightbulb went off when PWL Capital’s Justin Bender released a video on how to invest your RESP. Justin brilliantly explained how to set up your family RESP in such a way that you can separate out each child’s share of the funds while still keeping costs low and the portfolio easy to manage.
The TL;DW version is that you’d use an all-equity ETF, a short-term bond ETF, and eventually a high interest savings ETF from different ETF providers (say, Vanguard and iShares) for each child to separate their share of the portfolio. In fact, it’s very similar to the two-fund solution for investing in retirement that I wrote about recently.
So, I’ll just change my oldest daughter’s name to Vanguard, and my youngest daughter’s name to iShares as I attempt to reboot their RESP portfolio.
Rebooting the RESP Portfolio
It’ll take a few steps to make the appropriate changes in their RESP.
First, I need to determine the proportion of contributions, CESG, and investment growth assigned to each child. To do this, you can call the Canada Education Savings Plan hotline at 1-888-276-3624 and get a Statement of Account for each beneficiary. Have their Social Insurance Numbers handy.
Second, I’ll need to sell off the TD e-Series funds and then purchase the new ETF portfolio for each child.
Finally, I’ll need to stop contributing $416.66 monthly and instead contribute one lump sum of $5,000 in January. That limits my rebalancing efforts to once per year and also keeps transactions costs low since I’m switching from no-commission e-Series funds to potentially $9.99 per trade ETFs (if I keep this account at TD Direct).
For all of these reasons it makes sense to start this portfolio reboot in January, 2024.
The Current TD e-Series RESP
Here’s what the current RESP portfolio of ~$92,000 looks like:
- TDB900 – Canadian Equity – $26,530
- TDB902 – US Equity – $28,815
- TDB911 – International Equity – $29,720
- TDB909 – Canadian Bonds – $6,935
As you can see, the current portfolio is way lighter on bonds than it should be for our kids’ ages. That’s partly the reason for this portfolio reboot – I know we need to de-risk the RESP as our oldest daughter is just 3.5 years away from making her first withdrawal(!).
I’m okay with that. You’ll see that Justin Bender’s proposed asset mix is much more conservative than I think most people would expect. But that’s because the lifetime of this account is actually much shorter than we think. Even the most aggressive investor in their own retirement account has to admit that it doesn’t make sense to hold a large portion of equities when you’re close to making significant withdrawals.
The newly rebooted RESP Portfolio (as of January 2024)
Remember, I’m going to contribute $5,000 in January, 2024 to front-load their contributions for the year. That will earn $1,000 in CESG. I’ll also assume some investment growth between now and the end of the year, bringing up the portfolio balance to $100,000.
I’ll assign 56% of the portfolio to my oldest daughter (now named Vanguard – sorry!), and 44% of the portfolio to my youngest daughter (now named iShares – again, sorry!).
Vanguard’s share of the pot will follow the age 14 glide path and look like this:
- VEQT – Global Equities – $11,200 (20%)
- VSB – Short-term Bonds – $44,800 (80%)
iShares’ share of the pot will follow the age 11 glide path and look like this:
- XEQT – Global Equities – $17,600 (40%)
- XSB – Short-term Bonds – $26,400 (60%)
Once Vanguard approaches university age I’ll add a new high interest savings ETF to the mix, which will cover at least that year’s expected withdrawals.
This change will represent a significant “de-risking” of our kids’ RESP portfolio but one that has been largely overdue.
Readers, if you manage an RESP I’d love to hear your thoughts on this proposed change.
This Week’s Recap:
A few weeks ago I asked if outsourcing was the key to happiness. Some interesting responses!
I also explained how investors can control their urgency instinct. Don’t just do something, stand there!
Earlier this week I looked at a simple way for retirees to manage their investments using just two ETFs.
Is this the end for attainable home ownership in Canada? Sadly, that seems to be the case in some parts of the country.
More on the increasingly narrow path to owning a house, without becoming house poor.
Meanwhile, unaffordable Toronto and Vancouver are ranked as top cities for young people to live and work in.
The Globe & Mail’s Erica Alini explains why living with your parents in your 20s is becoming common financial advice (subs).
Investment industry lobbyists have fought hard against measures such as banning embedded commissions and providing a fiduciary standard of care, largely claiming this would drive advisors out of business and lead to an “advice gap” for regular Canadians. Preet Banerjee rightly argues that there isn’t so much an advice gap as there is a quality-advice gap.
PWL Capital’s Peter Guay wrote an incredible guide for families on how to pass on the cottage to the next generation.
Millionaire Teacher Andrew Hallam on why you find it hard to invest (plus, what makes the best investors).
Of Dollars and Data blogger Nick Maggiulli claps back at finfluencers, saying if you’re so rich, why are you so desperate?
“After all, if you’re so good at building wealth, why don’t you just go and build more for yourself instead of selling me on how to build it?”
Should you buy a covered-call ETF? You could, but you might be giving up as much as 9.5% in annualized returns.
What do to with a spousal RRSP at age 71? Converting the account to a spousal RRIF is a common option, but be aware of the income attribution rules.
A lot of research around retirement spending strongly suggests that spending declines as we age (go-go, slow-go, and no-go years) for reasons related to declining health and waning interest in travel and hobbies. But, as Michael James on Money has long argued, another reason for this is because of bad spending plans in the early retirement years that force spending cuts later in retirement.
Why buying a car has never been more expensive, assuming you can even find one.
Travel costs have also soared, but travel expert Barry Choi explains how loyalty programs can still help.
Finally, economist Tim Harford’s take on the cheese, the rats, and why some of us are poorer than others.
Have a great weekend, everyone!