Add RESP planning to parental duties
OTTAWA – You studied which car child seat to buy, weighed the choice between cloth and disposable diapers with careful calculation and researched more about strollers than you’re willing to admit.
Now, investment advisers say you need to approach RESP investing the same way for your child because graduation and pricey bills for tuition, books and other school-related costs will be upon you sooner than you think.
Janet Brick, manager of the RESP Initiative at the Royal Bank, said sleep-deprived new parents might not be looking too far beyond the next feeding or diaper change, but they need to.
“Even though you’re sleep deprived, put the same level of due diligence around choosing an RESP as you would a car seat,” Brick says.
“It is going to last a lot longer than the car seat, but it will provide protection in the same way. It needs to be a good fit.”
While an RESP is similar to other investment accounts such as RRSPs, in that you should have a plan that takes into account your goals as well as your tolerance for risk and volatility, there are differences.
Unlike a retirement savings account, the need for the money will usually be much sooner than retirement for most parents. Toddlers today may be off to college in 18 years, while retirement for new parents may be three decades or more away.
As well, the money will be spent more quickly with the account likely depleted within four or five years. A retirement savings account may have to last 20 or 30 years.
Shelley Smith, a financial planner at TD Wealth, says the sooner you start, the better.
“The cost of education is rising, if your child is going to go to school it can be from $10,000 up to $20,000 a year if they’re staying in residence,” she says.
“This can be a significant burden.”
When starting out, balances in an RESP account are likely small due, making holding a diversified portfolio of stocks and bonds difficult.
Mutual funds can make it easier to hold a diversified portfolio and will put small regular contributions to work immediately, instead of waiting until you have enough to buy a particular stock or bond.
Target date funds, which some firms offer for RESP accounts, automatically adjust their asset mix to become more conservative as graduation approaches and the post-secondary education bills loom.
“Take a look at what you are comfortable with in terms of your own personal risk tolerance,” Smith said.
“It’s not just a one-time conversation when you open up the RESP. Make sure that, when you are working with someone, that person is going to constantly come back to you.”
You can hold individual stocks, but you will have to weigh the fees to buy and sell relatively small numbers of shares at first, when the account balance will likely be relatively small, against the fees charged by mutual fund managers.
In addition to the investment choices, do-it-yourself investors need to manage the investment mix and the income stream from any holdings in the portfolio.
“If you get a dividend or get a bond interest payment, is it going to be reinvested and compound for you right away? Or is it going to be sitting there in savings earning next to nothing?” Brick said.
“It depends on how much time you want to put into monitoring the portfolio.”
Brick says there are alternatives for saving for a child’s education, such as using your Tax Free Savings Account or setting up a trust account, but the matching grant from the federal government makes RESP accounts very attractive, at least for the first $2,500 every year.
The $500 annual maximum from Ottawa gives an immediate 20 per cent boost that is unlikely to be found with other forms of saving. For low-income households, the amount can be more, depending on how much you make and contribute.
And even if you can’t max out the matching grant, 20 per cent on whatever you can save is better than nothing.
Even if your child is 12 or 13, it isn’t too late. You might not be able to max out the matching grant from Ottawa, but some of it is better than nothing.