Understanding RESPs: Jennifer’s Strategic Education Savings Plan for Her Children
As is true of many professional couples, Jennifer and her partner delayed having children and now approaching 40, they have two daughters under the age of three. Her husband is obsessively interested in finances and pontificates endlessly about “risk adjusted rates of returns” and other arcane jargon that mean nothing to her. However, she is determined to provide for her daughter’s education and wants an intuitively simple plan. She understands that an alternative approach involves using her corporation, but at present, hopes that an RESP (Registered Education Savings Plan) will make a strong start that she can manage.
We discussed her goals and reviewed how the Canadian RESP rules work. In short, if a contribution is made on a child’s behalf, the federal government will contribute up to an annual maximal annual sum of $500 with each plan capped at a lifetime maximum total contribution of 50K. The funds can be invested however the parents wish including the CST (Canadian Scholarship Trust) which has been around for over six decades devoted entirely to RESPs. More than three decades ago, I purchased CST plans for each of my children. Today, there are many more options.
Jennifer made it clear that she preferred a DIY approach where she could be confident exactly how things were progressing. Recognizing the benefits of compounding returns over time, she opted for a fast start with a 5K initial deposit for each daughter; when combined with the matching $500 per year annual federal contribution, by the end of year two, she had 11K in deposits for each child with a plan for her to add 2.5K per year after that (3K annually with the continuing $500 federal contribution).
She opened RESPs through her local bank and directed them to invest the rapidly growing capital in exchange traded funds again avoiding non-Canadian assets where dividends would be subject to withholding taxes. Each year, she prints out a simple statement:
Amount at the beginning of the year.
Amount invested that year (usually 3K).
Total sum at the end of the year with calculated rate of return that year.
Comparative rates of return of the Toronto exchange and the S/P 500. (US market)
Based on the results, she then decides where to invest the new funds every year.
KEY CONCEPTS:
There is no reason for investing to be complex.
Any good investor or advisor should be able to explain the performance of your investments in simple clear language readily understood by a reasonably bright ten-year-old. Hiding behind jargon pretending that these ideas are too complex for a fellowship trained physician should be concerning; insist on some version of Jennifer’s four-point review above and if not provided, consider finding better more transparent advice elsewhere.
Real-Life Insights for Education Planning
Jennifer's strategy highlights effective ways to plan for children's education:
RESP Benefits: Utilize RESP advantages, including government contributions and tax-deferred growth.
DIY Investment Approach: Manage investments independently for clarity and control.
Compounding Growth: Start early to harness the power of compounding for long-term financial growth.
Investment Transparency: Regularly review and analyze investment performance to optimize returns.
Benchmark Comparison: Compare investment performance against relevant benchmarks to inform future investment decisions.
Jennifer's proactive approach to education savings exemplifies the benefits of starting early, leveraging government incentives, and maintaining investment transparency. By adhering to simple financial principles and monitoring performance regularly, parents can effectively secure their children's educational futures.