Turning RESP goals into reality starts with good advice

Text transcript

Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves. 

* * * 

Michael Keaveney, client portfolio manager, CIBC Asset Management 

* * * 

Saving for a child’s education is one of the most common, and it’s one of the most important goals that Canadian families tell us they have. 

There’s a potentially long timeframe, and there’s the general busy-ness of raising a young family. So it might be tempting to put off addressing planning for education savings. But with the potential dollar amounts involved — maybe into six figures in the future, with inflation in general, and with credible evidence that post-secondary-related costs can grow at or in excess of general inflation – the prudent thing to do is to contribute early and often. 

So time horizon, both in the savings phase and the spending phase, and inflation consideration specific to education — tuition costs, book costs, supplies, food and residence — are all factors that need to be taken into account. 

Now, given those potential costs, we actually think most investors will need to take on some investment risk exposure to meet the savings goal. And that means, on average, a balanced approach with a mix of equities and fixed income. But that long time horizon — maybe from when a child starts as a baby, to starting university, 18 or 19 years — that sounds like a long time, but eventually it becomes a short time horizon. And we think that thought needs to be put together, and given to how that balance of investments — that split between stocks and bonds — might need to change as time passes and a child gets closer to starting post-secondary education, and indeed, while they’re in that post-secondary education phase when the bills start coming due. 

* * * 

The Canada Education Savings Grant (CESG) is a wonderful vehicle available to Canadians. And that CESG pays an amount of about 20% of the annual personal contributions that one can make to all eligible RESPs for a beneficiary, to a maximum of about $500 a year for each beneficiary. And then there’s a lifetime limit of $7,200. 

There’s also some complications, some limited catch-up provisions if you didn’t receive the maximum grant in a previous year. But keep in mind, there’s also a lifetime contribution limit, currently set in 2025 at about $50,000 for your overall RESP contributions. 

So in a sense, there could be some benefit to spreading out your contributions across a multitude of years, so you maximize the government grant in each individual year, and then get up to that $7,200. But if you’re in the privileged position to be able to make lump-sum contributions that exceed, or maybe even far exceed, what you’d otherwise be entitled to receive in the form of a grant in any given year, then I think speaking with a financial advisor becomes even more important. 

A financial advisor can help structure the assets that a client might have within different types of accounts, so that they might be able to both benefit from compounding a lump sum that’s in their possession earlier, but then steadily relocate those assets into an RESP account to actually get the grants that are available to them in the maximum form. 

Of course, having the lump sum in the first place might also have some implications for the types of investments that somebody might need to make to meet their long-term goals. So it’s not an isolated or simple question, but once again, a perfect opportunity for a financial advisor to step in and provide a tailored solution. 

* * * 

I think it’s prudent to think that there should be some sort of shift in the investments that one is making over time, given what I’ve already said. 

There are many considerations and various circumstances. But let’s say we’re dealing with a common situation: The child is very young — perhaps even a baby — and the parents have made the wise decision to begin now and are starting from zero, and making regular contributions. We think in the beginning and for a number of years, the underlying investment strategy could be focused squarely, entirely or dominantly on equity exposure. 

However, as we come to the last few years before those bills for tuition and residence start coming due — and maybe a sizable amount has been saved up — we think it’s prudent to start derisking, moving to more fixed income and moving to more conservative equities within whatever equity exposure you have remaining. Certainly, once we are in the bill-paying phase, that’s when the child is in that postsecondary education, whether it’s a two-year program or a four-year program or things like that, those bills start coming due each semester. And it’s important to be avoiding undue investment risk by investing, in our view, in a very focused manner into fixed income and short-term instruments. 

In our view, that expenditure phase in particular is not the prudent time to be taking significant short-term risks. So there’s absolutely a time to move to more conservative investments. It starts before the child starts their post-secondary journey. And certainly in that post-secondary journey itself, that’s the time to be taking very little, if any, investment risk. 

* * * 

We do have to be concerned about what our asset allocations are for the ultimate success of these types of programs — wherever we are in our journey — but it’s particularly important at the beginning. And one mistake I think could be common is thinking when you first set things up, ‘I’ve set up an RESP, and I’m making contributions, so that’s it. I’m all set.’ But what you’ve invested in matters. And given maximum contribution limits versus the likely funding requirements in the future, the return you end up getting is going to have to do some of the heavy lifting if you want to have success. 

So in many ways, the asset allocation advice here is similar to advice and recommendations related to any long-term goal, analogous to retirement, as if you were saving for retirement. Keep an eye on the long term, especially if the child is still some years away from going to school. 

So stay invested as long as your time horizon is still very long. 

To give you a personal example, my own two children are going through university now, and my wife and I have had RESP plans in place for them basically since they were young babies, since they were born, and they’re of great use to us now. My daughter was born in 2003; my son was born in 2005. Think about the changing market conditions and upheaval over that time, or really, any 15- to 20-year period that we’ve seen and are likely to see going forward. 

For example, historically, in that time period, we had a global financial crisis in 2008. [It] could have been very tempting to move to the sidelines at that time, but we didn’t. Now, mostly because I had the benefit of being a student of financial history, and I knew and was counseling others at the time to remain invested for their long-term needs. 

But we need to transition to more conservative investments as the time gets nearer for folks to actually need the money. Because, as I’ve said, the long term eventually becomes the short term. 

And as I think about it, for many parents, saving for a child’s education might actually be one of the first serious investment goals they take on as maybe a young family. They might actually feel ill-equipped to keep up with the markets. But I think it’s prudent to say that they don’t have to know everything. 

If they focus on what they can control, which is starting early and making regular contributions, and then they obtain sound financial advice along the way, they are set up for success. 

* * * 

There’s a Lifelong Learning Plan program that the federal government provides that allows a person to withdraw up to $10,000 in a calendar year from their RRSP. But it’s only for their own or their partner’s education or training. So that one isn’t for your children, and it’s actually also limited to a total withdrawal of $20,000 currently.  

Tax-Free Savings Accounts — or TFSAs — might also be used. Now keep in mind, there’s no specific education savings grant available for amounts that you put directly into a TFSA. To take advantage of that, you’ll need the RESP. But amounts withdrawn from a TFSA are usable for general purposes, and available without taxation. So certainly, that often is a source of education savings for a lot of families, and TFSAs could certainly be considered as part of an education financing strategy. 

Now, these are all locations, right? TFSAs, RESPs, any kind of investment account, they’re really just boxes, and there’s many options there. And a great opportunity, once again, for a parent to get sound advice tailored to their individual circumstances. 

But more broadly, beyond the location of the assets, delving into softer areas, one might also consider grandparents, extended family, as well as a child’s own earnings from part-time jobs as potential vehicles to consider for meeting education financing goals. 

Saving for education is one of those goals that a lot of families consider to be an extended family endeavour, for those of us are fortunate enough to be able to get assistance from close relatives who want to help. 

It’s also potentially an opportunity for the children themselves, as they get older, to make a contribution to their own success and promote some financial literacy.

* * *

This program is intended for Advisor Use Only. The views expressed in this material are the views of CIBC Asset Management Inc., as of the date of publication unless otherwise indicated, and are subject to change at any time. CIBC Asset Management Inc. does not undertake any obligation or responsibility to update such opinions. This material is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice, it should not be relied upon in that regard or be considered predictive of any future market performance, nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this material should consult with their advisor. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, or other similar wording. In addition, any statements that may be made concerning future performance, strategies, or prospects and possible future actions taken by the fund, are also forward-looking statements. Forward-looking statements are not guarantees of future performance. These statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results and achievements of the fund to differ materially from those expressed or implied by such statements. Such factors include, but are not limited to: general economic, market, and business conditions; fluctuations in securities prices, interest rates, and foreign currency exchange rates; changes in government regulations; and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors carefully. CIBC Asset Management Inc. does not undertake, and specifically disclaims, any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise prior to the release of the next management report of fund performance. Past performance may not be repeated and is not indicative of future results. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc. ^® The CIBC logo and “CIBC Asset Management” are registered trademarks of CIBC, used under license.