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Managing Your Money
Education Funds and how to make them work best for you
September 1, 2003
You want the best for your children and that includes an education that will give them the most advantageous start in life. According to Statistics Canada,* the average university graduate earns almost twice as much as someone who has a high school education. But the cost of a post-secondary education has risen dramatically. Statistics Canada also reports that the average national tuition for an undergraduate university student increased by 135.4 per cent between 1990-91 and the 2002-03 academic year - and that tuition fees have risen more than six times faster than the 20.6 per cent inflation rate over the same period.
And that's just for tuition, without books, room and board, and transportation. If your son or daughter must live away from home while attending college or university, his or her living costs will soar and a part-time job may be necessary to make ends meet. In fact, in 1999, the Canadian Undergraduate Survey Consortium reported 50 percent of students worked an average of 18 hours a week, in addition to attending class and studying. But a job will very likely cause academic work to suffer and having to work certainly impacts the overall university experience.
Projections show that by the time today's newborns and toddlers are ready for university, the total cost of a four-year degree - including tuition, books and living expenses - could easily exceed six figures. That's why so many parents are contributing to a Registered Education Savings Plan (RESP) to help offset the rapidly rising cost of a post-secondary education. Good thinking! An RESP allows anyone - parents, grandparents, aunts, uncles, even friends - to contribute up to $4,000 per year in total for each child, with a lifetime maximum of $42,000. All RESP dividends, interest and capital gains are tax-deferred while they're in the plan and when the child withdraws the money, the plan income or growth is taxed at the child's tax rate, which usually means significant tax savings.
The Canadian Education Savings Grant (CESG), provided by Human Resources Development Canada, adds another 20% on the first $2,000 contributed each year, which could add as much as $7,200 in extra investment capital over time. Unused grant room can be carried forward until the end of the year a child turns 17, so you can make up for lost time if you're unable to contribute in a given year. (Some restrictions apply for children turning 16 or 17 in a given year.) And there are no foreign content limits, so you can take advantage of investment opportunities anywhere in the world.
Choosing the right RESP investments depends on a number of factors including your overall financial goals, time horizon and tolerance for risk. Correct asset allocation is the key. That means creating an RESP investment portfolio that incorporates an 'asset allocation strategy' of investing your contributions in the range of geographically diversified asset classes that best matches your risk/return requirements. Here are some general guidelines for choosing a portfolio of RESP investments that match your needs:
Number of years from making withdrawals Higher risk tolerance Lower risk tolerance Investment strategy
8 or more You have time to seek growth An aggressive portfolio that provides high levels of long-term capital growth
You have time, but want to be conservative A moderately aggressive portfolio that provides a high level of long-term capital growth but also includes some fixed income investments
4- 8 years There's still time to seek moderate growth A moderate portfolio that combines long-term capital growth with modest income
You want to be a bit more conservative A moderate conservative portfolio that provides a high level of income and moderate long-term capital growth
3-4 years With less time left, it's important to protect your investment A conservative portfolio that provides a high level of income with limited capital appreciation.
You should also select RESP investments that allow you to switch as your financial goals change. Some investment organizations offer portfolios (usually called a 'fund of funds') consisting of a number of mutual funds which provide RESP investors with a 'one-stop' solution to RESP investing that meets individual needs. But regardless of the RESP investments you choose, one thing is certain: the sooner you start, the easier it'll be to afford the university or college of your child's choice. A professional financial planner can help you choose the best RESP investments for your child and your financial goals.
* Statistics Canada data as reported in the Toronto Star, August 22, 2002
This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.
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