Clients sometimes ask Zainab Williams to open a registered education savings plan for them because they think it’s just a savings account to save money for their child’s post-secondary school expenses.
The Milton, Ontario-based founder of Elleverity Wealth Management has to explain that an RESP is primarily an investment account that protects gains from heavy taxes.
A while ago, when education was cheaper and factors like rent made up a smaller part of the student budget, it was easier to ignore misconceptions like these.
But today, financial advisors say skyrocketing inflation and unchanged caps on RESP benefits mean it’s more important than ever for parents to own aggressive growth-oriented stock portfolios while saving for their children’s education.
Let’s take rent as an example of rising costs. This is one of the biggest expenses for students studying away from home and has grown rapidly over the last three years. Rentals.ca reports that the average rent for a two-bedroom apartment in Toronto rose to $3,411 in September, from $2,655 three years ago.
There were also significant increases in student cities. The average monthly price of a two-bedroom apartment in Waterloo, Ontario is now $2,543, compared to $1,708 three years ago. That’s more than $10,000 in additional rent costs per year.
At the same time, Ottawa grants under the RESP program have remained unchanged for years. The Canada Education Savings Grant, which automatically matches 20 percent of your contributions each year to a maximum of $500, has maintained that maximum amount unchanged for almost 15 years. During this time, the average tuition fee for an undergraduate degree in Canada increased by 51 per cent, from $4,524 in the 2007-08 school year to $6,834 in 2022-23.
Matt Morrish, a financial advisor at BlueShore Financial in British Columbia, says leaving RESP benefits largely untouched for many years weakens their effectiveness, and increasing the equity ratio of your RESP investments is one way to make up the difference.
Ms. Williams tries to steer her clients into more aggressive holdings, but she said taking on risky investments is one thing, ensuring you stay calm when an accident occurs is another.
“Once the truth sets in, we may not have the courage to see our portfolios decline without understanding that these are just turbulent times,” Ms. Williams said.
He tries to explain losses in numbers rather than percentages to help his clients fully understand the risk. He asks his clients questions like: How do you think you’ll react if your account goes from $1,000 to $800?
But Jason Heath, a financial planner at Objective Financial Partners Inc. in Toronto, said he has seen clients hold on to risky investments for too long.
“I had a client who had a bitcoin ETF and something else speculative in their RESP, and their kids were in high school,” said Mr. Heath, who said risk should be reduced as your children approach college age. .
He also noted that, unlike other investment accounts, losses on an RESP cannot be claimed for tax purposes.
“So you also have to be careful not to be overly speculative based on the time horizon.”
One way Ms. Williams recommends is to use a target date fund, which automatically changes your asset allocation as you get closer to the date you expect to use your RESP money. Financial planners and institutions can set up such investments, and they usually start with 90 percent diversified divided into stocks and 10 percent into bonds.
For self-directed investors, Mr. Heath said it’s important to start adjusting your RESP portfolio as your children approach high school.
“I find myself talking to people about mitigating their stock exposure… I find people forget about that and are used to investing like registered retirement savings plans,” Mr. Heath said.
“They may be in their 40s and 50s and have some time left for their own savings, but the time horizon for an RESP is rapidly narrowing.”