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RESPs: Start early, save $10,000?

When should new parents start saving for their childs education?
The answer, as just about any financial advisor will tell you, is as soon as possible.
Thats probably not news to anyone. Early investing keeps families on track with a good financial plan, and generates more money in the long-term. What might be surprising is just how much more money.
First, the basics: the most popular way for Canadians to save for education is a Registered Education Savings Plan (RESP). You can contribute a maximum of $50,000 to an RESP over its lifetime, and you should talk to a financial planner about how best to set one up for your own familys needs. For the purposes of this exercise, we chose a standard bank-managed RESP with an annual return of 5%. (The rate could be higher or lower, but our own financial advisor, Judith Cane of Ottawas Antara Financial Group, advised us that over a long timeline, 5% is a reasonable rate of return to expect.)
The government will contribute 20% of what you contribute, up to $2,500. Meaning if you contribute $2,500 a year, the government will contribute $500. Thats the max.
Lets suppose a family has a newborn child and a combined household income of $80,000 a year. The table below indicates what theyll need to contribute to make $50,000 by the time their newborn is college-age, depending on when they start saving.

Starting age Goal ($) Annual personal contribution ($) Total personal contribution ($) Total government contribution ($) Total accumulated interest
0 50,000 1,450 25,810 5,220 17,505
5 50,000 2,300 29,500 5,200 12,620
9 50,000 3,950 35,150 3,600 8,750

Pretty simple. The earlier our hypothetical family starts, the more interest is generated. Government contributions go up and annual payments go down. Most importantly, look at the last column: the total personal contribution over the lifetime of the RESP goes way down.
Delaying just five years means almost $4,000more in personal contributions over the lifetime of the RESP, and significantly steeper annual payments. Waiting nine years means almost $10,000more, and a whopping $3,950 annual contribution.
By contrast, starting at birth meant means that only about half the eventual value of the RESP was contributed by the family the rest was interest and government contributions.
There may be good reason to defer opening an RESP, especially if theres an immediate financial crisis, but the bottom line is start now, if you can. $10,000 can buy a lot of things from an inexpensive car to tuition at a better (or at least pricier) school.
Low-income families can also look into low-income learning bonds, an under-utilized program the federal government introduced in 2004. The government will cover the modest cost of setting up an RESP, pitch in a $500 grant at birth and contribute an extra $100 per year until the childs 15th birthday. Thats more than $2,000, before any return on the investment.