# How much are you saving for your childs education?



## Addy (Mar 12, 2010)

Our daughter has just turned three. We have ~6K in her RESP account. We put $100/month into it. We have equities at the moment, mainly dividend paying. I'm not sure what the return rate will be/is, but just out of curiousity I calculated how much she would have in 15 years if we kept the money in a simple savings account. If we keep up the $100/month at a modest interest rate (say 1.5 or 2%). In the end she would have just shy of 30K (give or take). To me this is not nearly enough.

I know she can get student loans, bursaries, scholarships and I will insist she apply for these things (I'd rather her not working during the school year unless she simply wants to vs needs to).

I am curious what others are doing for their children's education?


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## MoneyGal (Apr 24, 2009)

Nada. Heresy, I know. But only because my parents have committed to fund (a significant proportion of) their grandchildren's post-secondary education costs. I am focussing on the other aspects of ensuring educational success, like having a lot of books in my house. 

(I hope it's clear that my tongue is in my cheek. But yeah, we have well over 500 books in our house, and probably nearly 100 are cookbooks...)


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## Four Pillars (Apr 5, 2009)

I'm with MoneyGal - let the Grandparents do the heavy RESP lifting. 

My kids are 2 & 4 and the account has about $15k in it.

My plan is to fully fund it eventually but it's just not a priority at the moment. Paying the mortgage off, maxing out RRSP - they get done first.


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## MoneyGal (Apr 24, 2009)

To be frank my plan is the "pay as you play" strategy. My parents have invested funds for long-term growth (my kids are almost-6 and 8). 

For my part, I hope to be debt-free by the time they are entering university - this would free up cash to just pay the costs as they arise. 

I sometimes think these discussions get too focussed on products. I like simple. 

I'm also disinclined to buy a product when a different strategy will accomplish the same goal. 

Every dollar into an RESP is a dollar *not* invested in my own TFSA and RRSP - or into other things which I believe will have a high correlation with my kids' academic success, for that matter.


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## FrugalTrader (Oct 13, 2008)

We put in enough to maximize the government grant every year... so $2,500 per year.


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## ldk (Nov 10, 2009)

We saved $20k per child (they are now 22 and 16) with the idea that that should pay for a Bachelor's degree at a local university. (We did not use RESPs, though I suppose we should have!) 

My son (the 22 year old) lived at home, earned scholarships and worked summers to pay for his books and tuition...when he graduated we transferred the trust fund fully into his name for him to do with what he wants. He is currently in Grad school (and living with his girlfriend) and paying his own way in the world....he hasn't spent any of the money yet, though is talking about spending some time in Australia when he finishes his Masters. (or maybe he'll use it for a down payment on a house...who knows!) 

The same deal will apply to my daughter (who is finishing grade 10.)


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## Four Pillars (Apr 5, 2009)

MoneyGal said:


> To be frank my plan is the "pay as you play" strategy. My parents have invested funds for long-term growth (my kids are almost-6 and 8).
> 
> For my part, I hope to be debt-free by the time they are entering university - this would free up cash to just pay the costs as they arise.
> 
> ...


Perfectly good strategy. The only drawback is that you miss out on free grants. Not the worst thing in the world.


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## CanadianCapitalist (Mar 31, 2009)

We contribute enough to get the max CESG. So, it's $2,500 per year per child. But RESP is lower on the list of priorities and if money is tight in some years, we won't contribute to the RESP. We are hoping that the kids will have $36K plus $7,200 CESG plus whatever the investments earn over the years. We'll either ask the kids to make up any shortfall or fund it ourselves depending on how our circumstances are when the kids go to university.


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## MoneyGal (Apr 24, 2009)

I don't miss out on the grants - my parents' contributions attract them. If my parents were not making contributions for my kids, I'd consider opening RESPs in their names.


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## Sampson (Apr 3, 2009)

Interesting to hear what others are doing.

I'm just starting planning RESP contributions for our first child (to come in Nov), and I was thinking of maxing out the $50k, preferably most of it in the first few years (as much as possible).

Do any of you think that the RESP could grow too large? Based on the TD Economics Report released late last year, my projections have a fully funded RESP still not reaching $135k.


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## Ben (Apr 3, 2009)

Pretty relevant topic for me, since I'm only 2 weeks into this parenting thing. My wife's parents are putting in $1000 this year, so we'll do the other $1500. Perhaps this arrangement will continue in years to come. Need to actually set up the RESP in the coming months.

Not sure how I feel about a fully funded education. I think I'd like to cover the first couple of years, and let them take loans for the rest. In our school days, we all recall seeing kids born with silver spoons in their mouths handed everything they want, and perhaps a bit of a negative correlation with how seriously they take school. I suppose good parenting could counteract that...


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## Four Pillars (Apr 5, 2009)

Sampson said:


> Interesting to hear what others are doing.
> 
> I'm just starting planning RESP contributions for our first child (to come in Nov), and I was thinking of maxing out the $50k, preferably most of it in the first few years (as much as possible).
> 
> Do any of you think that the RESP could grow too large? Based on the TD Economics Report released late last year, my projections have a fully funded RESP still not reaching $135k.


Interesting thought. I definitely think it can get too large although the ramifications of that are not too significant. Perhaps the student will pay a bit of income tax withdrawing the money. 

Of course if you put $50k in now, and the returns are really good for the next 15 years....you might need to have more kids just to use up the money.


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## Sampson (Apr 3, 2009)

Four Pillars said:


> Of course if you put $50k in now, and the returns are really good for the next 15 years....you might need to have more kids just to use up the money.


Well if you put it that way...

We certainly can't afford to max out in the first few years, but say get to the $50k cap by year 12-14 (average $3-5k) for the first few years.

I'm actually quite seriously considering using a self-directed account vs. the 'standard' TD e-series, since I think we will try to get a sizeable lump in there early. We'll see, I'll have to mine the blogs for expense projections..., we'll probably end up broke like all other parents


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## Cal (Jun 17, 2009)

I thought I would comment on this now, as not married, no kids, perhaps I would look back on this and see how my views have changed.

However, I had only planned on putting approximately enough in a childs RESP (over time) to cover their tuition. Then the child would have to use their summer job $ for some of their schooling, depending upon where they decide to attend/live/study. Getting a bit of an appreciation for the value of a dollar.

Hey I dunno...maybe they will take after their mother and be smart enough to get a scholarship or bursary.


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## Addy (Mar 12, 2010)

Thanks everyone, it seems there's quite some interest in this topic. I'm a bit jealous of those who have grandparents helping out; my folks and my hubby's mom are all pretty much financially destitute, so there's no chance of them helping out with anything. Ever.  But thats okay, we can do it on our own.

My husband corrected me - we put $100/month and top up when we can to max it to $2500/year as well (to get the max grant). The free money (grant) is a big draw for us. I believe you get $500/yr grant is it? It maxes out though over time I'm pretty sure... I used to know all this by heart but it's been a couple of years now. What is the lifetime max grant amount, anyone here know?


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## Four Pillars (Apr 5, 2009)

Addy said:


> Thanks everyone, it seems there's quite some interest in this topic. I'm a bit jealous of those who have grandparents helping out; my folks and my hubby's mom are all pretty much financially destitute, so there's no chance of them helping out with anything. Ever.  But thats okay, we can do it on our own.
> 
> My husband corrected me - we put $100/month and top up when we can to max it to $2500/year as well (to get the max grant). The free money (grant) is a big draw for us. I believe you get $500/yr grant is it? It maxes out though over time I'm pretty sure... I used to know all this by heart but it's been a couple of years now. What is the lifetime max grant amount, anyone here know?


$7,200.

Here's a post I did which is basically a quick summary of RESP rules.

http://www.moneysmartsblog.com/2010-resp-contribution-rules-and-withdrawal-rules/


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## CanadianCapitalist (Mar 31, 2009)

Sampson said:


> Well if you put it that way...
> 
> We certainly can't afford to max out in the first few years, but say get to the $50k cap by year 12-14 (average $3-5k) for the first few years.
> 
> I'm actually quite seriously considering using a self-directed account vs. the 'standard' TD e-series, since I think we will try to get a sizeable lump in there early. We'll see, I'll have to mine the blogs for expense projections..., we'll probably end up broke like all other parents


The max. RESP contribution is $50,000.
The max. CESG is $7,200.
The RESP contribution that gets the maximum CESG is $36,000

I suppose you could contribute $14,000 upfront and then contribute $2,500 over 14.4 years to maximize the CESG. I think the CESG is far too valuable to give up even with the additional years of tax sheltering.

Hey, there's enough for a blog post here


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## Addy (Mar 12, 2010)

I thought the annual limit was $500 of grant money, with the lifetime max ($7200 as pointed out). I don't believe you can get the lifetime max right away.. although that would be nice!

edit: Ahh I see, I misunderstood CC's post. I still think there are maximums though you can put in each year? I know, I need to stop asking and start reading, especially since Four Pillars so kindly posted a link to it all!


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## HaroldCrump (Jun 10, 2009)

Addy said:


> I still think there are maximums though you can put in each year?


There used to be, not any more.
If you wanted to, you could put the entire $50,000 in at one shot.
However, you'd get only the max grant for 1 year i.e. $500.
You'll miss out on the other $6,700 since you have maxed out the lifetime limit.

For someone with a newborn baby and the $50,000 in hand, some quick math can be done to figure out whether lumpsump contribution in the first year allowed to compound for the full 17 years is more profitable rather than the more common $2,500 every year to get max. CESG grant.


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## Sampson (Apr 3, 2009)

CanadianCapitalist said:


> The max. RESP contribution is $50,000.
> The max. CESG is $7,200.
> The RESP contribution that gets the maximum CESG is $36,000
> 
> I suppose you could contribute $14,000 upfront and then contribute $2,500 over 14.4 years to maximize the CESG. I think the CESG is far too valuable to give up even with the additional years of tax sheltering.


That was the plan . Although depending how you model the ROR, I still think 12+ years of tax sheltering can exceed the benefit of the CESG. Any arguments (or math) against this?



CanadianCapitalist said:


> Hey, there's enough for a blog post here


Now you FT, and Mike have to see who gets the post out first  Make sure to include some examples and math please 

OT: have you guys ever considered a series of 'cross-over' blog posts, like Superman vs. Spiderman sort of deal?


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## Four Pillars (Apr 5, 2009)

I've done some of the math - an early lump sum contribution of any amount will easily outdo a series of annual contributions totalling the same amount, that get the 20% grant, if there is any investment return at all.

However, I didn't count for the fact that the lump sum strategy represents current dollars whereas spreading out that same amount into different years means that those future (contribution) dollars are worth less.

It's an interesting exercise, but I probably won't post on it, simply because it's just too rare a situation to be applicable for very many people. 

Of course if someone else wants to write something up...I'd be happy to publish.


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## MoneyGal (Apr 24, 2009)

(I am not going to write your spreadsheet or your post but) you must account for the time value of money! arghghghghg.


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## Doug Out West (Apr 25, 2010)

Saved up 30K in RESP by time daughter was ready for University. She's using about $5k a year. This year probably less as working full 4 months in summer.


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## Four Pillars (Apr 5, 2009)

MoneyGal said:


> (I am not going to write your spreadsheet or your post but) you must account for the time value of money! arghghghghg.


You don't have to, if it doesn't make a difference to final result.


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## MoneyGal (Apr 24, 2009)

But how do you know it makes no difference unless you run the calculations with a discounting factor and then without? 

Even at a 2% discount factor the value of a future dollar is substantially less in 16 years (estimating a likely contribution window for an average contributor) than its present value. 

Besides - it's...simple. Even pre-programmed into Excel.  How can we (collectively, on this site) argue that financial literacy is important if we won't hold out for this extremely basic component of financial literacy? 

OK, that's my stake in the ground.


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## Potato (Apr 3, 2009)

Four Pillars said:


> I've done some of the math - an early lump sum contribution of any amount will easily outdo a series of annual contributions totalling the same amount, that get the 20% grant, if there is any investment return at all.
> 
> However, I didn't count for the fact that the lump sum strategy represents current dollars whereas spreading out that same amount into different years means that those future (contribution) dollars are worth less.


Also, if you have lump sum available, you could invest it in a taxable account, and transfer in $2500 each year for the grants, which might beat out lump-sum, depending on tax rate. A quickie spreadsheet tells me that the break-even tax rate depends on the returns you assume, and is about 30% on the taxable amount when the tax-free return is about 8%. Since for most people, taxes on dividends and cap gains is lower than 30%, it probably makes sense to hold off on making the RESP contributions until you can get the grants (but still keep the money invested).

If you can make more on your money, the break-even tax rate becomes lower, so the more optimistic you are about your return assumptions, the more sense it makes to lump-sum contribute and get the tax shelter vs grants.


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## Four Pillars (Apr 5, 2009)

MoneyGal said:


> But how do you know it makes no difference unless you run the calculations with a discounting factor and then without?
> 
> Even at a 2% discount factor the value of a future dollar is substantially less in 16 years (estimating a likely contribution window for an average contributor) than its present value.
> 
> ...


This is why you are co-writing a book with mr. superstar annuity-dude and I'm just some dumb-*** blogger. 

As Potato Man said, it mainly depends on the investment returns which is why I didn't investigate further. (plus I didn't have $50k sitting around when my kids were born.


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## MoneyGal (Apr 24, 2009)

Four Pillars said:


> As Potato Man said, it mainly depends on the investment returns which is why I didn't investigate further


OK, I will let this go. However, one point: you would normally discount a payment made in the future by the risk-free rate (so, about 2%). 

The assumption that you are going to not only hold back the funds but invest them in a risky asset is a second consideration or calculation, and gives you the opportunity cost (of NOT investing in a risky asset). 

You can discount future cash flows by the opportunity cost, but normally this is a separate calculation from determining the net present value of a set of future obligations. 

Using a rate which assumes a (constant) rate of return in a risky asset - as Potato's example implicitly assumes - is overly optimistic and will discount the present value too heavily.


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## Potato (Apr 3, 2009)

MoneyGal said:


> OK, I will let this go. However, one point: you would normally discount a payment made in the future by the risk-free rate (so, about 2%).
> 
> The assumption that you are going to not only hold back the funds but invest them in a risky asset is a second consideration or calculation, and gives you the opportunity cost (of NOT investing in a risky asset).
> 
> ...



Yeah, but I figured this was a more applicable way to go since if you have a lump sum to put in the RESP, and just want to decide whether it's best to contribute all at once, or hold back to maximize CESG money, you'll probably invest the held-back portion in a taxable account.

That's a good point about a constant rate of return though. On the flip side, keeping the lump sum in a taxable account means if you get hit with losses, you can claim capital loss deductions (which you can't in the RESP); also realistically capital gains taxes can be deferred to some extent, which may also strengthen the case for not contributing the whole lump sum right away. 

MG, If you've got the tools, care to make a better (Monte Carlo?) model?  

I suspect the optimal solution may be to hold risky assets in the taxable account, and contribute to the RESP over time to collect the CESG, and then hold fixed income in there. That'll also serve as a natural rebalancer as the time horizon to enrolment shortens each year...



Four Pillars said:


> It's an interesting exercise, but I probably won't post on it, simply because it's just too rare a situation to be applicable for very many people.
> 
> Of course if someone else wants to write something up...I'd be happy to publish.


I'd be happy to be second author if you want to do all the heavy lifting MG 

(If not, Mike, I can cut 'n paste what I have and wait for corrections in the comments


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## MoneyGal (Apr 24, 2009)

OK, I am back from my early morning workout. 

You are making this too complicated. At a basic level, you would discount payments made in the future by the risk-free rate. 

You do not need to account for tax in this model because you do not need to set aside the assets at all. What you want to compare, at a basic level, is whether to invest in one lump sum or in a series of payments. 

You do not need to assume tax or any investment return because we are not assuming you have the lump sum available. 

Indeed, one of the benefits of this approach (if you take it, that is) is that you do not need to make the payments available until they are needed. 

This is why you would discount the payments made in the future - not because you have them now (and are going to invest them and pay tax on them) but because you do NOT have them now. This is the essence of a present value calculation. 

The conversation about whether to invest a lump sum in an RESP or hold back and invest the same lump sum in tranches is not a present value issue. The present value of $50,000 is $50,000 whether you invest it now or later. This is instead an opportunity cost question. 

So, all this to (quickly) say - no Monte Carlo needed. However, in general, I prefer using probabilities (i.e., calculus) rather than MC. But the concepts we are discussing (or maybe just me) are basic, basic, basic and do not require any assumptions for randomness. OK?


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## MoneyGal (Apr 24, 2009)

OK! I am back again. That early morning workout (yesterday) must have scrambled my brain. We are talking about several different things in the same post:

Scenario A: you have $50,000 available and you want to know whether you should invest it in your child's RESP (and forego most of the grant money) or keep it aside and invest periodically to get the maximum grant money. This scenario requires making assumptions about rates of return and tax rates (depending on how you invest the funds you have available and are NOT putting in the RESP). 

In this scenario, you do not need to account for the time value of money. 

Scenario B: you do not have $50,000 available but wonder whether you would come out ahead if you put a lump sum of $50,000 into your child's account now, or invested periodically. You would get more grant money if you invested periodically. Does that extra grant money make the periodic investing strategy a winner, or would the lump sum win? (Properly structured, you are actually looking for the points at which one strategy wins or loses, by varying rates of return.) 

In this scenario, you need to account for the time value of money, because some contributions are being made with future dollars. 

Potato, you are talking, I think, about the first scenario. I was talking about the second scenario. 

I have not done the math for Scenario A but (in a previous thread) I have argued that if you have a lump sum available, you should invest now, because you have the balance of probabilities on your side. The question I have now is whether the extra grant money would tip the strategy in favour of delaying contributions - and earlier posts (particularly Potato's) have ably covered that ground.


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