In the last couple of weeks I’ve received two questions from readers who were trying to figure out the right strategy for their children’s education savings accounts. Both were smart questions that stemmed from things they had read on this blog, and I was eager to help. But as I thought about how to respond, I began to worry about the danger of making some investing goals too complicated.
The first question came from Karen, who had opened an RESP for her nine-year-old. Karen had read my post on bond duration, where I explained that investors should try to match the duration of their bond fund to their time horizon. She wondered if XBB (which has a duration of about seven years) would still be suitable once her child was 11 or 12. If not, what’s the best way to shorten your bonds’ duration as your child approaches university age?
The second came from Bryan, who has an RESP for his five-year-old and a second child on the way. His brokerage, TD Waterhouse, allows only family RESPs, which means he can only open a single account for both children. Bryan read my post about choosing an appropriate asset allocation for an RESP according to your child’s age and wanted to know how it would work when you had two beneficiaries of different ages.
In both cases, it’s possible to create a spreadsheet and a formula to work out the optimal strategy. But the question is, how far do you want to go with this?
Can’t get no satisficing
More than half a century ago, the psychologist and economist Herbert A. Simon coined the term “satisficing” to describe the process of making a decision that is good enough, as opposed to “maximizing,” which seeks the perfect solution. When it comes to RESPs—and other investing goals, for that matter—it pays to be a satisficer.
Remember that RESPs are medium-term investments: even if you open an account when your child is an infant (and most parents do not) you are not likely to have more than 18 years before you start drawing it down. It may grow fairly large over 18 years (although I would argue it makes little sense to contribute more than $36,000, at which point the government grant is maxed out), but by that time virtually all of it should be in cash, GICs, or other safe, low-return instruments. A significant percentage of your RESP may be in equities when your child is young, but that is when the account will be smallest, so your rate of return is not likely to have a large effect during these early years. And, of course, a significant portion of the growth in RESPs is likely to come from the 20% government grant.
All of these factors mean the amount you contribute to an RESP will typically have a far greater impact than your investment returns. Here’s an example: if you contribute $167 a month beginning the year your child is born and ending the year she turns 18, you’ll collect the maximum grant ($7,200) and wind up with about $56,200 assuming an annualized return of just 3%. If you contribute $100 a month, you would need a return of about 8.5% to end up with the same amount. So are you better off trying to come up with an extra $67 a month, or trying to triple your investment returns?
Simple isn’t settling
To return to the readers’ questions, I would suggest Karen use XBB for her bond holdings now. Starting when her child is 11 or 12, she can gradually move some of the money to cash until the proportion reaches 80% to 100% by the time her child starts university. For Bryan, I would just opt for an allocation that is close to what one might use for the oldest child—even a straightforward 50% equity, 50% fixed-income blend would be fine until the oldest reaches high school, after which I would start dialing down the risk. But there are several other strategies that would work just as well—and none of them require a spreadsheet with complicated formulas.
Karen and Bryan were asking the right questions, and I certainly don’t mean to suggest investors shouldn’t care about the details of their strategy. Indeed, one of the frequently misunderstood ideas about “satisficers” is that they have low standards and are happy to settle for mediocrity, which just isn’t true. My point is simply that it’s possible to adopt an RESP strategy that is low-cost, broadly diversified, easy to implement, and fully capable of meeting your goal, even if it is less than optimal. More important, there is a lot of evidence that satisficers tend to be more content, less paralyzed during the decision-making process, and less likely to be plagued by regret—and those qualities are almost certain to make you a better investor.
I recently bought into BMO Target Education Mutual Fund inside an RESP.
Curious if its holdings seem to be well balanced or are they missing something large.
Appreciate any input.
We are new to investing and have started a RESP for our 2 year old with a Mutual Fund from a bank. 2.5% MER
I am now realizing what kind of fees we will lose over the life of this RESP.
My math tells me that it will be over $7,000.
I have a hard time believing our fund will provide that amount of increase over the indexes.
Seems to me it is worth moving away from the Mutual Fund.
I don’t think I can use Tangerine for an RESP. Is my only option to go to a discount brokerage?
@John: Unfortunately Tangerine does not offer RESPs, so for a self-directed account you would have to open a discount brokerage account. Is it possible to simply switch to a lower-cost mutual fund at your bank? You can’t expect ETF-like fees, but 2.5% is high for bank-sponsored funds.
I will have to look at lower MER funds.
My other thought is when is it worth moving to a self directed ETF? I see #’s like $50,000. does it make no sense for someone at 5,000 to 10,000, if they are applying the Couch Potato Method and only trading once per year?
@CCP could you please extend on RESP rules and specifically regarding the different withdrawal limits? I recently came across RESP Bulletin No.1 at:
I find it especially confusing with the family RESP accounts. I realize it might not be related directly to investing but it does affect my investing decisions.
@Bibi: RESP rules are quite complex. I would recommend this book as the most comprehensive source:
Hi Dan, my RESP is at RBC Banking for 10 years now and is now getting close to the 6 figures now, so, I’m more and more concerned by 0.70% MER (cant believe it was 1.7% before I knew CCP!). When my wife took the parental leave in 2008, we received 2×25$ (2 kids) as additional grant from Québec Gov. because of our salaries back then.
Now, I filled a transfer form to switch to RBC Direct Investing and buy some ETFs like ZCN and VSC. This would save me about 450-500$/year. Now, they just answered they cannot accept accounts holding that kind of grant. I cannot even repay that 50$ to the gov without giving back the whole 3,500$ of grant they gave through the years.
Anyway, I openned a new RESP with RBC Direct Investing and will use it for the future contributions. Not that I want to focus over MER but now, this account as more fees than the rest of my entire investments.
Going through this process, a friend of mine whose RESP is at TD Banking, told me he cannot even hold some TDB900 or TDB909 because of the same reason (additional grant) and his only option is super-charged-MER funds from TD.
Did you know about that kind of issue? Are we alone and is there any clue?
@Le Barbu: Yes, this is a fairly common issue: some brokerages do not support the provincial grant programs. TD Direct, for example, does not support the Alberta grant program. I am less familiar with the restrictions for Quebec’s QESI. If you transfer an RESP from one brokerage to another you risk losing the grants you’ve accumulated. This almost certainly outweighs any advantage from lowering MERs.
These links may help, but remember that the banks have several divisions (e.g. TD Bank vs. TD Asset Management) and it’s possible that one will support the grants and another will not.
I used to have my Alberta Grants at TD Canada Trust and my RESP and TD Waterhouse. 2 years ago I was able to move and merge both accounts to Questrade. I am now able to invest in lower MER etf with no commissions on buys. Their fees for withdrawals were lower than TD if I remember correctly. Perhaps they could handle Quebec Grants as well.
I can understand that some RESP providers don’t support some of the grants but how come I cannot return my additional grant only to the QC gov without returning everything? This is the issue in my case especially because we talk about 50$ in this particular situation. Should I try to contact QESI directly?
@Le Barbu: I’m afraid I’m not familiar with the specific provincial rules, so contacting QESI directly would be a good idea.
Hi Dan, Thank you for all the information. I am following TD e-series portfolio for my son RESP. He is 8 months old now. I received his firs grant $500 from government and want to invest it back in. I am following aggressive portfolio. I used Re-balance excel sheet to find out the amount to buy. For TDB909, it came up $54.52 to invest. When I try to buy, I am getting a message that there is minimum amount to buy the fund. When I look at the fund details, it says minimum $100 to invest. So in this case, what can I do ? how do I maintain the fund ratio. Thank you
@Mayoo: You don’t have to worry about rebalancing with precision, especially when your portfolio is small. Just get as close as you can while investing at least $100 at a time.
hi there I know this thread is old but my boy is 2 years old and i have an RESP (i have no idea what kind! that’s how iittle i know) and I’m new to investing. I know BMO will eat up tons of fees. Should I move to Tangerine for an RESP and do you know if they do target date RESP? or should i consider a robo advisor like wealth simple?
thanks so much!
@kristen: Tangerine does not offer RESPs, unfortunately. If you are looking for a low-cost hands-off solution, a robo-advisor may well make sense. Good luck!
Hi Dan, many thanks for your informative efforts… I was curious about your thoughts on Vanguards new “all in one funds” that hold the 60/40 etc combinations within the fund. I created a 3 index fund portfolio with an equivalent 60 stocks/ 40 fixed for my 8/9 year olds…, I’ve been unable to consistently add new contributions to the mix in our CIBC self directed brokerage account with life’s busy-ness thereby leaving a accumulating cash balance… before I consider a roboadvisor (which I’m moving towards with my wife and my RRSP/TSFA) I thought I’ might simplify this way…. It took your colleague Justin’s videos to help make the trades possible so I’m familiar but not overly savvy with the ongoing process …. Thanks in advance for your thoughts.
@Scott: If you’re comfortable making one or two trades a year it does seem like the one-fund solution would be helpful. One of the benefits is that it makes life easier for those who don’t want to fuss about rebalancing and investing small amounts.
Thanks so much for your response…. sorry for the delay in my reply… at this stage VBAL seems to match our asset allocation.. the mechanism by which I taper the portfolio over the next 9-10 years as we need the funds and what form that would look like has me stumped. Theoretically if I was able to carry on with 3 ETFs I could adjust the stocks/fixed income ratios… any suggestions on what the tapering from VBAL to cash over the set time frame for practical use could look like? Ironically I just finished listening to your latest podcast which discussed these funds in response to the questions of your listeners.. Thanks again. Scott
Thanks so much for all the info over the years!
I think I need to reduce the equity allocation in my kids’ RESP TD e-series account now that they’re older. My 13 yr old has 34.5% in the TD E-series Bond fund and my 14 yr old has 52.5% in the same bond fund. They both currently have their balances split evenly between the TD E-series CDN, US and International equity funds.
I think I remember you writing that these funds are what you use for your kids’ RESPs. Anyway, just wondering if you could post that chart again showing your recommended RESP allocations at certain ages of the child.
@Frank: This article, featuring Justin’s recommendations, should be helpful:
I have some allocation questions because my family has three qualities that don’t conform to standard RESP advice:
1) We have four kids.
2) With four, we have a 9.5-year spread chronologically and a 10-year spread in terms of expected matriculation dates. Their birth years are 2004, ’07, ’09, and ’14.
3) We started late, in 2014, when the eldest was 10 and the youngest was 6 months. For five years, we could only contribute $2500 *total* each year, and then in 2019 our circumstances changed and we began putting in the full catch-up amount of $5000 per child, $20,000 total to maximize CESGs.
We currently have $85,000 in family RESPs at WealthSimple ($80k) in a Level 8 80/20 mix that we just opened, leaving RBC expensive Target Date funds, and Meridian ($5k in cash, 1.2% RESP savings account).
I fear that this is too aggressive, but also fear running out of funds if we don’t go for big returns. People act like fixed income is the “safe” options, but we got badly burned with WS moving to all long bonds, which have lost 10% YTD. Our returns are flat so far at WS. I now feel like GICs and saving accounts are the only truly safe options, except maybe buying bonds, not bond indexes, but those are guaranteed to not keep up with inflation.
My eldest cannot receive any more CESG because of his age, and we can’t make any deposits after 2021 in his name. The other three are on target to receive the maximum $7200 in grants, with us making contributions for the next 6 years for post-secondary training that could easily stretch from 2022 to 2037.
Your thoughts? Happy to be part of a whole column, as I know other large families feel flummoxed, as do families with a big spread between youngest and eldest. Tips for those of us playing catch up also appreciated!
@StudentMama: Thanks for the comment. I can’t give you very specific advice, but I definitely agree than managing a Family RESP with multiple beneficiaries creates some confusion when it comes to determining time horizons. You can never be precise, so the best you can do is use a balanced approach, erring on the side of conservative.
With that in mind, I would suggest that 80% equities is much too aggressive for this situation. For my clients in the situation I would be unlikely to recommend more than 40% or 50% equities.
It can be tempting to try to make up for a late start by being more aggressive, and it might work out, but it’s very risky. At least some of the RESP should be in GICs or cash, as you may need to be making withdrawals in a year or two. (I agree that long-term bonds are not appropriate here either.) I’m not sure what kind of flexibility you have at Wealthsimple to hold GICs or cash, but going forward, try to anticipate how much you will need to withdraw the following year and keep that much in something safe.
I accidentally bought a 5-year GIC (best risk-free rate at the time) inside an RESP and then realized that my children will both be out of university before it matures. Is it possible to swap a GIC inside an RESP for cash or something else in a non-registered investment account in order to get that money free for RESP withdrawals roughly now, a few years before the GIC matures?
@Steve: Unfortunately, you cannot swap a GIC in a registered acconut with an equivalent amount of cash in a different account. Your only option might be to ask the GIC issuer for an early redemption. GIC issuers can do this at their discretion, though if they agree they will charge a significant penalty.
I am wondering why you recommend contributing a max of $36000 up front as opposed to $50000 up front (assuming one has access to 50k up front)? Many of the calculators I’ve seen would predict higher future total portfolio values with a starting deposit of 50k.
@Margaret: It’s true, if you have the ability, it does make sense to contribute more than $36,000. For our clients we often advise them to contribute a $14,000 lump sum in the first year (That is $50,000 minus $36,000), and then $2,500 annually until the maximum contribution is reached and the maximum grant is received. Few parents have the means to do this however (let alone the ability to contribute $50,000 in year one), and contributing just enough to get the maximum grant is often enough to pay for a child’s undergraduate program.