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With markets see-sawing over the past few weeks, many parents are wondering whether their registered education savings plan is set up to weather the storm. The sinking feeling of watching investments dip has been especially hard for Canadians planning to start drawing from their RESP this fall when their child heads to university.
In a Q&A with The Globe and Mail last week, one reader, Ian Currie, said that the RESP for his son has lost about $5,000 in value over the past few weeks, and he is planning on withdrawing some funds this coming September.
The key, financial planners say, is to treat your RESP with the same mindset you’d bring to retirement planning: Reduce risk as your withdrawal date nears. For those close to having to withdraw, it’s a good time to plan an exit strategy, but for those with more time, try to “stay the course,” said Adam Jenkins, a certified financial planner based in Kingston.
What if I need the money soon?
Ideally, you have already gradually shifted assets in your RESP into more conservative investments – such as bonds or cash – as your child approached postsecondary age. That way, market dips won’t hit as hard.
But if your portfolio remains heavily invested in equities and the value has dropped, there are some options you should consider.
Some advisers recommend moving money into cash now to avoid further declines, even if that means locking in some losses. However, if you’ve got some extra cash on hand, it might be worth waiting it out while your investments recover.
The world is changing, is an RESP still the best investment in my children’s future?
Simon Wong, a certified financial planner at Blueprint Financial in Calgary, said that if parents have the resources, they could set aside one or two years of tuition in a liquid account, such as a high-interest savings account or in a guaranteed investment certificate, so you’re not forced to sell investments during a downturn.
“It’s a powerful way to reduce risk when you’re entering the withdrawal phase,” he said.
What if I have time?
If your child is young enough that you don’t need to access funds in the RESP for a few more years, this market volatility is a great time to check in on your plan, Mr. Wong said.
“The biggest mistake parents make is reacting emotionally to short-term market noise,” Mr. Wong said. He said that when markets dip, he has seen parents want to reallocate everything into cash, but the most important thing to do before making any changes is to evaluate when the child will actually need the money.
“If it’s five to 10 years away, volatility is just background noise.”
A general rule for RESP investments is that they should start aggressive and then become more conservative, similar to retirement planning (but with a shorter runway).
A good option for parents who want a hands-off approach is to invest in a target-date fund. These portfolios automatically become more conservative as the university start date approaches, so you don’t have to constantly tweak your holdings.
However, Mr. Wong said that these funds come with high fees, some more than 2 per cent, which could mean lower returns. It also means that you’ll have less control over your investments.
If the continuing trade war and any uncertainty about your finances has you thinking about cutting back on RESP contributions, be careful not to miss out on free money.
The federal government offers up to $7,200 per child through the Canada Education Savings Grant, matching 20 per cent of the contribution to a maximum of $500 a year. To receive the full $500 each year, you would need to contribute $2,500. However, if you don’t contribute the maximum, the unused CESG room can be carried over, allowing you to make a contribution for the current year and any prior year you have missed.
RESP 101: How to use a RESP to save for your child's education
Parents should also prioritize “peace of mind,” Mr. Wong said. “If parents are losing sleep or they feel compelled to check their account daily, it’s a sign that the portfolio might be a little bit too aggressive.”
Mr. Wong says that dialling back the risk, even if it means slightly lower returns, can lead to better long-term outcomes because it keeps people invested through tough times.
“It’s not all about the numbers. Sometimes, the mental health of the parent can come into play as well.”
