A winning educational savings plan

Meaningful financial planning eludes many Canadians, especially when it comes to a sound plan for their children’s education.

Many investors don’t even realize where they stand. When asked if they have a plan, clients usually say “yes,” referring to an RESP. This is akin to referring to an RRSP as a retirement plan without really looking at the details. And, incredibly, most people seem content with that.

Advisors often hear statements like, “We are maxing out the government programs, what else can we do?” Any further questioning about their existing plans elicits uneasiness and glazed eyes. The reality? They likely don’t have a comprehensive plan — one with specific objectives — that integrates with an overall family financial plan.

The table “Education Funding” (click here for the table) outlines a comprehensive plan that will fund post-secondary education for Wilma and Fred Flintstone’s children.

The area highlighted in yellow shows that they currently have two children: Pebbles, 5, Bam Bam, 3, and plan to have another in two years’ time. Further, it demonstrates their intention to support 100% of a four-year, out-of-town post-secondary education program for each child, starting at age 18.

The area in green estimates the current annual cost components of such a program and includes a 5% annual inflation factor. The far right column shows the projected costs by year, given the current costs and inflation assumptions. As you can see, the current annual estimate of $15,300 increases to $28,100 when the oldest child begins using the money.

After assessing the costs, how can the family provide funding? The area highlighted in blue outlines a strategy: Our example shows opening RESP investments of $15,000. In order to maximize government grants, Fred and Wilma plan to make annual RESP contributions of $2,500 per child.

What about the rest? Part of it can be derived from market growth. We have assumed 6% annual returns on the investments, and Fred and Wilma have elected to make monthly in-trust investments to fund the balance of the requirement. In our example, this amounts to a monthly amount of $208 per child.

The area in purple shows the yearly ending balance of the educational funding investments. Given the assumptions in the plan, their investments are exhausted after providing the anticipated funds in the appropriate years.

This is a comprehensive educational funding plan that reflects their objectives. Now the question is, can Fred and Wilma afford to do this?

They can do it if they integrate the educational funding plan into their overall financial plan by updating their current household budget for their RESP and in-trust investments. If the cash is not currently available, they can review all spending — especially the discretionary items — to allow this program to be funded and integrated into their overall financial plan.

If the cash isn’t available, then perhaps the children themselves can take responsibility for a portion, which would reduce the 100% objective. Individuals with children from a prior relationship might have varying portions of such programs to plan for.

Using this approach, a family gains on two fronts: they have peace of mind and a comprehensive educational plan that fits into their overall financial goals.