How I plan to Accumulate $100,000 for my Child's Post-Secondary Education
The Financialist • Issue 130 • July 2016
BY LINSON CHEN BA CFP CIM CLU FCSI
My wife and I are expecting our first child this August. As new parents to be, we are spending a lot of time analyzing our finances and are doing a lot of planning to ensure that we are well prepared. This includes budgeting and making sure we have adequate insurance in place, such as life, disability and critical illness.
Raising a child has never been cheap, but as millennial parents, we face additional challenges with stagnant wages and high costs of living, especially in the Vancouver area. With an already constrained budget and despite all the challenges, we want to do everything in our power to make sure our child is provided with the best opportunity to succeed.
Perhaps some of you are unable to start saving because you are still paying down your own student loan debt? But what if I told you that it is possible for some families to accumulate over $100,000 for a child’s education at no additional cost out of pocket?
According to Stats Canada, in the 2015-2016 academic year, the average tuition in Canada was $6,191. Tuition is only getting more expensive, especially comparing it to the average $551 tuition fee paid back in 1975. With higher educational requirements needed in today’s workforce, students are required to accumulate record levels of student loan debt to remain competitive. The Canadian Centre for Policy Alternatives calculated that, since 1990, the average tuition has risen by 6.2% per year. In 18 years, assuming an inflation rate of 3%-6%, a post-secondary education will cost $10,500-$18,000 per year not including any textbooks or living expenses.
Starting in July 2016, the Universal Child Care Benefit (UCCB) and the Canada Child Tax Benefit (CCTB) will be replaced with an all new non-taxable Canada Child Benefit (CCB). This is free money the government gives to all parents with children under 18. You can use this money any way you like. The amount you get depends on your net family income. Families with children under age six will receive an annual benefit of up to $6,400 per child and those with children between the ages of six and 17 will receive up to $5,400 annually per child. Households with an annual income below $30,000 will receive the maximum amount while higher-income households will have the benefit amount clawed back.
Although it is nice to have some additional help paying for those extra child expenses, most parents did not expect to receive this money, so why not use it to save for your child’s future?
One of the best ways to save for a child’s education is through a Registered Education Savings Plan (RESP). The main draw to these plans is the 20% government grant available. Regardless of the family income, a basic grant of 20% up to a maximum grant of $500 per year and a lifetime limit of $7,200 is available to all Canadians. There are additional grants for families with net incomes below $89,401.
Rather than splurging on pricey strollers and designer baby clothes, redirect that money into an RESP account instead.
The idea is to put free government money inside an RESP and, by doing so, the government will give you even more free money. Here is an example of how it works:
1. A family earning an income of $110,320 with a child under 6 would be entitled to a Canada Child Benefit of $208.33 per month tax-free.
2. They deposit $208.33 into an RESP account every month.
3. The government will contribute an additional $41.67 (20% grant).
4. The $250 per month ($208.33 + $41.67) inside an RESP benefits from tax-free and compounding growth for the next 18 years.
5. Using a rate of return between 5%-8%, in 18 years this family could end up with a balance of $76,499 to $108,372 for their child’s education.
6. These funds will eventually be taxed in the child’s hands when taken out, but they will most likely have little to no income so the taxes payable will be minimal.
It is possible for some families to accumulate a large education savings with the help of the Canada Child Benefit, but even for families with incomes above $180,000 and receiving little to no Canada Child Benefit, an RESP is still a worthwhile opportunity to pursue. A contribution of $36,000 can grow to over $108,000 after 18 years but even a modest $50 per month has the potential to grow close to $30,000. By starting an RESP early, you benefit from compounding and tax-free growth. The earlier you start saving, the more you will end up with.
A post-secondary education is only getting more expensive, but by planning ahead, you are able to amortize the cost over 18 years. My family is planning to take advantage of an RESP and will be taking the early steps to ensure our child is provided with the best opportunity to succeed. Talk to your advisor at Rogers Group Financial to learn more about the benefits of starting an RESP.