RESP Strategy

RESP StrategyPlanning a RESP strategy is similar to planning your retirement (including RRSP) but your timeline is shorter and the adjustment happens much earlier and it may not be enough time to be aggressive depending on your risk appetite. I have now sold all my mutual funds from my RESP account and moved it all over to my discount brokerRBC Direct Investing.

Previous RESP Strategy (or Lack of a Strategy)

I had everything in a few mutual funds:

  • 67% in a dividend income fund (Yeah, I was dividend focus from an early age just not in stocks)
  • 20% in Canadian equity
  • 13% in bond fund

The 8% yield I was getting out of the dividend income mutual fund was keeping me away from making major changes until now. Everything has now been transferred in my RBC Direct Investing account and I have been planning my strategy.

Planning a RESP Strategy

The timeline is critical as you don’t have 40 years like a retirement. I will repeat that the timeline is critical as you may not be able to recover from a market crash in that timeline. The initial step to planning a RESP strategy is to define your goals. Afterwards, you can define your saving ability, plan your investments and define your review process.

RESP Goals

The obvious is that you should at least look at maintaining a 20% growth considering you get a 20% CESG grant from the government. One important question to ask yourself is your target growth. Just wanting more isn’t setting a target to use in your review to assess where you are at later on.

  • If you stick to 20% then, you are satisfied with no growth and GICs are probably good enough for you :)
  • If you want an annual return in the 5% vicinity then you need a plan
  • If you want an annual return above 5%, good luck :) I hope your crystal ball work out.
Where I am getting at is that your target percentage will define the risk you take and the type of investment that fit your model. Write down your target and assess what investments can help you reach that target. Once you have that, assess if you are willing to take the risk. Do that for every year or 3 year timeline. That way you end up building your investing ratio based on the return you want and the risk you are willing to accept.

RESP Savings

How much can you really save? Will it be your priority? Those are important questions to answer because you might have to choose one day and adjust. I was not always able to invest in all accounts but when I can I follow the priorities below:

When you add up all the possible savings you can do, it can be quite a bit.
  • $5,000 for TFSA
  • $5,000 for RRSP or up to a maximum of 18% of last year’s T4 income. This amount can be well above $10,000.
  • $2,500 per child in a Family RESP account
  • How much can you spare in a non-registered account? Do you maximize your RRSP contribution first?
As you can see, toping up your TFSA and RESP account will require you to save $7,500 plus anything you want to put in your RRSP. I have worked on saving a little bit at a time to invest in my non registered account through Computershare when I can and it has worked well over the past years. The same can apply to RESP if you work on it – just define your RESP Strategy.

RESP Investments

The investments you pick should really be defined by your goals and risks. Remember that the more return you want the more risk you will have and the less risk you want, the less return you will have.

What is also important is to understand the RRSP timeline is much longer than the RESP timeline and you might not want to apply the same investment strategy.

Personally, I am very interested in income-producing investment with a lower risk of stock price movement. One type of investments that fit the bill is Real Estate Income Trusts (REITs).

RESP Review

Define your RESP review strategy against your RESP strategy. I’ll outline my RESP strategy below and I will be reviewed annually to balance. I don’t have enough money in the account to do a quarterly balance. With accounts under $100,000, I don’t believe a quarterly review is necessary unless the stock market has really peaked or bottomed.

RESP Withdrawals

Do you know what the average cost of a university year cost? You can easily find out. All you need to do is to get the annual cost of the universities nearby and estimate the cost with and without lodging. The cost you get to, should give you an idea of what you would need in today’s dollar. Increase it by some factor, you can use inflation but I think it’s too much, to extrapolate a value in the future (some 10, 15, or 20 years).

Here is what you might want to estimate for cost:

  • Session Fees
  • Apartment / Dorm Cost
  • Books (New? Used?)
  • Transportation
  • Groceries / Meals
  • Pocket Change
  • Clothes / Entertainment
That’s a fair bit to add up for a year to cover everything. Make sure your plan takes into account what you would like to cover and what you expect your child to cover. If you have more than one kid, don’t empty the account after your first child  :)

My RESP Strategy

Time is critical with RESP. I am picking specific investments and specific ratio to adapt to the short investing cycle. This is my first real pass on my strategy and I am sure to adjust it over time. I have to admit that I did not really have a strategy before now unfortunately except for investing in a family RESP.

I am basically making a full adjustment to the RESP portfolio and I stand at year 11 now with my target investments. I am still researching the bond part. I am making progress and my bond investments will definitely be through ETFs. As for stocks, I am not going all out picking risky stocks either. I am sticking to dividend paying stocks with lower risks. I am choosing not to index my stock portion as I don’t believe my timeline would allow me to whether some major down market for the remaining timeline. I am sticking to generating income as I can better see the path of my investments.

YearEquityFixed IncomeBondsInvestment Method
190.00%0.00%10.00%Mutual Funds
390.00%0.00%10.00%Mutual Funds
590.00%0.00%10.00%Mutual Funds
790.00%0.00%10.00%Mutual Funds
990.00%0.00%10.00%Mutual Funds
1140.00%35.00%25.00%Stock, REITs, ETFs
1340.00%35.00%25.00%Stock, REITs, ETFs
1525.00%35.00%40.00%Stock, REITs, ETFs
1725.00%35.00%40.00%Stock, REITs, ETFs
1915.00%35.00%50.00%Stock, REITs, ETFs
2110.00%40.00%50.00%Stock, REITs, ETFs
235.00%40.00%55.00%Stock, REITs, ETFs
250.00%40.00%60.00%Stock, REITs, ETFs

 RESP Strategy

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