As many of us in the investment blogosphere will write – the one-ticket asset allocation portfolios are game changers. Canadian investors can enter a single ticker symbol and receive well-balanced globally-diversified managed portfolios. And because they are offered at various risk levels asset allocation portfolios can work with the RESP plan.
It’s obviously a great idea to take full advantage of the Registered Education Savings Plan as there are free monies to be had. The government grant portion is 20% of contributions up to a certain level. The Canada Education Savings Grant provides 20 cents on every dollar you contribute up to a maximum benefit of $500 on an annual contribution of $2,500. You can contribute any amount to an RESP up to a lifetime maximum of $50,000 per child.
How much might you earn in that RESP?
If markets continue to deliver generous returns it’s certainly possible to build an RESP portfolio in the range of $100,000. Of course, there are no guarantees of those generous gains. But we invest in that probability of solid investment gains. Portfolio growth in the RESP will help the family finances.
And we certainly have the time horizon to invest for growth in the early and mid stages of building that RESP bucket. So let’s assume you’ve done your research on the RESP plan. We’ll now look at how to use those asset allocation portfolios.
Let’s first look at how the pros do it.
My readers will know that Justwealth offers RESP target date funds. Target date means they adjust the risk level as we approach the date when the funds will be needed. We take on more risk early in the wealth building. The portfolios will be de-risked on the way to the school start date, and eventually will carry low risk.
You can have a read of The smart way to invest in the RESP at Justwealth.
Here’s the target date asset allocation chart.
The portfolios begin with 80% stock exposure and wind down to 20% stock exposure when the student is within 3 years of heading off to College or University. At the start of school, the RESP portfolio is in a short-duration bond mix.
You can certainly choose to follow that Justwealth equity glide path. It’s very sensible. My research and training would would suggest that we can be slightly more aggressive through most of the entire process.
And here’s the breakdown of risk level matched to time horizon that I will work to.
- 10 years or more = 100% equity
- 6-9 years = 75% to 80% equity
- 3-5 years = 20% to 60% equity
If we add the child’s age to that approach, to end of each year.
- 10 years or more = 100% equity (age 1 to 7)
- 6-9 years = 75% to 80% equity (age 8 to 12)
- 3-5 years = 20% to 60% equity (age 13 to 14)
At age 15 you might then have that RESP in cash and GICs. That said, you might let some of those RESP funds ride as the time horizon extends to year 4 of a typical University undergrad degree. The time horizon can be even longer if the child is planning to undertake graduate studies.
The Vanguard asset allocation portfolios.
To demonstrate the use of one ticket portfolios for RESP plans we’ll turn to the Vanguard options.
The equity glide path using the one ticket portfolios would look something like this. By age..
- 1-7 VEQT
- 8-10 VGRO
- 11-12 VBAL
- 13-14 VCNS
At age 15 you might then choose to put the first year’s funding in a savings account. You can then ladder the remainder in GICs. As an example of the rate environment here’s a look at the current GIC rates at Tangerine. Keep in mind Tangerine does not currently offer RESP plans.
That’s the safe and secure way to go at protecting those RESP gains.
You still have time to invest when the student turns 15.
While we are de-risking at age 15, the time horizon to the last year of school is still several years. There’s plenty of time to keep some RESP funds in a Balanced or Conservative model. Here’s the hybrid approach.
Protect first. Growth second.
I think it’s very important to protect the RESP funds for the first year or two of College or University. That means moving those funds to safety (no risk) at age 15, or 3 years previous to start date. Even with a very conservative Balanced portfolio, or all-bond portfolio, there is the risk of losses in a 2-3 year period.
That would mean you might choose to remove 2 years of planned RESP needs at age 15 and let the rest ride in a conservative or balanced portfolio model. You might go with that VCNS model as a suggestion.
Now you have options.
The first 2 years of spending needs are covered. If the conservative portfolio continues to deliver positive gains you can move more to savings and GICs. If the stock and bond markets are not cooperating, no worries. You have those first 2 years covered. There is a strong probability that a conservative portfolio can deliver positive gains over a 3 and 4 year period. History suggests that you will have the opportunity to move more portfolio gains to safety from age 15. You may choose to ‘roll the dice’ with some monies while the student is in University. But typically we do not want to have portfolio assets at risk when the time horizon is 4 years or more.
Vanguard is not the only one ticket game in town.
You can also have a read of these reviews.
BMO keeps it simple with their one ticket portfolio solutions.
iShares adds 3 one ticket asset allocation portfolios.
You can use those wonderful options as well. Simply match the stock to bond allocations to the above examples. If you’re a self-directed investor that holds a stock or ETF portfolio, again, match the stock to bond weightings.
I hope you’ve found this helpful. Please ensure you understand the RESP withdrawal rules and tax consequences. Here’s a go-to post from savvynewcanadians.
If you go that ETF route of course you can sign up with Canada’s top-rated discount brokerage Questrade. ETF purchases are free.
If you want a managed RESP portfolio you can sign up with Justwealth. As a reader of Cut The Crap Investing you can earn a cash bonus up to $500, through that link.
Thanks for reading. We’ll see you in the comment section. Please share your strategies and experiences and RESP tips.
This post and linked posts contains affiliate links. For more on that please have a read of this About link.
Dale
I find little difference between RESP, TFSA and RRIF management, except that you are generally working in a specific time frame. Of course, it is not uncommon for students to delay their university education at the last minute. Better to have a good chunk of money still working for you. My preference is to have no bonds, about 60% in Canadian dividend stocks, 20-30% in US ETFs, and 1 to 2 years of annual cash payout sitting in a money market fund, starting 2 years before payouts begin, and continuing each year thereafter. With dividends yielding 4 % or more, they provide a nice cushion too. And yes, I use a bank (TD) and it is all free, other than fees for stock transactions. Finally, there is a chance that the kids might actually learn something useful about money management while they study ancient philosophies or early Chinese art.
Thanks Doug. I love the big juicy dividends as you may know. I think RESP is unique in that we need to raid it quite quickly, usually. And we need to get it protected well in advance. It could get half wiped out, it many not recover for several years. And juniors college or university days are long behind him 🙂
Thanks again for stopping by. I hope you’ll make it a regular stop.
Dale
A very helpful guide. One-ticket ETFs and a de-risking process like the one you’ve outlined make managing an investment portfolio easier and less expensive. RESPs are also a prime candidate given the relatively known target date.
Beyond splitting up by years of study (year 1 and year 2) there’s also an option to look at mandatory vs. optional expenses. Some may feel comfortable knowing tuition will be covered for sure. While support for other expenses may be less critical provided their child can be flexible on costs if need be.
Either way, the process you’ve outlined of assigning money in the account to specific spending goals and taking on a level of risk that’s comfortable is a great way to balance the risk and reward trade-off.
Thanks Steve, yes it then becomes so personal. It’s almost like funding the retirement stage. We might be using TFSA monies to supplement education funding needs. We might be using real time cash flows to fund certain parts of the education process. We certainly did that.
Our daughter’s costs fell tremendously when she went off campus. RESP to help with some tuition. She was working. We covered food and gas bills and a few others on an on-going basis. Costs were more spread out.
So many options and nuances.
Thanks for stopping by …
Dale
The laddering of funds to match year of need is smart. As is leaving some in the equities market for out years. You don’t need 100% of the cash as a freshman. And sitting out of the equities market for 7-8 years would miss a lot of gain historically. Of course your options increase if you’re allocating $100,000 versus $20,000. Good article, Dale, with clear illustrations and easy to follow examples.
Thanks Daniel, it’s a simple to execute strategy, I think, and hope. Best to squeeze all we can out of that RESP.
Dale
I am at 15 year mark for one child and other is 9. I am also in the process of moving from TD E-Series to Questrade, after I realized that the TD account does not have a good low MER option for conserving cash option. I had them in TD Canadian Money Market – I Series(Fund code TDB164) – 0.64MER. Insane 0.64 MER for something that grew at 0.20 %. So it was eating my funds more than growing. But where do you park the first 2 years when at Questrade. They have GICs and BONDS which they say are under Fixed Income with almost same risk. Why would I not choose bonds over GICs. And a mix of Short and Long term bonds. Right now I have a mix in mind of 30% Equities, 35% Bonds and 35% GIC. But the GIC part is what I am struggling with in putting in a GIC with such low rates below inflation. https://www.questrade.com/docs/librariesprovider7/default-document-library/questrade_bonds_list.pdf
1 to 2 year GIC has rates of 0.50 to 0.60. Sometimes the HISA have special rates of 2% for 3-4 months duration, but those are not RESP accounts, just regular savings account. First Ontario CU is the highest of Dec 2020 at 1.15% for 2 year GIC.
Sorry Navin, I missed this question. I will give it some thought and will reply.
Dale
What are your thoughts on keeping a RESP 100 percent canadian?
As in no US or global securities to prevent one from suffering from withholding tax? Is this a recipe for disaster, as in not enough diversification?
Hi, I think that asset allocation and risk management should trump any tax considerations. Don’t let the tax dog wag the portfolio dog.
https://cutthecrapinvesting.com/2020/01/18/taxes-and-your-etfs-dont-let-withholding-taxes-drive-the-bus/
Dale
Thanks Dale. Very nice and simple strategy. I am planning to follow this. Quick question. My Kid is 7 years now, If I start with VEQT, after couple of years, should I sell all the VEQT and buy VGRO and hold for 2 years and do the same? (sell all and buy the next one).
Thanks Dale. I am planning start RESP for my Kid (7 year old). When we move from VEQT –> VGOR–> VBAL etc. Do we need to completely sell the current ETF and buy the next one and move on?
Good question, you could add to more conservative portfolios along the way and just keep track of your total/combined (weighted) stock to bond ratio. Again, you can follow the Justwealth model.
That said, eventually you will have to gear down the aggressive assets. At the end you are bonds and cash. Or all cash.
Let me noodle this to adjust or address the post.
Thanks for stopping by,
Dale