A cautionary tale about RESPs

Bruce Sellery says don’t cry over spilled milk. If your kid’s RESP goes awry when they are in school there’s only one thing to do: learn from the mistake and move on.

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photo by pillowhead
Question

We are very concerned about our RESPs. We were given poor advice to invest our contributions in equity mutual funds. Our two children, who are starting years two and three of university, have already used up the grant portion. The remainder in the RESPs does not even equal our contributions. How can we best protect and perhaps increase the funds that we do have?

Answer

The milk has been spilled I’m afraid. I would love to be able to turn back the clock to the second before the elbow connected with the glass, but I cannot. Nor can I change the mix of your RESP investments. Your kids are already in university and, I expect, need access to that money now. As the milk pools around your chair there is no use crying over it. Still, there are a few things you can do to move past this mistake.

Move RESP investment to cash

Yours is a cautionary tale about asset allocation. With an RESP, you know that you’re likely to need the funds around the time your child turns 18. That means that you should reduce your exposure to equity in the years leading up to that birthday. If you don’t do this and markets dip, then you don’t have time to wait for them to recover. (For more on how your asset allocation should change over time, click here.)  But that doesn’t help you now.

You could wait to see if the equity markets improve over the next year, and just cash in what your kids need in the immediate future. But I would be inclined to move it all to cash now, assuming there aren’t deferred sales charges attached to the mutual funds.

I would recommend this not because I have any insight into where stocks are headed—I don’t—but because you’ll be able to get closure on your mistake faster. Your investments won’t decline further and you’ll have certainty on how much money there is, even if you don’t like the amount. Said another way: clean up the milk immediately, instead of letting it go sour under the table. Then pour yourself another glass and learn from the experience.

Open up an “Oops Fund”

I have made a good number of mistakes in my time—ones that have cost me a pretty penny: a car accident, getting towed, holding awful mutual funds for years, along with some other mistakes that I have blocked out to protect my sanity. One of thing that has helped me move on is my “Oops Fund.” This fund exists only in my head and is designed to remind me that sometimes sh*t happens. Pretty much every year I am going to experience a costly mistake and the “Oops Fund” means that it isn’t a huge surprise.

Focus on mutual fund fees

You may have more than one “Oops” to contend with. As you now know, holding your kids’ RESPs in equity mutual funds so close to when you need the money wasn’t the best idea, but I bet there is another issue at play: mutual fund fees. The TSX is up more than 68% in the last 10 years. So if the remaining amount in your RESP doesn’t match your contributions, it’s possible mutual fund fees have eaten into your return, not the performance of the stock market.

Don’t repeat the mistake with your RRSPs

Whatever the cause, don’t repeat your RESP mistakes with your RRSPs. You will move on from this experience. My advice to you is this: make sure you correct your strategy when it comes to your retirement savings. If you thought the stakes were high for your kids’ education, they are ten times higher when it comes to retirement.

ask@moneysense.ca

One comment on “A cautionary tale about RESPs

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