My son is two months old and I want to open an RESP for him. I also want to open a separate non-RESP account to help him save for big-ticket items, like a wedding or a down payment on a house. And finally, my husband and I want to invest $500 a month to start saving for our retirement. Where we should start investing our money?
Hooray for the RESP. You definitely want to open an RESP for your son. He’s going to need big bucks to pay for his post-secondary education in 18 years. Plus the juicy 20% government grant is the best guaranteed return out there.
But boo for the big-ticket items account. I have a three-year-old and of course I would like to be able to give her a splashy wedding and help her buy her first home. But you need to get your priorities straight. So much of parenting requires you to be selfless, but when it comes to saving for your son as adult, you’re better off being selfish.
First things first: Your retirement
You listed retirement savings as your third priority, after the RESP and the big-ticket account. This is a big mistake. You have put your wants (wedding or house) before your needs (putting food in your fridge when you’re 80-years-old) and you just don’t have the flexibility to do that.
I see the “offspring first” behaviour a lot and it breaks my heart. I talked with one woman recently who withdrew $2,000 from her retirement savings to buy her 22-year-old son a couch. A couch! One she might have to sleep on some day because she doesn’t have enough money for a place of her own.
It is one thing to save for a child’s education. He doesn’t have the ability as a toddler or a teen to earn what you can. Plus the government grant makes the RESP really compelling. But saving for an adult’s home down payment instead of your own retirement makes no sense. You do not have a financial obligation to him as an adult, either practically or morally.
You won’t get far on $500 a month
It sounds like you’re unclear as to how much money it is going to take for you to retire. I don’t have any details on your other assets, pensions, or how much your lifestyle costs you. But I can tell you that saving $500 a month between the two of you isn’t going to add up to as much as you might think. You’ll have just $570,000 saved in 35 years time, which would only be enough to support you if you made about $29,000 combined in your final year of work. This is based on [the rule of thumb that you need 20 times your earnings to provide sufficient income to last you from the day you stop working until the day you die. The $570,000 number might seem like a lot, but it really isn’t.
The first thing I would do is to take a step back and look at your retirement plan. Find out how much will you need to save to retire. That will give you some sense as to how far off that $500 actually is.
Make the most of your RESPs
The 20% government grant is worth up to $500 per year. To maximize the RESP you’ll want to deposit $2,500 per year into the account. That works out to just over $200 per month and half of that amount could come from the $100 Universal Child Care Benefit cheque that you’ll receive every month.
You’ll want to make sure that the RESP money is invested in a simple, low-cost vehicle such as a low-cost mutual fund or an exchange traded fund. Click here for my recommendation of an ETF for an RESP.
You love your son. And I love that you love your son. But do everyone a favour and balance that love with prudent action that won’t leave him with the burden of supporting you in your old age.