RRSP vs. RESP: Which comes first?

Two MoneySense dads on which they’re prioritizing and why

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MoneySense dads Bruce Sellery and Dan Bortolotti weigh in on the RRSP vs. RESP debate.

“I’m investing in my retirement.”

Bruce Sellery, dad of one

I don’t want to be working at Starbucks when I’m 85 years old. When I retire, I want my days free to travel, gamble online and read the obituaries.

But that freedom in the future requires that I save today. If I couldn’t contribute to both my retirement and my daughter Abby’s education, and I didn’t have a pension, I would choose RRSP over RESP.

What? Don’t I value education? Don’t I love her? Of course I do, on both counts. But the fact is that Abby can take a loan or get a job to pay for her education. As an octogenarian, I wouldn’t be a good credit risk for a retirement loan, and as agile as I intend to be at that age, operating Starbucks’s espresso machine during morning rush would be hell.

I also don’t want to be a financial burden on my daughter. Like verbosity and male pattern baldness, longevity runs in my family. I need to plan ahead to pay my own bills so I don’t end up sleeping in her basement and cleaning out her fridge.

Plus, there’s the math. If I contribute $2,500 per year to Abby’s RESP for 17 years, I’ll qualify for the full $500 Education Savings Grant each year. That $3,000 will be worth about $51,000 by the time she needs it, and will go a long way to fund the books and beers that come with post-secondary education.

Let’s say, instead, I put $2,500 a year into my RRSP for 17 years. Assume a 30 percent tax bracket and that I contribute back the tax refund I receive every year. After letting the money quietly compound, I’ll have almost $285,000 by age 65 (depending on the interest rate). If it really was an either/or situation, the math favours the RRSP.

For many Canadian families it isn’t so black and white—savings are typically a mash up of throwing a little here, a little there whenever you can. Ideally, you’ll do bit of both—saving for your retirement and your kid’s education at the same time, enabling you, in your old age, to be the café customer and not the barista.

“I’m investing in my kids’ education.”

Dan Bortolotti, dad of two

There are parents who have enough money to max out their retirement accounts and save for their kids’ university education. And then there are the rest of us who need to set priorities.

Over the past 20 years or so, my wife and I have contributed regularly to our RRSPs, but only after putting money aside for our kids’ education. Today our daughter is halfway to a bachelor’s degree, and our son is just about to enter his first year of university. We expect both to graduate with zero debt.

Not everyone will agree with our decision to put our kids’ education ahead of our retirement, but here’s our reasoning: We expect our kids to cover part of their university costs with summer jobs and co-op placements, because they need to have skin in the game. But unless they can swing summer jobs as investment bankers, that won’t be enough: Tuition plus room and board adds up to at least $15,000 a year. Without our help, they’ll leave university with diplomas and debt, and they may feel pressured to accept the first jobs that come along, even if they are unrelated to their fields of study. That defeats the whole purpose of investing in education.

There are also good financial reasons to contribute to RESPs, even at the expense of retirement savings. The government tops up your contributions with a 20 percent grant, to a maximum of $7,200 per child, depending on how much you deposit each year. (For low-income earners, there are even more generous incentives.) But to collect all that free money, you need to open an RESP by the time your child is 10 and make all the contributions by the end of the year she turns 17. The RRSP window is much wider.

Our kids were born while we were in our twenties, so we won’t even be 50 when they’ve finished their degrees. That will leave us at least a decade of peak earning years to supercharge our RRSPs. If we’re short on cash as retirement looms, we should be able to work an extra year or two. And if we’re really strapped, we can always move in with our kids.

A version of this article appeared in the March 2015 issue of Today’s Parent magazine with the headline “Save for your retirement or your kid’s education?”, p. 104.

Read more:
RESP: A parent’s guide to saving for school>
Why my kids won’t get a free ride to university>
Should you borrow money to invest in your RRSP?>

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