Should your child’s future trump saving for retirement?

Put small cash gifts into an RESP

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So you want to help your child get a good education…but you also need to make sure you retire on track. Which priority should come first? Here’s how you can balance your child’s needs with yours.

RRSP vs. RESP: Which comes first? »

1. Budget carefully

– First, study your monthly cash flow and create a budget, says Paul Shelestowsky, senior wealth advisor at Meridian Credit Union, which provides retirement and education savings products. That way, you’ll see where you can free up money and how much you can put aside for your child’s education and for your own retirement.

“Important as it is, we can’t get too aggressive with [saving for education] and start jeopardizing loan payments and things like that,” he explains.

2. Start early

– If you don’t start saving for your child’s education well in advance, the closer you get to his or her 18th birthday—and to your retirement date—the trickier things will become.

If your child is seven, for example, you have only a decade to save for his or her education, but you may have another 20 years to save for your retirement.

Even if you have less than 20 years to retirement, there’s still an argument for prioritizing education savings, says Shelestowsky. Why? Because once children start school, education savings evaporate quickly. But that’s not the case for retirement savings: those can be managed for a longer period.

And, Shelestowsky adds, part-time retirement employment might be an option. “There are more options for a retiree to make up a shortfall than there are to make up a shortfall for an education plan.”

3. Use an RESP

– Because it involves free government money, the registered education savings plan (RESP) is the best way for the average Canadian parent to save, according to Shelestowsky. For every dollar you deposit, the federal government puts in 20 cents. You can contribute up to $50,000 per beneficiary (there’s no annual contribution limit), which would attract $7,200 of government aid.

And that total of $57,200 assumes there’s no growth. If you get returns of, say, 2% to 5%, and you maximize contributions, you could potentially cover all education costs, says Shelestowsky. (Currently, four years of post-secondary education costs around $65,000, on average.)

4. Put small cash gifts into the RESP

– When kids get cash gifts from grandparents and other relatives—even if it’s as little as $50—put that money into an RESP, Shelestowsky advises. Do the same for the monthly universal childcare benefit ($160 for a child under age six and $60 for each child age six to 17).

5. Involve your kids

– Recent research reveals that you foot the entire bill, you may discourage your kids from working hard. After tracking U.S. undergrads in the Midwest for five years, Laura Hamilton, assistant professor of sociology at the University of California, Merced, found when parents funded their children’s education, the kids’ grades dropped. Hamilton’s research showed that, unlike students who were paying part or all of their own way, youngsters whose school expenses were 100% covered had no incentive to excel academically and use resources strategically, because they lacked appreciation for the costs involved.

One solution, according to Hamilton, is to set minimum grade requirements and be ready to withdraw financial help if those requirements aren’t met.

Another solution is to encourage kids to apply for scholarships and get part-time jobs during high school and university. Also, Shelestowsky adds, show kids your budget calculations so they know where the money’s coming from.

What options do parents have with RESPs if kids forgo education?

1. Designate another child to receive the money.

2. Transfer the money to an RRSP. Up to $50,000 can be transferred tax-free under certain conditions.

3. Close the RESP, return the government grants and get the rest of the money back.

If you have more than one kid, open a family RESP so the funds can be allocated between different children as needed, Shelestowsky advises.

If you can’t afford to put aside money for education, you can take a loan and deposit it in an RESP so you can still get the 20% government grant, he adds.

This article first appeared on Benefits Canada.

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