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Why is the RESP an Out-dated Option for My Child’s Future?

This is a continuing blog in the series Millennial Parents’ Guide to Financial Planning for Children.

My father always told me: “If you’re going to spend your time thinking, you might as well spend it thinking big.”

While I am President of insuranceforchildren, I still advise and manage investments of two-dozen successful clients whom I previously managed when I was at RBC Dominion Securities.

In September, I invited five of my clients to a private dinner at Mistura, one of my favourite Italian power restaurants. I believe all five of these clients are going to grow tenfold over the next ten years, and exit with a large liquidity event.

Given their success, I wanted to learn what roles their parents played in shaping their future.

Each of these clients started their own company in their early 30s and all followed a similar path to get to where they are today—about a decade later—with children of their own, all under the age of five.

I wanted to know how they were planning for their children’s future.

Their responses provided an insightful reminder…

You don’t need to reinvent the wheel to become successful; use the one that worked.

As we settled to dinner, I began by asking how their parents planned for their future. The first topic was of course education. All five said their parents believed in pursuing a great education. However, all said their parents were realistic in recognizing they could not predict what their children would want to do in life or what and where they would study when they turned 18.

Because their parents knew the economies were global, education was going global as well and none of their parents opened an RESP because of their concerns for the restriction it would place on their children’s options in the future.

They felt the RESP wasn’t flexible enough for the future.

While they believed the RESP was a well-intentioned government program set up in the 1970s to help parents save for their children’s education. They knew it was a plan ideal for the days when their children were most likely to pursue their post-secondary education locally, and also work for a local company after graduating.

Their parents believed education in the future would be global and the programs their children would choose to study were probably not even created yet.

They understood that so much influencing their future success was unknown.

And therefore their children would need a flexible plan – one without limits on how much they could save for their children’s future education and without restrictions set by government bureaucrats on what their children studied, where they studied and what path they chose to follow.

Following the advice of their parents, none of my colleagues chose to set up an RESP for their kids and set up their own plans.

One of my clients already set up ties to MIT and Wharton business school because of their programs in AI and Bio Tech where the average tuition for a bachelor’s degree today is over $50,000 a year and over $200,000 for an MBA.

She had looked at RESP because her bank advisor kept telling her to open the RESP. He kept repeating, like a parrot, “You get 20% from the government to match whatever you contribute to use for your son’s education.”

As she had a great career and above average income, she said, “That’s great. Let’s start with $5,000 this year and increase it to $10,000 next year and beyond.”

She asked if that means the government would match her contribution with $1,000 this year and $2,000 every year until her son starts university.

The advisor sheepishly said, “No, they’ll only contribute a maximum $500 each year if you put in the maximum of $2,500 ever year up to age 17.”

He said because her income was over $85,000 a year, the maximum the government would match her RESP contribution by the time her son turned 17 would be $7,200 if she deposited $36,000 by the time her son was 17.

She looked at him and asked, “Do parents know this when they sign up for this plan?”

He said proudly, “Absolutely. In 2015, our parents contributed an average of $1,509 to their children’s RESP, and really loved getting the $300 to help save for their child’s education.”

As soon as he said $1,500 a year, she thought to herself: Where in the world would a child get an education for $25,000, 15 years from now?

The average cost for students pursuing a four-year bachelor’s degree today is $68,000. And that’s expected to climb to $125,000 for kids born today, according to all banks and financial experts.

Three of my clients said they invested for their kids’ futures in the following two parts:

1. Open a Child Plan participating whole life insurance plan for their children.

This accomplished three goals with one plan…

Lock in their life insurance at low rates.
They were able to lock in their children’s future life insurance when they had their family at very cheap rates (since they were kids and they hadn’t done the crazy things their parents did as teenagers).

Contribute with no maximum.
Unlike the RESP, there was no maximum on how much they could deposit into their Child Plan for their children’s future education goals.

Their Child would earn annual tax-free dividends for life.
The annual dividends their child would earn during their entire lifetime, as well as the growth, would be completely tax-free. And they loved knowing they could transfer the Child Plan completely tax-free when they felt their child was ready to handle the responsibility of all that money, and not simply because they turned 18 and the government said it now belongs to them.

2. Use their TFSA as a tax-free direct investment account.

This strategy meant they could invest extra funds, the growth would be completely tax-free and they could access as much as their kids need for their education expenses, tax-free.

In addition, the TFSA allowed them to put all the funds they used for their kids’ education right back into their TFSA at one time. This was an incredible advantage since they couldn’t do that from their regular investment accounts without paying a huge tax bill.

When we finished dinner, my clients told me it’s great knowing they weren’t alone in their plans and dreams for their kids’ futures.

They said because the RESP was marketed so heavily by the banks, all their friends who set up RESPs looked at them like they were from outer space because they didn’t want the $500 per year and wanted to go their own path.

This is an ongoing series in Millennial Parents’ Guide To Financial Planning For Children. Michael Lampel is President and co founder of insuranceforchildren.

Child Plan™ is Canada’s fastest growing alternative to RESP. It’s a secure and flexible way to invest in your child’s future.

Sample illustration of Child Plan™ Cash and Insurance Values

Based on a Monthly Deposit of $225 per month

Age Accumulated Cash Value Life Insurance Value
20 $80,448 (Education) $770,802
35 $184,850 (House) $1,070,880
45 $325,714 (Security) $1,343,568
65 $964,321 (Retirement) $2,082,564

Sample illustration is based on a $225 monthly premium for twenty years, starting when the child is less than 1. Cash and life insurance values are based on the current dividend scale of 6.0% from a Canadian Life Insurance Company. This example is strictly for illustrative purposes only, the annual dividend scale is not guaranteed and values may differ.

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*illustrations are reflective of the annual premium amount

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