Episode 33: RESPs | The Kids Are Alright

If we learned anything from Colin and Josh in this episode, it's that Josh really doesn't like high-pressure sales techniques or scholarship trusts! It doesn't have to be terribly complicated, but there are a few different solutions to make sure your kids are able to access the education they need and want when they're ready.

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BARENAKED MONEY PODCAST: EPISODE 33
RESPs | The Kids Are Alright
Speaker 1:
You're about to get lucky. With the Barenaked Money podcast. The show that gives you the naked truth about personal finance with your hosts, Josh Sheluk and Colin White, Portfolio Managers with WLWP Wealth Planners, iA Private Wealth.

Josh Sheluk:
Here we are for another in-person episode of Barenaked Money. Colin and I get the flesh, looking at the whites of each other's eyes. Today, we're talking about education. Everybody needs a good education, right Colin?

Colin White:
Oh. Really? You want to start right there. Well, as a parent and as somebody who's gone to school, I have opinions about education that aren't shared by everybody. And that's not going to attain a whole lot of this conversation, but it is going to provide some color. Education is a thing. People want to give education to their children because they believe it leads into a better life. And they can argue that by [inaudible 00:01:02], that's true. We'll save the rest of the argument for later in the podcast, I'm sure we'll get into it. Because we're going to start by talking about how I feel about how to fund education. So Josh, pop quiz, what's the simplest way to pay for your kids' education?

Josh Sheluk:
This thing called a scholarship trust is what I've heard. Everybody's told me that this is the absolute best way to do it.

Colin White:
No, no. Your bank account, Josh. You got money in the bank and you pay for your kid's education, that's the simplest way to do it. And you know what, for some people it doesn't have to get more complicated than that. But if you're willing to put up with a bit more complication, it might be able to get better, right?

Josh Sheluk:
Yeah. That scholarship trust.

Colin White:
I just thought I was going to prompt you to keep going with that. Definitely, keep going. Okay. So we'll save that for last. Let's talk generally about RESPs, Registered Education Savings Plans. Now as professional financial advisors, free money. Are you in favor of free money, Josh?

Josh Sheluk:
Especially in favor when it comes from the government.

Colin White:
There you go. Free government money. It just tastes better and it smells better. So RESPs offer a [inaudible 00:02:13] who's trying to provide for better education for their children, a way to partake [inaudible 00:02:19] free money. So how does that work, Josh?

Josh Sheluk:
So you have to have an RESP opened first. It's an account type, an investment account type. And the government is going to match 20% of your contributions to that RESP, up to $2,500 per child per year.

Colin White:
Yeah. So $2,500 contribution will be, the 20% of that will be granted. Yes.

Josh Sheluk:
So what that means, you're looking at about a $500 per year grant from the government for each one of your children, between the ages of 1 and 16.

Colin White:
What if I miss a year, Josh?

Josh Sheluk:
Well, if you miss a year, Colin, I'm glad you asked. So if you miss a year, you can double up underpayments in a future year. So if you miss a year, not the end of the world, if you miss the $2,500 contribution one year, or if you contribute less than $2,500 for one year, the 2,500 or less of contribution room will carry forward to a future year. So let's say, for example, that you missed five years, you open an RESP when your child is six, does it still make sense? Yes, it does still make sense, because from the age of six going forward, you'll have five years where you can contribute $5,000 in each of those years and get up to $1,000 of contribution of grant, rather, from the government for each of those years.

Colin White:
And I love that you're calculating the maximum amount and I just want to allow for the fact that you may not love your children that much, therefore the maximum amount may be in excess of what you really need to put away for the little gremlins, depending on your given mood, but also depending on your other goals you have financially. Right? Because again, people are trying to balance paying their mortgages, putting money in RESPs. If you only need $20,000 to do what you want to do for your child, then why would you put away 70? Right. Because maybe that other money could go and get other types of free money from the government to any different kinds of strategies. So, step one is to have a goal, maximizing free money? Yeah, that's not the worst goal, but there may be more effective ways of accomplishing this goal while still accomplishing other goals.

Josh Sheluk:
So let me ask the question then. Somebody sitting in front of you says, should I contribute to an RESP, an RRSP or a [inaudible 00:04:44]? What's your answer?

Colin White:
You sly W, it depends. No, this is where the planning aspect comes in. And this is, again, we're talking about a specific part of planning here. And when people start talking about maximums, unfortunately some people can stream that as advice.

Colin White:
Well, it must be a good thing to put away $2,500 a year, because that's what the government will match. And they let that substitute for actual rational thought, which may lead you in a completely different direction. So our challenge to clients is always to start from, what are your expectations? Do you want to pay for tuition for your child for four years? At what school? Do you want to pay for tuition and books? Do you want to pay for tuition, books and lodging? Do you want to send them to Yale so they can become a doctor? I don't even know if Yale trains doctors. What is your goal? Where are you starting from?

Colin White:
Because you work backwards from that, then maximize your free money. Running around, trying to grab all the free money you can get, that you can't use, that isn't necessarily the best way to do it. So let me ask you another question, Josh. What happens if the little munchkin doesn't go to school, do I get to keep the free money?

Josh Sheluk:
So you don't get to keep the free money, but there-

Colin White:
I must lose the rest of it too.

Josh Sheluk:
Well, no. So here's the good thing about it. So, first of all, I'm going to take a step back because you might have more than one little munchkin. You may have multiple little munchkins. You may have dozens of little munchkins. Who knows? If you opened a family RESP, the money that's in that RESP could be shared between the little munchkins. So child one, munchkin one, goes to school. Munchkin two doesn't, that's okay. Munchkin one could use the vast majority of that RESP that's there for them, as long as it's a family RESP. That compares to an individual RESP, where you'd have a separate account for each munchkin. And if one of them doesn't go to school that whole RESP needs to be raft after one way, shape or form.

Colin White:
Yeah. We often recommend family RESPs because again, it's just a little bit easier to deal with the curveballs you get thrown at, the average family in the run of a life. And again, if you think that you just brought a new life into the world and they're definitely going to do a four year degree somewhere, I don't know how to disappoint you gently or quietly, but wow. Aren't you being optimistic? It may turn out that way, but I really wouldn't put it down as being really confident. Right.

Josh Sheluk:
Yeah.

Colin White:
So life doesn't go in a straight line.

Josh Sheluk:
Yeah. So back to your question, what happens if, let's say, none of your children go to school. You have this RESP and you think, oh, well, I have this education money, can't use it for anything. There are really a number of different options, but ultimately what happens is, you have the grant portion, that free money from the government is no longer free. The government says, I gave you that for education, I want it back. So you give the government back the grant portion of that RESP but you can keep everything that you contributed to that RESP and the growth of that money over the last 15 to 20, some odd years. There are, depending on what you do with that money when you pull it out, potentially some tax implications along the way for you, but it's not necessarily a bad thing. You still get access to all the money and the growth of your money over time, just may have a couple of tax things to deal with along the way.

Colin White:
And another wrinkle that's in there, which is particularly unpalatable to me, because I don't understand the point. If you were so indebted to your [inaudible 00:08:25] that you would like to see them get money, the grant money that your munchkin is not going to use can actually be gifted to a university for no apparent reason. Even though you paid them to go to school there and you feel obligated to give them more, which again, I don't understand. It's another use for the free money, you can actually send it to an institution that doesn't deserve it so that they can use it for whatever purposes that they have in mind.

Josh Sheluk:
It's funny that it never really occurred to me that it was a little bit questionable, maybe, to give to a university until you said, why should I give my hard earned money to a public institution, a publicly funded institution? And I thought there's maybe a lot of sense to that. That's a really good question. That's kind of the reverse of getting the free government money, isn't it? Giving government sponsored institution free money.

Colin White:
Yeah, no, it's amazing how we get conditioned over time. It's sort of like how, when you're around Christmas time, to give your wife a gift of a vacuum cleaner for Christmas would be the worst thing in the world. My wife would use it to beat me to death. But somehow, I was given a Shop-Vac for Christmas one year and I was really, really happy. And I'm going, how did I get conditioned to be excited about receiving a vacuum cleaner when other people consider this to be an insult. Anyway, I'm in the weeds again.

Josh Sheluk:
It's not a vacuum cleaner. It's a Shop-Vac [inaudible 00:09:44]. It's all marketing. All marketing.

Colin White:
So now do you want to... You keep talking about these scholarship trusts. I mean, they sound really, really good because I get to profit off other kids who don't go to school. Isn't that how they work?

Josh Sheluk:
Yes. I guess in a nutshell, but they're also, [inaudible 00:10:04] can I call them that? Was that fair?

Colin White:
We're going to find out when the edited version of this appears online.

Josh Sheluk:
That's right.

Colin White:
I'm not going to disagree with you.

Josh Sheluk:
Yeah. So the scholarship trust, where do we start? Colin, [inaudible 00:10:20].

Colin White:
Let me help. Let me help, because you're going to blow an aneurysm here if you keep going. So let's just clear a couple of things up. Number one, they're going to call themselves... They're going to the [inaudible 00:10:33] talk about the CESG. The Canada Education Savings Grant. And they're going to look like and sound like, maybe even taste like an RESP. But what differentiates the scholarship trust programs from an RESP account is what happens at dissolution. If you decide you no longer to want to contribute or if you decide the kid's not going to school.

Colin White:
Under a true RESP account, those are big issues. The money you put in is still yours. You could put more money in or less money in, year over year, none of that changes. They're perfectly flexible.

Colin White:
The scholarship trust programs have a fixed monthly payment that's a bill that can cause you pay if you try to change. Either you can't or there's huge penalties or all kinds of other problems with, if you're changing your monthly payment. Which again, from our perspective is ludicrous. If I'm setting up a monthly savings program, why are you hitting me with a stick and telling me I can't change it? Again, 18 years is a long time to go on a straight line. And the other thing is, they put artificial rules and regulations on money coming out, and you can't actually forfeit money in some situations that you would otherwise do if you don't attend an accredited universe, which is a different definition sometimes than what the RESPs are.

Colin White:
So what you have is a product that uses some free money, which we are record of saying is good. And it avails itself appropriate programs, which are good, but has punitive measures built into it that really make them unpalatable compared to the alternatives.

Colin White:
Again, life doesn't go in a straight line. I can't say that enough. So if you're still in the hospital and you're signing up for something that guarantees a monthly payment for the next 18 years, for an education that you may or may not exist or qualify for, don't do it. The same amount of money can get you as much benefit or more benefit with much more flexibility. And have you recovered enough to comment now, Josh, or you still [inaudible 00:12:33]?

Josh Sheluk:
Well, you just triggered me there for a second because you said, if you're still in the hospital and signing up for these things... And this is a thing that maybe makes my skin crawl more than anything else about these, is you could be a new mother still in the hospital, and you're getting a phone call from a salesperson for one of these scholarship trusts telling you or asking you, do you love your child? Do you want them to go to school? Your three day old child? If your answer is, yes, you should sign up for the scholarship trust. And by the way, here's some free money. They don't tell you about all the catches. They don't tell you about all the fees that are involved because that's one thing you had mentioned. There's layers upon layers of potential fees here and as well. So higher fees, less flexibility, a little bit predatory and maybe sacrificing a bunch of your money sometime down the road, versus an [inaudible 00:13:25] fee that does none of these things. What are you doing?

Colin White:
Well that's something a little predatory. But to me that's a binary state, either you're a predator-

Josh Sheluk:
Well, it's like they're setting a trap. They're not necessarily eating you if you do everything well.

Colin White:
Here's something else to put in your guide for everybody out there. If anybody ever comes up to you and asks you, do you love your children? And the next follow up line is, then you should do this. You're being sold to. They're trying to get you to demonstrate your love to a child by making them money. And it is one of the evilest, oldest, stupidest, most transparent tricks in the book.

Colin White:
So, if anybody asks about loving your family or loving your children and as an inducement to buy something, just walk away. That person's not trying to help you. Now if, on the other hand, you go through more of a complete planning exercise and get properly prioritize where the education of your children, the financial support of the education for your children lies in your plans, and you decide to make an allocation towards that because your current cash flow allows for it. This is a way to augment that to make it better. It does not mean that you need to desperately find a way to put away 2,500 bucks a year, regardless of anything else that's going on in your world. But it is something that makes it a little bit better. Maybe fits in with the other financial goals that you set for yourself.

Josh Sheluk:
Yeah. And for record, do you love your mother? Do you love your father? Do you love your brother, your sister, your grandma? Those are all sales tactics-

Colin White:
Yep.

Josh Sheluk:
In the same vein. So, go ahead.

Colin White:
Well, we never got into our argument about the value of higher education and I think it's all bogus.

Josh Sheluk:
Well, you don't think it's bogus, though.

Colin White:
I think it's overvalued. I think that we've got a huge shortage in the trade. We've got lots of clients in the trades who make exceptional livings for themselves and are very happy, and they never went to higher education. And I've got lots of... They're not clients, people that I've met and oh, who've been in lot of higher education. He never really got out of the launching locks.

Josh Sheluk:
Yeah.

Colin White:
So, yeah I guess the point I'm trying to make from a planning perspective is, be careful of the financial burden that you take on in making educational choices. It's all nice to come out of school and my kids' just came out school and the counselor's telling them, what do you dream to be when you grow up? And it's like, well, I want to be a vet. Why? Because I like dogs.

Colin White:
No, it's going to be more to it. So unfortunately there's a span in life where everybody's chasing dreams and if you blink twice, all of a sudden you're $80,000 in debt having chased a dream and realize that it's not practical in any way, shape or form. And now you dug yourself a hole that you're going to have to find a way to dig out of at some point.

Josh Sheluk:
So, my [inaudible 00:16:14] was not that higher education is the panacea, you're guaranteed success if you have a bachelor's degree or a master's degree or anything like that. And by the way, RESPs, eligible for apprenticeship or something like that-

Colin White:
Yeah.

Josh Sheluk:
Along the way, so that's good. My biggest thing is, I think people should chase their dreams. I think they should go for that. Is that necessarily going to work out well for them, financially? Maybe not. Are you guaranteed a six figure job if you do four years of university? No, but I think in this world that you're really, really good at what you do. You're probably going to be financially successful along the way.

Colin White:
Well, no and I'm absolutely, I don't disagree with anything you said. My only comment is, taking on six figures of debt in the process of doing that, that's problematic because again, you're creating yourself a hole to dig out of later. That's not necessary. Chase your goals, but again, don't rack up a debt that's going to take you 20 years to pay back because your dream wasn't that exciting. I will guarantee it. It wasn't that satisfying. I mean, to get the end of that [inaudible 00:17:18]. Yeah. It didn't, it's not going to keep you warm 20 years in.

Josh Sheluk:
Go in eyes wide open, I guess.

Colin White:
Exactly. Ask somebody. Again, chase your dreams and living the life you want to live, fantastic. Digging at a financial hole for yourself you can't ever comfortably get out of. Yeah, please don't do that.

Josh Sheluk:
Well, that probably goes for any profession, no matter what. If you can't... If you're not going to be able to get out of the hole, don't dig it in the first place.

Colin White:
See, there you go. So it's constrained, dream chasing. I guess that's what we're talking.

Josh Sheluk:
That's a new one. I haven't heard that. So having said that Colin, is there, in your mind, a right amount that somebody should be aiming for, in terms of education saved? It doesn't sound like it.

Colin White:
Well, no. I mean, it depends. I mean, in my situation, I raised my family where there's four universities that you could walk or drive to. So yeah, in our situation it set aside enough money to be pay tuition for four years. That's pretty generous, right? It's not going to be the life, my children couldn't get an education. Other situations where it's, hey, there's nothing that's local. Or I want to give my child to the opportunity to chase bigger dreams that may occur somewhere else in Canada, or internationally. Then that dollar figure gets bigger. But that's, to me a very, very personal choice. Some people will say, you know what, hey, I only want to pay half their education. I want them to pay the other half so that they're invested. I've had other clients who set it up so they paid zero education.

Josh Sheluk:
Yeah.

Colin White:
And when the child graduates the [inaudible 00:18:45] and pays out of the student loan, because they wanted them to make all the decisions all the way along with the weight of the financial aspect of it on their shoulders. But at the end of the day, didn't want them to have to deal with it. So they chose to do it that way. So this is one of those things where a financial advisor can't give you some perspective. Like if you sit down, explained your circumstances, you can ask the question, what have other people in this situation done? Because there'll be a range.

Josh Sheluk:
Mm-hmm (affirmative).

Colin White:
And you can just identify yourself on that range and pick a target. But with everything else that we talk about again, don't have an artificial target, it's like picking your pitch and date as your retirement date. Or, this is my [inaudible 00:19:22] speed limit so this is how much I have to stay here. Those are all artificial things that may or may not be serving your true goals over time. Just do some math. You may find of that you shouldn't be maxing at your RESP right now. Or you should be maxing your [inaudible 00:19:36]. Don't take these limits that are put in place as, that's my target because it's not. It may not be terrible, but it may not be odd.

Josh Sheluk:
Yeah. Although, one thing that we've been talking about a lot this week is, the cost of education has gone up quite substantially over time. So if you went to school 10 years ago and graduated 10 years ago and think, yeah I probably need to save five grand a year for my child, you might be sorely disappointed in 15 years-

Colin White:
Yep.

Josh Sheluk:
When inflation for university costs runs in 5% per year for that entire duration.

Colin White:
Well, there's been the periods very recently here in Canada where the tuition inflation rates have been double digits.

Josh Sheluk:
Yeah.

Colin White:
They gave in 10, 12, 13% over periods of time. As anybody [inaudible 00:20:22] when you started drilling into it, the nuances are even more complicated now because the amount of money awarded on scholarships is also going up. So when I went to school, if you didn't have an ID average, you didn't get a stab for any scholarship money. Now, if you show up to an open host and you can show them a 70% average after grade 11, here's 500 bucks, even when it's that simple. So yeah, the tuition number is higher, but it's also quite a bit easier to get some money so it gets a little murky as to what the true costs are. So again, if you look at the local universities and again, the ones I had experiences with, 10 grand a year is going to be a ballpark for tuition and books.

Colin White:
And that's probably pretty reasonable right now for one index that going forwards, maybe apply for 6%, a little bit higher than what we expect overall inflation to be.

Josh Sheluk:
Yeah.

Colin White:
You're going to be at the ballpark probably, but again, keep an eye on it. That's one of those goals that you review five years now.

Josh Sheluk:
Mm-hmm (affirmative).

Colin White:
It's a [inaudible 00:21:14] that you're going to realize that, it's $13,000. Wow. That happened fast. So you have to adjust to those kind of things, but it is growing up in price more quickly than other things. And you're not putting a kid in school every year so you may not see it. So don't look at it one year and say, oh, I know what the number is and 10 years go by, you didn't look at that number. All the universities [inaudible 00:21:36] go take a look at their websites and you can find out what the current tuition is. Not every year, maybe every couple years, just make sure it's on the ground you're looking at.

Josh Sheluk:
Yeah. And you made a good point there, scholarships available, bursaries available as well. So [inaudible 00:21:50] definitely, if you have a child going to school in the near term, look for those scholarships and bursaries to see if there's some financial assistance that you can get.

Colin White:
I got one more soapbox feeling because you brought up scholarships, and having been involved in minor sports a lot in my life. 97% of scholarship money is non-athletic. You want your kid to get a scholarship? Don't take them to the gym, take them to the library. Stop wasting everybody's time.

Josh Sheluk:
Can't end it up angry, better than that Colin.

Speaker 1:
This information has been prepared by White LeBlanc Wealth Planners, who is a Portfolio Manager for iA Private Wealth. Opinions expressed in this podcast are those of the Portfolio Manager only and do not necessarily reflect those of iA Private Wealth Inc. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.

Speaker 4:
We've noticed something. It seems there are a lot of people who would rather try to figure out their lives with an online calculator than air your finances to a human. Stop doing that. You need to talk to someone who can help direct you, tell you where to start with what you've got to make the biggest impact on your future. You can't figure that out at doihaveenoughcash.com, but you can figure it out by chatting with us. Call us. It'll be okay. You'll see.

Speaker 5:
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