Jack, the three-year-old Warren Buffett wannabe, is in an investing mood now that he has a few thousand in his RESP.
Actually, truth be told, it’s his Nana (me) who is hoping to channel him in this direction. But what should he (his parents) buy for his fledgling education account to ensure any post secondary studies are as debt-free as possible?
Last week I wrote about the issues parents face in terms of savings choices. RESP? TFSA? RRSP?
Because the government tops up RESPs with a 20 per cent grant on the first $2,500 contributed, I suggested his parents focus savings efforts here, at least until they achieve that $2,500 mark to receive the maximum grant.
The other option is to contribute some to RESPs and some to RRSPs, then take the tax refund and plunk it in the RESP.
But how should they invest the money? Banks, where you open RESP accounts, want to sell mutual funds, most of which charge high fees.
Also, as we’ve seen with the latest incarnation of market volatility, equity (stock) mutual funds are offering little joy and much risk these days.
Let’s say Jack persuades Mom and Dad to invest with the tortoise rather than the hare — i.e. GICs rather than the stock market. After 15 years, assuming they achieve a four per cent average annual compounded rate of return over time -— that’s the GIC return plus reinvested income — he will have nearly $62,000 for his post-secondary education.
Boring, yes. Safe? Oh yes.
The government gives you a 20 per cent return annually on any money contributed up to $2,500. This means you don’t need to take any risks at all.
One complication is that most banks have a minimum GIC amount, usually $5,000. But Jack can wait until he has that in his RESP before he directs his parents to buy a GIC and then roll it over annually with the additional contributions added in.
Another issue is rock bottom rates. Go for third party GICs offered by other financial institutions at your bank. Rates are higher, though the minimum investment might be also.
Here’s an example: CIBC’s one-year GIC pays 0.9 per cent annually but the bank offers three GICs from other institutions paying just over 1.7 per cent.