Funding post secondary education is becoming increasingly expensive. But there are ways to save effectively for these costs, including registered retirement education plans (RESPs). Many clients, however, need help navigating what can be a complex system. This is where you can provide important value to your clients, says Caroline Dabu, VP and head of BMO’s Wealth Planning Group, in Toronto.
There is no doubt that the need is there. Dabu estimates that about 75% parents with children under the age of 18 do not fully understand the potential costs of post secondary education. Perhaps that’s because the numbers can be daunting: a four-year university degree can now cost upwards of $60,000. Dabu estimates that could rise to more than $140,000 for a child born this year.
But with many families facing more immediate bills, ranging from the mortgage to child care, there can be a tendency to put off saving for post-secondary education, Dabu says. Too often, Dabu says, clients delay starting the process or do not maximize their RESP contributions. There is also often a knowledge gap when it comes to understanding the legal or tax implications of using different types of RESP accounts.
“It’s a balancing act,” says Dabu. “It goes back to having a disciplined financial plan for education savings to help manage competing financial priorities.”
Dabu suggests four ways to help your clients with this planning challenge:
> Clarify client goals
Many clients have difficulty articulating a clear vision when it comes to funding post-secondary education. It’s your role to make sure that conversation happens at the outset of your relationship.
For example, if you are taking on newly wed clients, it might be helpful to know if they are planning on having children.
This conversation will help you develop a plan of attack when it comes to saving for post-secondary education.
> Get your clients saving early
One of the most common blunders is waiting too long to start the saving process. You can help clients over that hurdle by explaining the power of compound returns when there is a long-term saving strategy in place.
For example, getting your clients to commit $2,500 per year for 12 years, starting at birth, will transform a total contribution of $30,000 into $55,992 by the time the child is 18, assuming a 5% rate of return.
Contrast that with parents who invest $5,000 per year for six years, beginning when the child is 12 years old. While the principle investment is the same, the latter investment will grow to only $35,391 at the same rate of return.
One suggestion to get a client on track and keep them there is to set up regular contributions that are automatically deducted (weekly or monthly) from their bank account.
> Get your clients to maximize their RESPs
According to a recent study from the BMO Wealth Institute, only half of Canadian parents have set up an RESP at the time of their child’s birth. The report also found that only about a third of parents are taking full advantage of the government grants that are available for RESPs.
“[Advisors] should make sure that parents don’t leave government money on the table,” says Dabu.
One way to ensure that doesn’t happen is to flag the contribution deadline, Dec. 31, well in advance.
You should also do some research on the Canada Education Savings Grant (CESG), which is a matching program funded by the federal government and has a lifetime maximum of $7,200 per child.
> Know the tax and legal rules
Being familiar with the intricacies of how RESP’s and the CESG work can help you provide clarity for your clients.
For example, if your clients cannot make their annual $2,500 contribution to get the maximum $500 available each year with the CESG, it’s helpful to know that contribution room can be carried forward for a certain number of years.
RESPs can be complex, even for advisers, and so it’s a good idea to ensure you know where to seek clarification, should it be required.
Tomorrow: Saving for education beyond RESPs.