Registered Education Savings Plans (or RESPs) are one of the best ways, if not the best way for Canadian parents to save for their children’s post-secondary education.

However, we all know kids grow up fast, which is why it’s important to have an RESP asset allocation strategy in place that adjusts as they get older. In this blog/video, I’ll give you some pointers on how to use low-cost ETFs to make that happen without too many hassles.

Investing in an RESP with one beneficiary

If you have an RESP with just one beneficiary, our general advice is relatively straight-forward. When your child is young, you can take more equity risk with their investments. As they get older, you’ll need to gradually reduce this risk to minimize the odds that their education fund might take a nose-dive right before they head off to school.

To gradually adjust your RESP’s asset mix, you’ll place multiple ETF trades each year, so I would recommend opening an RESP at a commission-free brokerage that doesn’t charge trading commissions. Otherwise, those trading costs when buying or selling ETFs can really add up.

There’s no optimal asset allocation strategy that’s right for every investor. But a simple rule-of-thumb would be to start with a 90% stock, 10% bond allocation in the year your child is born, reducing the equity allocation by 5% in each subsequent year. By the time your kid reaches university age, your RESP should have zero exposure to stock markets, since they can swing up or down too wildly over short periods of time.

For example, suppose you have an RESP with one beneficiary named Bart, who turns 10 years old on April 1st of this year. You’d want to allocate 40% of your RESP to stocks, and 60% to bonds.

Each year, you would update the RESP’s target asset mix by allocating a greater proportion of the account to bonds. By the time Bart heads off to school, the RESP would only hold far more stable short-term bonds or cash equivalents.

For your stock and bond allocations alike, we’ll want to keep things simple. You can do so by holding a single equity ETF and a single bond ETF. Equity, by the way, is just another term for stocks.

For the equity ETF, you could use the Vanguard All-Equity ETF Portfolio (VEQT). This ETF invests in thousands of companies around the world, offering you extensive diversification for your investment.

For the bond ETF, we’ll opt for the Vanguard Canadian Short-Term Bond Index ETF (VSB). This ETF invests in Canadian government and corporate bonds with maturities ranging from 1 to 5 years.

[Note: You could also consider a broad market Canadian bond ETF, like the Vanguard Canadian Aggregate Bond Index ETF (VAB) – just remember to gradually shift the holding to VSB as your child gets older].

When it comes time to hold liquid cash equivalents to pay for upcoming education expenses, many big bank discount brokerages offer investment savings accounts, or ISAs, for short. ISAs typically earn a low, fluctuating interest rate, so you can reap a bit of reward, while still easily accessing the cash as needed to fund your kids’ college expenses. In the event of an ISA issuer default, most ISA deposits are protected by the Canada Deposit Insurance Corporation (CDIC), up to $100,000 per beneficiary in an RESP.

If you’d prefer to stick with ETFs for your cash holdings, you could also consider one of the various High Interest Savings Account ETFs (or HISA ETFs) available to investors. HISA ETFs are similar to ISAs, except that the Canada Deposit Insurance Corporation provides no protection for HISA ETFs. However, most HISA ETFs invest in deposits offered by the big 6 Canadian banks, so the likelihood of default is low.

For the purposes of this video, we’ll invest our cash allocations in the following HISA ETFs. However, if your big bank brokerage has blocked you from buying HISA ETFs, you can simply invest in their ISAs instead.

To illustrate Bart’s RESP investment for the current year, we’ll assume his RESP holds $50,000 in uninvested cash. Following our RESP glide path strategy, we would purchase $20,000 of VEQT (or 40% of the total RESP value) and $30,000 of VSB (which is 60% of the total RESP value). At the beginning of each subsequent year, we would adjust the account allocations between stocks, bonds, and cash, based on Bart’s age. Whenever possible, we would use new contributions and any government grants to top-up the asset classes each year to their new target weights.

Investing in an RESP with multiple beneficiaries

As we’ve shown in our previous example, investing in an RESP with only one beneficiary is relatively straight-forward. Simply adjust the account’s risk level each year, starting with the suggested asset allocations found in our RESP glide path.

That said, a lot of you may have several children. On all sorts of levels, things can get more complicated when that happens—including if you’re investing in an RESP with multiple beneficiaries, also known as a “Family RESP”.

As the ages of most beneficiaries will differ, the overall risk of the RESP will need to reflect this. We often hear from parents struggling to determine an appropriate asset allocation for their family RESP, so we’ve put together a more intuitive method for handling this task.

Let’s now assume Bart has a little sister named Lisa, who is 8 years old, or two years younger than him. Based on our RESP Glide Path strategy, her portion of the account should be invested in 50% stocks and 50% bonds this year … while, as you may recall, Bart’s portion should be 40% stocks and 60% bonds.

So how do we resolve the dilemma? We could try allocating her RESP portion to the Vanguard ETFs from our previous example. But that gets pretty confusing, pretty fast. So instead, we’ll invest Lisa’s allocation in similar, but not identical ETFs.

For the 50% equity portion, we’ll purchase the iShares Core Equity ETF Portfolio (XEQT). For the bond portion, we’ll invest in the iShares Core Canadian Short Term Bond Index ETF (XSB). And once Lisa approaches university age, we’ll also add a new HISA ETF to the mix.

Now, let’s also assume Bart and Lisa have a baby sister named Maggie, who just turned one this year. Since Maggie is still so young, her portion of the RESP can be invested more aggressively than her siblings’ portions. Based on our RESP Glide Path strategy, Maggie’s portion would be invested into 85% stocks and 15% bonds this year.

We’ll once again invest in different ETFs for Maggie’s contributions and grant. For her equity allocation, we’ll purchase the BMO All-Equity ETF (ZEQT). For the bonds, we’ll buy the BMO Short-Term Bond Index ETF (ZSB). And when Maggie eventually reaches university age, we’ll throw another HISA ETF into the mix.

Okay, so we’ve now chosen the current target asset mixes for the three beneficiaries, but we still need to determine what portion of the RESP account to allocate to each of them. To do this, we’ll need to add up all contributions made and government grant received by each beneficiary.

If you haven’t kept a detailed record of this information, not to worry. You can obtain these figures by calling the Canada Education Savings Program hotline at 1-888-276-3624 and requesting a Statement of Account for each beneficiary. You’ll need to provide each beneficiary’s social insurance number and date of birth, so have these ready when you call. The government representative will then email you a copy of each beneficiary’s Statement of Account, which will include all contributions made on behalf of the beneficiary, all Canada Education Savings Grant (or CESG) received, as well as any additional CESG assets paid into the RESP. Also, if the beneficiaries received any Canada Learning Bond (CLB) or provincial grant payments, this information will also be provided.

On the Statement of Account, you’ll find a summary of all contributions and grant payments to date—although any transactions from the most recent month may not be included. You can total up the contributions, CESG and additional CESG columns, and allocate these amounts to the appropriate beneficiary. For example, we’ll assume Bart has $27,500 of contributions, and $5,500 of grant received on these contributions. Lisa has $22,500 of contributions and $4,500 of grant, while Maggie has $5,000 of contributions and $1,000 of grant.

We now know the total contributions made to the RESP were $55,000, and the total grant received on these contributions was $11,000, for a combined total of $66,000.

Now, let’s assume the RESP’s current market value is $100,000. The difference between this market value and the total contributions and grant provides us with the account’s investment growth (or loss) to date. In this case, the RESP has investment growth of $34,000.

It’s a bit trickier to allocate this growth component to the three RESP beneficiaries, as there’s no way to really know how much income each beneficiary’s specific contributions or grant earned while invested. As a rough estimate, we’ll simply weight the $34,000 of growth by the proportional age of each beneficiary in the current year.

For example, since Bart is 10 years old, and the total age of the beneficiaries is 19 years, his allocation of growth will be 52.6%, or 10 divided by 19. Bart will therefore receive 52.6% of the total $34,000 of growth in the RESP, which is $17,884. Following the same process, Lisa would receive $14,314 of the RESP growth and Maggie would receive $1,802.

Okay, we’ve now allocated the existing RESP assets across all three beneficiaries. Of the total RESP value of $100,000, we’ll invest $50,884 into Bart’s target asset mix, $41,314 into Lisa’s asset mix, and $7,802 into Maggie’s.

If we assume the RESP assets are currently uninvested, we’d start by purchasing $20,354 of VEQT and $30,530 of VSB for Bart, providing him with a 40% stock, 60% bond allocation for his RESP portion.

For Lisa, we would buy $20,657 of both XEQT and XSB, resulting in a 50/50 stock/bond allocation for her RESP portion.

And for Maggie’s portion, we would purchase $6,632 of ZEQT and $1,170 of ZSB, giving her a more aggressive 85% stock, 15% bond asset mix.

And none of the beneficiaries are old enough to warrant investing in a HISA ETF just yet.

Each year, we’ll adjust the asset mix for each child, reducing the stock allocation and increasing the bond allocation according to our schedule. As a tip, try to contribute annually to your RESP, as this will simplify the exercise. For example, you could place your ETF trades each January, after making your annual contributions for each beneficiary, and place additional trades a month or two later once the government grants are paid into the account.

At the beginning of each year, you can also reinvest any dividends paid into the account. If you don’t feel like combing through the prior year’s transactions to determine the exact amounts to allocate to each beneficiary, just divvy it up like we did earlier in the video. Simply weight the extra cash by the proportional age of each beneficiary and call it a day.

Managing Your RESP Annually

So, to recap: Once a year, adjust the asset mix for each beneficiary, invest your contributions, invest the government grants, and reinvest the dividends—all according to our handy glide paths and a little math to divvy up the assets. After completing these tasks, you can then set the account back on autopilot and get on with your busy life until next year.

In fact, the less you fuss with your RESP, the better. That’s in large part because you’ve wisely invested in low-cost, globally diversified ETFs, instead of trying to mess with selecting individual securities. And by the way, don’t even think about trying to jump in and out of markets based on fluctuating conditions. When you’ve got time on your side, it’s best to let capital markets do the heavy lifting for you.