A burger needs ketchup and mustard. Coffee tastes better with cream and sugar. We should be saving for retirement and our kids’ education. But which one is more important?
There are two camps to the RRSP vs. RESP* question.
The first puts the parents’ needs first – we need to help ourselves before we can help someone else. Kids can borrow to go to school, but we can’t borrow to fund our retirement. (Reverse mortgages being the exception, which most people consider a last-resort option).
The other is to save for whatever is coming first. In most cases, our kids will be heading to post-secondary before we retire. By saving for education first, we can get really serious about saving for retirement after the kids are through school.
1. Values. Some parents are passionate about paying for every penny of their child’s education. Others think their kids should do it on their own just like they did. And many fall in the middle. Your values will play an important part in your savings decisions.
2. Matching contributions. Here’s something to consider – a guaranteed 20% rate of return on RESP investments. Or to put it more correctly, the Canadian Government matches 20% of your RESP contributions. The matching is capped at $500 per year and $7500 per lifetime, per child. In it’s simplest form, if you contribute $2500 per year per child, or $208.33 per month, you will receive an extra $500 per year.
So, what’s the right decision?
Saving for both is the best option – betcha didn’t see that coming. A really good scenario is if you are saving at least 10% of your income for retirement, plus at least $2500 per child into the RESP.
But if you are planning to help pay for your child’s education, think about making the RESP a priority. Turning down free money for something you plan to pay for anyway doesn’t make sense. And remember this: You get to choose what happens with the RESP money. Should your child not use it, or if you decide you want it to fund your retirement after all, then you can make that happen. You can even deny your child the money if they enrol in a course you don’t agree with (talk about family feud)! RESP money is still your money.
Ignore saving for both retirement and education at your peril – at that rate, your kids will end up over their head in loans and you’ll still be working at 80. So be sure to save, but also to not be paralyzed by choice. Make your decision, implement it, and change course as needed.
* There are many features, maximums and regulations on RESPs that aren’t discussed in this article. See the Government of Canada’s RESP literature, look at these Money Sense articles, or ask your financial institution. Careful out there, some “Group RESP providers” have significant restrictions and fees.