Now more than ever, it’s time to get comfortable with risky portfolios for education savings

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Clients sometimes ask Zainab Williams to open a registered education savings plan for them, thinking it’s just a savings account to park money for their kids’ postsecondary schooling expenses.

The Milton, Ont.-based founder of Elleverity Wealth Management then has to explain that an RESP is primarily an investment account that shelters gains from being heavily taxed.

Some time ago, when education was cheaper and factors such as rent were a smaller part of a student’s budget, it was easier to shrug off misunderstandings such as that one.

But today, financial advisers say rapidly rising inflation and unchanging caps on RESP benefits mean it’s more important than ever for parents to have aggressive growth-oriented stock portfolios when saving for the education of their children.

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Take rent as one example of a rising cost. It’s one of the largest expenses for students studying away from home, and it has soared over the last three years. Rentals.ca reported average rent for a two-bedroom unit in Toronto was $3,411 a month in September, up from $2,655 three years prior.

Increases have been drastic in student towns as well. The average two-bedroom unit in Waterloo, Ont., is now $2,543 a month, compared to $1,708 three years ago. That’s more than $10,000 in added rent costs per year.

At the same time, grants Ottawa offers within the RESP program have remained unchanged for years. The Canada Education Savings Grant, which automatically matches 20 per cent of your contributions to maximum of $500 each year, has had that maximum unchanged for almost 15 years. Over that time, the average tuition cost for an undergraduate degree in Canada has grown by 51 per cent from $4,524 in the 2007-08 school year to $6,834 in 2022-23.

Matt Morrish, a financial adviser with BlueShore Financial in British Columbia, says RESP benefits being largely left untouched for so many years has weakened their effectiveness, and raising the proportion of your RESP investments in stocks is one way to make up the difference.

Ms. Williams tries to guide her clients toward more aggressive holdings, but she said it’s one thing to take on risky investments, and another to ensure you remain calm when a crash hits.

“Once reality hits, we may not have the stomach to see our portfolios drop without understanding that these are just turbulent times,” said Ms. Williams.

To better help her clients fully understand risk, she tries to explain losses by numbers rather than percentages. She asks clients questions such as: If your account went from $1,000 to $800, how do you think you’d react?

But Jason Heath, a financial planner with Objective Financial Partners Inc. in Toronto, said he’s seen clients retain risky investments too long as well.

“I had a client that had a bitcoin ETF in their RESP and something else that was speculative, and their kids were in high school,” said Mr. Heath, who said risk needs to be pared down as your kids get closer to university age.

He also pointed out that losses in an RESP can’t be claimed for tax purposes, unlike other investment accounts.

“So you have to be careful of being overly speculative as well, depending on the time horizon.”

One avenue Ms. Williams suggests is using a target date fund that automatically changes your asset allocation as you come closer to the date you expect to use your RESP money. Financial planners and institutions can set up these kinds of investments, and they generally start with a split of 90 per cent in diversified stocks and 10 per cent in bonds.

For self-directed investors, Mr. Heath said it’s important to start adjusting your RESP portfolio as your kids approach high school.

“I do find myself talking people into reducing stock exposure... I find people forget and they’re used to investing it like their registered retirement savings plan,” said Mr. Heath.

“They might be in their 40s and 50s, and have fair bit of time left for their own savings, but the time horizon for an RESP shrinks quick.”