The RESP Strategy

ABC Stocks asked me to post about my RESP strategy. As mentioned in my post on “Having a Newborn – Getting down to business“, I plan on opening a TD e-funds account (non aff) and buying cheap index based mutual funds.

Why TD e-funds?

What I really like about the TD e-funds setup is that they only offer low management expense ratio (MER) index funds. This is great for the investor who likes to “do it yourself”. Why not buy ETF’s instead? As I plan on putting small amounts at time, index mutual funds are cheaper than purchasing ETF’s via commission. In addition, the TD e-fund MER’s are so low that they are comparable to the MER’s on ishare ETF’s.

The Strategy

We’re going to implement a global couch potato based strategy where the RESP money will be split between 4 index funds and rebalanced on an annual basis. The 4 index funds will consist of:

  1. Canadian Equity
  2. US Equity
  3. International Equity
  4. Canadian Bonds

As for the actual percentages of each stock, that will change as time goes on to reduce risk and volatility. Lets assume that the RESP Plan will start withdrawing on year 18:

Index 0-10yrs 10-14yrs 14-17yrs 18yrs +
Canadian Equity 30% 20% 10% 0%
US Equity 30% 20% 10% 0%
International Equity 30% 20% 10% 0%
Canadian Bonds 10% 40% 35% 0%
GIC’s 0% 0% 35+% 75%
Money Market Fund 0% 0% 0% 25%
  • As you can see, from years 0-10 (Growth), the equity portion of the portfolio will be aggressive to hopefully maximize equity gains over the 10 years.
  • Moving into years 10-14 (Balanced), the portfolio takes a more balanced approach between equities/bonds to reduce risk without sacrificing too much in returns.
  • In years 14-17(Capital Preservation) is nearing withdrawal time, which means that capital preservation are among the top priorities. To do this, most of the portfolio will be in bonds/GIC’s. The equity and bond allocation will slowly be reduced to 0 over the three years while adding to the GIC allocation.
  • Years 18+ are the withdrawal years which means that capital preservation is the top priority which will be achieved via investing in a GIC ladder. This will allow money to be available every year that the child is in school. The annual lump sum will most likely be kept in a money market fund until the money is needed.

There is some planning to do with regards to the timing of the GIC ladder, but this is the general strategy. How does my plan look? Do you have any suggestions?

If you want to do some more reading on the TD e-funds, Canadian Capitalist also has a ton of information on them.

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Posted in
Frugal Trader

FT

FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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retireby45
1 year ago

Which funds I can follow which has these distributions for RESP? I am trying to open one for my daughter but my doesnt seem to have a fund which does this kind of distribution.
Any funds which you guys can recommend here?

David
6 years ago

After reading many posts surrounding RESP portfolio strategies, I decided to share with you the strategy I build for my 9 month old. Here it is:

33% CDZ.TO
18% CEW.TO
12% VGG.TO
9% XEF.TO
8% ZLU.TO
8% ZSP.TO
5% XCB.TO
4% XEC.TO
3% HFR.TO

Del Anderson
8 years ago

I have been a TD/Canada Trust customer since the early 1980’s, both personal and business. I recently opened a RESP for my Grandson and was blindsided when I was told that I needed TWO RESP accounts – one for the self-administered individual mutual fund and one for a term GIC. The policy is that all grants other than the CESG must go into the Term GIC account and remain in that account until he withdraws the funds or the account is collapsed!
In this case, the GIC account would start with $1,100.00, gain $100 per year (CLB) and another $300 (A-CESG) over the next 14 years – not insignificant to me.

Unless you want your RESP, and Government Grants to be invested in a Term GIC, beware of TD Canada Trust’s RESP !

If you want your RESP invested in mutual funds, if you want to receive Government Grants that are available (beyond the CESG), and, do not want a RESP account plus a Term GIC account (yes, two accounts!), look at either Royal Bank of Canada, Scotia Bank, CIBC or Bank of Montreal and not TD Canada Trust!

TD Canada Trust’s policy dictates that if you wish to receive Government Grants such as the a-CESG, the Canadian Learning Bond, Quebec Education Savings Incentive, or the Alberta Centennial Education Savings Grant, they will only process the applications if the funds from these Grants are placed into a Term GIC. And, these funds cannot ever be rolled into your mutual fund RESP or transferred.

You have no choice in this !

With TD Canada Trust, if you wish your TD Canada Trust RESP be invested in Mutual Funds, and, you also wish to receive Government Grants beyond the CESG, you must have two RESP accounts (imagine the headaches for you the subscriber, and also the problems when the beneficiary begins his or her post-secondary education) with this. You have no choice with TD Canada Trust.

Royal Bank of Canada, Scotia Bank, CIBC or Bank of Montreal do not have such a restrictive policy.

Will
10 years ago

@Steph how can one contribute only $25 when each fund costs roughly $10 and the couch potato method uses 4 funds? 25 divided by 4 would not allow for the purchase of a single share of any e-series fund…

Steph
10 years ago

@Baalat, the minimum is only $25 per transaction if you set up a pre-authorized purchase plan (PPP). I set up a monthly PPP based on my desired allocation and then plan to use birthday (July) and Christmas money to rebalance (manually).

Baalat
10 years ago

@Peter @FrugalTrader: I have the same question. According to TD e-series rules the minimum ammount to buy each time is $100. So if you contribute $2500 per year (to maximize grants) and have 4 e-funds to distribute it would be $625 per fund, or a maximum of 6 transactions per fund ($104.17 each) per year. What I have not found is a way to make it automatically with e-funds (will we have to do it manually, each 2 months?)

jodi
10 years ago

I’ve recently been contacted by Heritage Education Funds about opening an account with them. To start off I should let you all know that we are a low income family with only one parent working, we have 2 children ages 6 born 2004 and our daughter born 2009. I would like to take advantage of the CLB and basically anything else the government is going to contribute, but at this time we don’t have the finances to contribute.
what would you suggest for us to do?

Peter
10 years ago

@FrugalTrader: thanks for the info. Once the funds are in the “TD CDN Money Mkt” would you do a ‘switch’ to the TD e-series funds when you rebalance? Does it make sense to rebalance more than once a year?