A reader left a comment asking if our financial freedom income goal would be enough to cover post-secondary education costs for our children. The simple answer is yes, but not through excess passive income, but through some planning and investing when the kids were born.
While I believe that there is merit in having children pay for their own education (my wife and I did this), we have decided to offer our kids a helping hand in their higher education pursuits by setting up a family RESP. For those new to RESPs, here is an introduction to registered education savings plans.
Mrs. FT and I had our first child in 2008 and set up a self-directed RESP account shortly after (like the same week). At the time, one of the lowest cost and easiest ways to index a portfolio was by using the TD e-series mutual funds.
If I were to start over today, I’d probably open an account with a discount brokerage that offers commission-free trading of ETFs, and go with a simple ETF portfolio of 1 or 2 ETFs.
When we had our second child a few years after, we decided to stick with TD e-series as the path of least resistance. No fees to buy or sell, just a slightly higher MER than a proper index ETF portfolio.
How Much will Tuition Cost in Canada?
Before we get into investment growth, we need to know what we are working towards – the cost of tuition (plus other fees)!
I wrote an article a little while back about the cost of Ivey League schools in the US. I concluded at the time that the going rate was $50k USD/year (including accommodations), or $200k USD for a 4-year undergraduate degree. The numbers are insane, but most Canadians that study in the U.S get scholarships of some sort which help offset the madness.
What about Canada? According to Stats Canada 2016/2017, here is the average annual undergraduate tuition by area:
- Canada: $6,373
- NL: $2,759
- PEI: $6,288
- NS: $7,218
- NB: $6,682
- QC: $2,851
- ON: $8,114
- MB: $4,058
- SK: $7,177
- AB: $5,750
- BC: $5,534
Year over year, the average increase was 2.8%. Assuming the same increase compounded over the next 7 years when my first child is due to start post-secondary, the average tuition will be closer to $7,732/year.
Of course, these are average numbers that vary greatly depending on the degree that you go after. Here are some of the average undergraduate tuition fees by field of study (2016/2017).
- Education: $4,580
- Visual and Performing Arts: $5,640
- Humanities: $5,482
- Social and behavioral sciences: $5,566
- Law, legal professions: $11,385
- Business: $6,776
- Life Sciences: $6,048
- Mathematics/Computer Science: $6,978
- Engineering $7,825
- Architecture: $6,581
- Agriculture, natural resources: $5,651
- Dentistry: $21,012 (!)
- Medicine: $13,858
- Nursing: $5,527
- Pharmacy: $9,738
- Veterinary medicine: $7,419
I find the numbers quite interesting, and one can only assume that higher the cost of the field of study, the higher the demand. The one field that really stands out from the rest is dentistry which is head and shoulders above the others (even medicine).
Another cost to consider is if the kids move away for school. If they do, then we’d need to add another $10k-$15k/year to the cost.
How Big will the RESPs Get?
So what kind of returns can we expect from an indexed portfolio? Time for some charting fun!
Let’s model this scenario by assuming:
- 17 years of growth
- $3,000 deposit per year ($2,500 deposit + $500 government grant)
- 7% returns
Judging from the chart (and the assumptions above), by the time my oldest child reaches post-secondary (age 17), the RESP will have almost $100k CAD in the account.
Although the actual long-term return on that account is closer to 8.5%, I think this conservative estimate is fair since I’ll likely be converting at least first years tuition into a GIC in year 16 or sooner.
Putting it all Together
Assuming that the indexed portfolio returns 7% annually over 17 years, we’ll have about $100k in each RESP account. While $100k sounds like a lot of cash, it can get eaten up pretty quickly depending on the school, program, and where they live.
If my kids decide to do dentistry which is outside NL, it will cost over $30k/year for 4 years which would require supplementary funds.
If they go to a school outside NL that has more of an average tuition rate, the RESP would more than cover tuition plus living expenses.
If the kids decide to stay in NL (fingers crossed) where tuition is cheap, programs are decent, and accommodations are free – the RESP will have enough for not only their first degree but also a graduate degree (s) if that’s the path they want to take.
Or maybe the best solution is to pack up our bags and move to Ontario where tuition is free. :)