RESP ASSUMPTIONS

When I began a RESP about a year ago, I made some quick ad hoc assumptions on a simple spreadsheet to calculate how much I should be setting aside each month for future University costs. This week I decided to throw a bit more rigor into these assumptions and found the following.

First, the tools available on the web from banks/finance companies (try this one) overestimate inflation and expected future yearly tuition increases, thereby suggesting higher than necessary monthly RESP contributions. When filling out these online calculators, for example, presumed inflation will default to 3% and tuition increases to 10%. However, one may safely set these assumptions to 2% and 3.9%, respectively, given that the Bank of Canada manages its monetary policy around an inflation target of between 1% and 3% and that tuition increases have averaged 3.9% from 2000-2006.

Second, some calculators give you the option to maximize your Registered Education Savings Plan (RESP) savings or maximize your Canada Education Savings Grant (CESG). What does this mean?

The contribution limits for a RESP are $4,000 per year for each beneficiary of the plan, with a lifetime maximum of $42,000 per beneficiary. Consequently, under the RESP option the tool will suggest you save up to a maximum of $4 K per year.

Under the Canada Education Savings Grant (CESG), the maximum grant is $400 per year per beneficiary, meaning that the grant covers the first $2,000 of annual contributions per beneficiary (20% of $2,000 equals $400). Under this option the tool suggests you save up to a maximum of $2 K per year.

To conclude, although online tools allow for quick on the fly "guesstimates", conduct your due diligence before deciding on how much to set aside. By inflating assumptions, these online calculators may suggest higher than necessary monthly RESP contributions.