To determine my monthly RESP contributions, I calculated that by saving $140 per month I should be able to cover a good portion of my son's future university costs. Assuming an annual rate of return of 7%, sixteen years from now this monthly payment should come to $63,000 (note that I'm including the CESG contribution in this calculation). However, am I being overly ambitious in expecting a rate of return of 7%, per year?
The table below contains data on annual real equity returns over a 103 year period. Note that the real rate of return on Canadian equities has been 5.9%*. Assuming an annual inflation rate of 2.5%, this translates to a nominal rate of return of 8.4%. If 40% of my RESP contribution is going into a bond fund that returns 5.94%, I can safely expect my son's RESP portfolio to earn 7.4% per year.
In short, using the last 100 years as a guide, we have reasonable evidence to assume a rate of return of 8.4% for the equity portion of our portfolio. However, if a significant portion of your portfolio is comprised of bonds, it may be time to revise your expectations.*You can refer to this post for an explanation on the difference between the geometric vs. arithmetic mean.
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