In a previous article, I discussed how to open a TD e-Series Funds account and the pros and cons of using the e-Series funds. I have also summarized the basics of the Registered Education Savings Plan (RESP) here.
When we had our first kid, we immediately opened an RESP account for him with RBC and invested in their Select Balanced Portfolio fund. At this time (late 2013), I was not too concerned about high Management Expense Ratios (MER) because I was very busy tackling my veterinary board exams.
I needed to pass the notoriously tough and expensive exams (nine exams in all) in order to obtain a license to practice veterinary medicine in Canada (Haha! I digress, I will talk about these experiences another day!).
We had set up our first kid’s RESP with a $500 initial contribution and bi-weekly contributions of $60. The plan was to set-up a self-directed investing portfolio somewhere down the line when there was more time to do so.
A Confession: We are yet to relocate our first kid’s RESP from RBC and plan to do so this year as part of our financial resolutions for 2017. The MER for the RBC fund the RESP is currently invested in is 1.94%.
July 2017 Update: I partly kept my promise and opened a new TD e-Series RESP account for our older kid. I left the RESP account at RBC open so we could keep the a-CESG he had previously received in the account (when we were still eligible for it). All his RESP contributions going forward will go to the new TD e-Series RESP account.
In 2015, I decided I needed to start utilizing my TFSA room. I had accumulated a TFSA contribution room of $31,000 at this time, having immigrated to Canada in 2011. While surfing the internet for an easy DIY investing solution for a TFSA, I stumbled on Dan Bortolotti’s Canadian Couch Potato blog.
After going through his article on model portfolios, I became interested in the TD e-Series funds because:
- I did not have a big chunk of money to invest.
- Making small automatic monthly contributions was the only way I could jump-start my TFSA.
- I am able to rebalance my portfolio as often as required.
Opening a TD TFSA e-Series account was my first foray into using the e-Series funds. When we had our second kid in 2016, we opened a TD e-Series RESP right away.
As described in my article here, we visited a TD branch and opened a mutual funds account. Thereafter, I mailed in the e-Series account conversion form. I did not get an email confirmation but did see that I could purchase e-Series funds on the account after about 2 weeks.
Note: While setting up the RESP mutual funds account, the financial advisor mentioned that the government grant money (Canada Education Savings Grant (CESG) can only be deposited by buying into a fund. She advised that the grant be used to buy the TD Comfort Balanced Portfolio. I did not bother asking her to do otherwise as my plan was to call the TD directly after converting the account into e-Series and requesting that the grant money be put in a money market fund.
One advantage with using the money market fund for any government grants is that they are not subject to the short-term trading fees/penalty and as such can easily be moved into other funds when you are re-balancing your portfolio.
My RESP Strategy
While answering the investor profile questionnaire, I set up my investing strategy to be growth-oriented, with a high-risk tolerance for portfolio volatility and loss of capital. This was important because I wanted the RESP account to be heavy on equities and light on fixed income (~80/90:20/10) until my son is at least 10 years old.
I modified Canadian Couch Potato’s format slightly to include some bonds initially – up to 20% maximum between ages 0 – 9 years. Thereafter, a 10% reduction in equities every year until 18 when the funds would be fully in fixed income (short-term bonds, GICs, and cash).
This is what I envisage the portfolio asset allocation would generally look like over time:
7 months after, a snapshot of the asset mix in the RESP account for our second kid looked like this on December 31, 2016 :
As you can see above, the RESP portfolio is over 80% in equities (comprising TD CDN Index-e, TD US Index-e, TD International Index-e) and less than 20% in bonds (TD CDN Bond Index-e) plus the TD CDN Money Market fund where Canada Education Savings Grant (CESG) is deposited.
One aspect of DIY investing is the need to rebalance your portfolio manually when the portfolio asset allocations diverge from your target allocations. There are two approaches I take to bring back the portfolio to my desired asset mix:
- Funds Switching: Every quarter or so, I switch the grant money that has been deposited in the money market funds into buying funds that I want more of. Essentially what this means is that I “sell” or “withdraw” the funds in money market funds and use it to buy another fund that has fallen below its target allocation. For example, say TD US Index Fund-e has fallen from my desired level of 30% to 25%, then I will buy more of the fund using funds that have accumulated in the TD Money Market Fund. This method works well because there is no short-term trading penalty for withdrawing or switching money market funds.
- Annual Re-balancing: For my TFSA e-Series funds, I carry out an annual portfolio re-balancing by specifically buying more of one fund over the other so I can have the portfolio back to my original allocation of 80% Equities: 20% Bonds. The same approach would work for an RESP or RRSP e-Series account.
Other Things to Note
TD e-Series Funds are not A-CESG friendly: If you are eligible to receive the additional Canada Education Savings Grant (CESG), Canada Learning Bond and other provincial education savings incentives, please note that TD e-Series funds do not support them. For this additional grants, you will need to open a separate account such as a term Guaranteed Investment Certificates (GIC) to receive the funds.
Set up a Pre-authorised Purchase Plan (PPP): You can set up a PPP for as little as $25/fund on a weekly, biweekly, monthly or even less frequent basis. The funds are automatically applied to purchase funds according to your defined allocation. Makes your investing pretty easy and stress-free!
Using the Bank of Montreal’s Education Savings Calculator, a child born in 2016 would potentially require $96,518 or more to obtain a 4-year degree from the University of Calgary (for example) by 2034.
We would like to ensure that our kids do not get bogged down with heavy debt loads in their quest to obtain a university education. With this in mind, it is essential that we start putting money aside in an RESP. By starting early, we have compound interest on our side. Add the 20% additional government grants on RESP contributions (up to a lifetime maximum of $7,200 per child), and things are already starting to look up! 😉
I like hearing from my readers. If you have any thoughts or questions, please feel free to drop them in the comments section below.