It's Your Money  

Paying for university

Should you pay for your child’s university education?

If you have the resources to do so, many parents simply assume that it’s the right thing to do.

But it may not be that simple.

  • Is simply paying outright for their education the best method?
  • What will it teach them about financial responsibility?
  • Will they take their courses seriously if they’re not footing the bill or will they just do the bare minimum to get by and party the rest of the time?

University should be partly about getting out into the world, having some fun and earning some valuable social skills but the financial aspects should not be too easily ignored.

The cost itself can be pretty staggering. The average four-year degree program including books and living expenses will run close to $100,000 right now if you’re not living at home.

For a child born in 2013, this cost will climb to around $140,000 by the time they’re ready to start their post-secondary educations.

But what if you have the funds available?

Let’s say you saved diligently in your RESP plan and have enough money set aside or if you simply have the disposable income on hand to foot the bill?

Paying your child’s full way still might not be the simple solution.

Whether you have the funds or not, that degree is going to cost a fair bit of money and your child should be taught to understand the significance of the investment you’re making in them.

So what should you do?

One option that I particularly like is to have your child take out student loans, even if you have the funds available.

Their student loans will attract no interest until after they’re done their program and they can be paid back in full at any time. Not only that, you can hold onto the RESP or investment funds for four more years and can earn some extra growth during that time.

RESP money can be drawn out of the plan while they go to school, but can be reinvested in a TFSA or other non-registered plan to keep growing.

But here’s where the financial education part comes in. Sit down with your child and discuss the terms for using the education money you’ve set aside to pay off the loans.

This might be as simple as saying that you’ll pay the loans off in full once they earn their degree but if they drop out part way through, the loans are theirs to pay back. Or you might base the loan repayment on the marks that they attain as well.

If they achieve a 4.0 GPA, you’ll pay off 100% of their debt. A 3.5 or higher might warrant a 90% loan repayment and so on.

The terms that you settle on are up to you but some variation of this suggested structure would go a long way in teaching your child financial responsibility and help to ensure that they take their course load seriously.

For those parents fortunate enough to be in a position to pay for their child’s education, take some time to think about exactly how you want that process to play out.

Simply paying their education costs as they come up may not be the best course of action but having a well thought out plan is.         


Too good to be true?

People regularly ask me about a piece of investment advertising material they’ve come across that seems too good to be true.

Before I even look at what they’re referring to, I can usually assume it has some relation to an Exempt Market Product or security.

What are these Exempt Market Products (EMPs) and are they something you should be considering?

An EMP is a security issued in Canada that is exempt from prospectus requirements and they require less disclosure than a prospectus offering.

To sell an EMP, the issuer must ensure that the investor qualifies under a specific “exemption”. Common exemptions include only selling to an accredited investor or only selling them to family, friends and business associates.

Depending on the exemption relied upon, these products often don’t have detailed disclosures and it’s up to the investor to perform much of the due diligence themselves.

Unfortunately, due to a lack of oversight, many unqualified investors are still being sold these products.

EMPs carry many serious risks that the salespeople often don’t explain.

The main concerns are:

  • Lack of liquidity – Many EMPs are illiquid and investors can’t access their money if they want to.
  • Not insured – Unlike traditional investments, they are not protected by the Canadian Investor Protection Fund, the Investor Protection Corporation or Assuris.
  • Inadequate disclosure – Their offering documents are not reviewed by regulators for completeness and it can be difficult to find out what you’re really buying until it’s too late.
  • Subject to key person risks – Exempt products are generally smaller operations and the loss of a single individual involved could create significant losses in the values.
  • Conflict of interest – Unlike regulated products, there may be significant conflicts of interest that are not being disclosed to the investors.

Not long ago, the Ontario Securities Commission concluded a year-long review of firms selling EMPs. They found a range of deficiencies in many firms, primarily around selling EMPs to investors who did not qualify.

The OSC said that 75% of EMP dealers had inadequate processes for collecting and maintaining know-your-client information.

In the rest of the country, the situation is not any better. But the much bigger problem in all this is that even if an investor is eligible to purchase an EMP, is the product actually suitable for them?    

Many of those who sell EMPs try to tell investors that their products are actually less risky than standard investment options since they’re not subject to the normal market volatility. But from a regulatory point of view, exempt product are high risk.

Many investment dealers (the “back office” responsible for compliance oversight) go so far as to require that advisers under their umbrella can’t work in the same office as someone who sells EMPs.

They are very fearful of lawsuits that regularly result from these high risk investments and they don’t want to be associated with them in any way.    

To be fair, there are legitimate firms and dealers that operate in the exempt market space but it’s up to the consumer to decide which ones are legit and the majority of Canadians aren’t properly informed to make an informed decision.

It’s your money and you can invest it in whatever you want but be sure to think twice before taking part in any exempt market plan.

When something sounds too good to be true, it usually is.    

2 main priorities

Two of the main priorities for many retirees are to:

  • make sure their retirement income is sustainable
  • second pass on a legacy to their children or other charitable priorities.

To fund these aspirations, many conservative investors opt to stick with bonds, GICs and other lower risk investment options as these vehicles meet their safety and capital preservation requirements.

The problem is that the low rate of return these investments generate may result in not reaching their retirement goals and/or not having enough money left over to leave to their chosen benefactors.

There is an alternative option that provides a tax-efficient, guaranteed lifetime income while simultaneously provides a guaranteed, tax-free payout to the retiree’s beneficiaries when he or she dies.

The Insured Annuity strategy provides a guaranteed income for life and upon death pays your originally invested capital directly to your beneficiaries without the usual estate-related hassles and costs.

There are two approaches to this type of strategy.

In the traditional Insured Annuity, your retirement capital is used to purchase an annuity. Part of the monthly annuity payment is used to pay for a life insurance policy that has a fixed cost for life.

This insurance policy will then be set up so that upon your death, the benefit amount will be paid directly to your beneficiaries tax free.

The remainder of the monthly annuity payment amount is also guaranteed for life and is used to fund your retirement expenses.

The alternative strategy has you pre-pay for the full cost of the insurance policy up front with some of your retirement savings.

The remaining capital is used to purchase a life annuity which provides your monthly living expenses. By utilizing this alternative option, you further reduce your tax bill and help to avoid claw-backs of OAS benefits.

For an example, let’s take a look at “Jane” who is 72 years old and has $500,000 in GICs in addition to her pension and RRIF assets.

She currently has a total income of $94,050 per year that comes from her pension ($57,000), CPP/OAS ($18,750), RRIF ($5,800) and her GIC account earning 2.5 per cent ($12,500).

She is required to repay $3,464 of her OAS each year due to claw-back.

If Jane were to set up a $500,000 life insurance policy and purchase a life annuity with the GIC money, the annuity would pay out $38,340 per year.

Only $2,113 of this would be taxable instead of the full $12,500 of GIC interest and her tax bill would drop by $3,979 each year.

After paying the annual life insurance premium of $19,375, she would be left with $18,156 of after-tax income instead of $7,713 with the GICs.

The net result for Jane would be that her taxable income would drop from $94,050 to $82,881 and her OAS claw-back would drop to $1,789 each year.

At the same time, her retirement income would increase by $10,443 per year and her beneficiaries would be guaranteed to receive the full $500,000 amount tax free!   

While not for everyone, this strategy is a good option for those who are between ages 60-85, risk adverse, dissatisfied with the low interest rates we currently face and are also in good health (in order to qualify for the life insurance).   

An Insured Annuity strategy can preserve the value of your estate, minimize income taxes and most importantly, guarantee a lifetime income stream for your retirement with no stress of watching your portfolio move up and down with the markets.

For those conservative investors who want to increase their retirement income without increasing their investment risk, this strategy is definitely one worth considering.

Feel free to email me if you want to see a quote on this type of strategy and how it would compare to your current retirement plan.              

Grab that $384,000

There is a simple mistake that can cost you $384,000 but is easy to avoid.

That mistake is not being aggressive enough with your investment savings.

While I often preach about being conservative and not being too greedy, there are many people that go too far in the opposite direction. A certain level of risk and aggressiveness in your investment portfolio is required to reach its full growth potential.

The stock market is no doubt volatile; the S&P 500 saw over 30 downturns of -10% or more in the past 50 years. But here’s the thing – it ultimately recovered from each and every one of them.

If you simply can’t weather the downturns and you will pull your money out during each one, then the stock market may not be for you. But if you can truly take a long-term investment view and stick to your plan, there is an awful lot of upside potential.

Let’s take a closer look. Assuming a $500/month contribution over the 30 years of your working career, how much can you expect to accumulate:

  • A conservative portfolio comprising of mostly fixed income would grow to $349,970 (four per cent per year).
  • A moderate portfolio with a mixture of stocks and bonds would reach $502,810 (six per cent per year).
  • A more aggressive portfolio invested entirely in stocks would grow to $734,075 (eight per cent per year).

If you limit yourself to that more conservative portfolio and achieve the four per cent per year average growth rate, you would be missing out on $384,105 of extra assets to use in your retirement.

Your retirement will likely cost a lot more than you think so that extra cash will be much appreciated!

The key distinction here is that I’m talking about being more aggressive, not downright greedy or foolish. The reason so many investors achieve low returns or even lose much of what they put in is that they attempt to earn even higher returns, expecting north of 10% each year.

They put money is real estate investments/scams, risky resource plays and long shot startups that have a slight chance of hitting it big.

By suggesting some of you be more aggressive, I’m not suggesting you “roll the dice” on a long shot, but instead talking about reducing your fixed income allocations a little bit and being more fully invested in a well-diversified and stable portfolio with an appropriate amount of equities.

It is easy to adopt a conservative investment strategy and resign yourself to limited growth in your investments, but that move could really end up hurting you in the long run – to the tune of $384,105.

While investing in the stock market may seem too risky for you, consider the risk of not having enough money to fund your retirement and how you will make ends meet?

Of course, each situation is different and you should work with a qualified advisor to determine what level of aggressiveness is right for you.     

More It's Your Money articles

About the Author

Brett, designated as a chartered investment manager and certified financial planner, is the regional director (Okanagan) for IG Wealth Management.

In addition to his “day job," Brett was appointed to the board of directors of FP Canada (formerly FPSC) in 2014, named as the board’s vice-chair in 2017 and will take over as board chairman in June. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations for the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FP Canada board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected].

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

Previous Stories