One of the biggest dilemmas now facing parents, is the question of whether they should be putting away funds for their childrens’ future university or college educational costs, or to begin placing money into an RRSP or TFSA for their own retirement planning. So, what is the right approach?
The easy and straight answer to this question would be for you to address both these goals at the same time, if at all possible. They are both equally important, and require a regular and consistent savings effort in order to accumulate the target amount of funds over a long period of time.
For a majority of individuals, the requirement to finance their child’s education will occur earlier than their retirement years. It would therefore seem appropriate to focus all the savings towards funding the educational requirement initially, and to turn to retirement savings only after the educational fund target has been realized.
Why you should start saving for retirement early
But there’s a key drawback to this approach: a delayed start to retirement savings could deprive you of the tremendous growth potential of compound interest on your retirement savings. Even a heightened amount of savings, hastily placed in an investment vehicle during your later years leading up to your retirement, cannot possibly compensate for the lack of a minimal, albeit consistent, saving plan during your earlier years.
Maximize tax refunds to save for education AND retirement
However, through careful financial planning you can save for both of the above goals even if you have limited availability of funds. A key strategy is to select an appropriate amount to contribute to the Retirement Savings Plan (RRSP), so as to lower your tax bracket and generate a tax refund. The tax refund can then be utilized within your child’s Registered Education Savings Plan (RESP) for the ultimate benefit of your child’s post-secondary education goals. The added benefit in contributing to this plan is that this would qualify for an additional contribution by the Government as per the applicable rules under this plan.
Some dedicated research and guidance as you develop your savings strategy can go a long way towards ensuring you achieve your long-range financial goals successfully.