Question

Parents can start saving for a child's post-secondary education from when they are born. It cannot be done earlier, even while the mother is pregnant. Chris and Sam would like to save enough so that each child has $50,000 by the time each is 18 . Registered Education Savings Plans have a provision where the Government of Canada through the Canada Education Savings Grant (CESG) provides a grant of 20% of donations subject to a contribution limit of $2,500 per year per child. CESGs are not payable to accounts for children 18 years or older. Actually, there are qualification that must be met for CESG grants for children 16 and 17 years old, but assume, for purposes of this assignment, that the qualifications are met. Determine how much must be saved each year for the account to hold $50,000 for each child. Like the amounts saved for down payment, the money will be invested. Determine a rate of return on the investments in the RESP and any other account they use and support your answer.

Answer 1

Chris and Sam should aim to save less than $2,500 per year to reach $50,000 by the time their child is 18, taking into account a 7% annual rate of return and maximizing the CESG benefit. Precise calculations would require a financial calculator due to the effects of compounding interest.

Step-by-step explanation:

To calculate how much Chris and Sam need to save each year for their child's post-secondary education to reach $50,000 by the time the child is 18, we use the concept of compound interest and consider the Canada Education Savings Grant (CESG). They are entitled to a 20% government match on contributions of up to $2,500 per child per year, which equates to a maximum CESG of $500 annually per child, until the child turns 18.

Assuming a 7% annual rate of return, we can approximate the required savings. First, we maximize the CESG by contributing $2,500 per year, resulting in $3,000 annually with the grant. However, this alone over 18 years would yield approximately $96,000 (compounded annually), which is higher than the $50,000 goal. To meet exactly $50,000, less than $2,500 can be saved annually, but precise calculations would require a financial calculator or specific software to account for the compounding effect and to solve for the exact annual contribution needed.