Retirement vs your children's education

Many doctors worry first about paying for
their kids' education and only then save
for retirement. Don't you?

By Charles Corvallis

Not that it's a new problem. A decade ago, a man who is now a respected physician practising in southern Ontario describes how he was nearly brought to his knees by debt when he graduated in 1996. "I really felt crushed," he begins. "I owed $77,000, about half in credit card debt, some to the government and about $10,000 to some, let's call them questionable, lenders. In 1997, just when I was considering personal bankruptcy, as some of my friends had done, the government changed the rules. You couldn't take that route until you were out of school for more than 10 years. I was despairing. About this time I went to New York to visit a doctor friend who was in residence at New York Presbyterian. His family wasn't well off and I asked him how he managed. There was a pause and a wink and then he said calmly, 'I'm dealing drugs'. I was flabbergasted. It turned out he wasn't exactly a drug dealer, more of a courier. In his off hours he delivered 'packages' to apartments on the Westside for a syndicate. His earnings (including what he said were 'phenomenal tips') — ranged from $200 to $700 a week. Most of it went to paying off his debts. At first I was appalled — what if he was arrested? The more I thought about it though, the more it seemed to offer a way out. Without going into the details, one thing led to another and for three years I 'imported' what I like to call 'recreational' products. The moment I paid off my last dollar I gave it up and would never go back to it but frankly, the steady cash saved my life."

In the last 10 years the situation facing graduates has become steadily worse, with tuition fees up everywhere except Quebec (For more see, "Turn your head and cough up", NRM Volume 1, No 13).

Direct school costs are only part of it, of course, and the lesser part at that. Living expenses are significant contributors. These days it costs undergraduates over $20,000 a year to attend university. That balloons to $30-35,000 for those in medical school. About one in two physicians graduate saddled with debt; of those one in seven owes more than $100,000.

WHAT ABOUT MY KIDS?
Once established and married with children, physicians often seek to spare their own offspring from a similar burden. The question then becomes: Do I save for my own retirement or to put my kids through college? Many put their kids' education first. It's a mistake, say financial planners. You could well find that once the children are through school there's simply not enough time left to top up your retirement savings.

It's not hard to see why. If you saved $1,000 a month for 30 years at 6.5% interest, you'd accumulate a nest egg of $1.12 million. On the other hand, if you saved the same amount for, say 10 years, then spent the sum on an education for the kids and only then began saving the same $1,000 a month for your retirement 20 years hence, your situation would look something like this. The children's college fund: $169,000. Retirement savings: $493,000. To meet a retirement goal of approximately $1 million, you'd have to double your savings to $2,000 a month once the kids had flown. Presumably you could afford to do that now that the children are out of the house but clearly there are many variables: How old are your kids now? How long do you have left until retirement? Are your living expenses really going to go down once the youngest has graduated?

You'll likely use a RRSP for at least a portion of your retirement savings. For college funds it's worth taking a look at a Registered Education Savings Plan (RESP) but it may turn out to be only a passing glance.

First off, the only similarity between an RRSP and an RESP are the initials. Contributions to RESPs can't be deducted from income; there's an annual maximum of $2,000 per child; and when you take the money out, any income that the plan has generated is taxable, albeit in the hands of the student whose income may be sufficiently low that he or she doesn't have to pay taxes. You might be eligible for help with your contributions from the federal or provincial governments in the form of education savings grants but you have to apply for them. And guess what — you have to return the money to the government when you cash out! Should you invest the maximum per child in such a plan, at 6.5% interest you'd accumulate $37,900 over a 17-year period — better than nothing, but a long way from the $100,000 each child may need.

Clearly, RESPs aren't a slam dunk. Go over any college savings plan with a financial advisor who doesn't earn a commission on RESPs and you could well find there may be better ways to put money aside to provide for your children's future needs — and your own.