Couple wants to save money for their daughters education

Fred, 35 years old and Wilma Flintstone, 32 years old are a happily married couple and living in Brampton, Ontario. Fred is a construction worker working for the City of Brampton earning $ 75,000 gross and Wilma works for the Royal Bank of Canada earning $ 65,000 gross annually. They have one daughter Pebbles, 2 years old.

Fred and Wilma would like to save money for their daughters post-secondary education. They believe, generally speaking, educated people with a post-secondary degree do better in life that those without one. However, they are very concerned with the rising tuition and education costs in Ontario. They estimate the total cost of post-secondary education is $ 10,000 per year or $ 40,000 for a 4-year program at a College or University. While inflation for goods and services hovers around 3 %, the cost of education seems to be increasing at a higher rate of about 8 %.

They heard from friends that they should consider setting up an RESP account to help them save for their children education. They were told that the government subsidized this program with thousands of dollars in grants. They would like to learn more about this program, and they came to you for advice. One of the questions they have is what would happen to the RESP money if one of their kids or even both of them do not go to College or University. They currently receive the Canada Child Benefit (CCB) from the government - about $ 3,600 annually - which they would like to deposit into an RESP. They also tell you that they have already saved $ 5,000 for Pebbles education these money are earning 0.25 % in savings account with the Royal Bank of Canada. They would like your recommendations on how to access the grants provided by the government. Lastly, they would like to make deposits into the RESP only as long as they are receiving grants from the government.

REQUIRED:

Show all your work and state any assumptions.

1. Explain in simple terms the most important features/benefits (5 items) of the Registered Education Savings Plan (RESP).

2. What happens to the RESP money if one or both of their kids do not go to school.

Present your specific recommendations to Fred and Wilma (state all assumptions).

3. Calculate the total cost of education for Pebbles when she goes to school

4. Project the total amount to be accumulated in the RESP account. Show funds deposited, grants received, and income generated annually. It is suggested that you use a table to show your projections.

5. What is the gap, if any, between projected cost and projected RESP account value? What are your recommendations on what they should do to eliminate this shortfall ?