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Graduation math: Starting up an investment plan would be best gift of all

by Wayne Cheveldayoff, 2004-06-10

Do you want to give your graduating child or grandchild a gift that would last a lifetime? Then forget about a car or a trip to Europe.

For families with some cash to spend, the best gift to reward accomplishments in high school or university would be to salt away some money into investments in the childís name and provide a roadmap, in the form of an investment plan, on how he or she can reach financial independence through a program of systematic savings.

Donít count on this being having been taught already. Many wisdoms of every day life are missing from the curriculums of our great high schools and universities.

Itís really up to parents and grandparents to ensure young adults get on the right track financially.

Some of those graduating have student loans to pay. Even in such cases, it would still make sense to start up the investment plan, rather than providing help in making the loan payments, in order to provide the practical education of how investment returns compound over time and build wealth.

Here is an example that makes the point. The example assumes the investment is in an RRSP and therefore sheltered from income tax.

For a graduating student aged 21 years old, a gift of $1,000, invested at 8 per cent return annually, would grow to $6,341 by age 45, $13,690 by age 55, and $29,556 by age 65. Thatís from just $1,000 with no further investment.

The 8-per-cent return assumption is quite realistic given the availability of 8-11 per cent annual returns from many income funds and trusts in the Canadian investment marketplace.

If a return of 10 per cent annually is targeted and achieved, the $1,000 gift today would grow into $66,264 by age 65.

Here are more calculations that should drive home the point about the financial freedom that could come from a regular savings plan.

Suppose in addition to the $1,000 initial investment, another $1,000 is put away each year for 10 years. Thereafter, no further investment is made. Average annual return is assumed to be 8 per cent.

This modest investment plan would produce $48,890 by age 45, $105,549 by age 55 and $227,872 by age 65.

Just think of what the sum would be if a total $5,000 was put away each year for 10 years instead of only $1,000.

If the math of the above example is not enough to impress, it may help to point out what it would take to save $227,872 by age 65 if one started instead at age 45.

Starting at that age, it would require $5,000 a year for 20 years (again assuming an average annual return of 8 per cent) to reach the same level at age 65. (Since that amount of money is acknowledged as inadequate to support a comfortable retirement, the annual savings would really have to be substantially higher.)

The investment counseling session should include a visit to a financial website to use the calculators, just as I have done to produce the example. These calculators are invaluable in setting up a plan.

Another step would be a visit to an investment advisor or discount brokerage to set up the account that would hold the investments.

Itís not unrealistic to think that investments of this kind could be sheltered from tax indefinitely.

Most graduating students have earned income and have filed (or should have filed) income tax returns. This would give them an amount (listed on the notice of assessment from tax authorities) that they can sock away into an RRSP.

Even for those who have had no previous income, it is possible to over-contribute up to $2,000 into an RRSP without penalty. An over-contribution can be made now and the student can carry forward the tax deduction for use at another time.

While the above-mentioned graduation math is unrefutable, parents or grandparents may be reluctant to press the point because of feelings that other kinds of gifts, like a trip to another country, are important cultural experiences.

Itís true, they are. However, let the student earn the money to take such trips ó and to pay off the student loan, buy the first car, make the first mortgage down payment.

Itís all part of the financial lesson that we all must learn to survive and enjoy life in our system.

But what is usually missing in all of these daily lessons in our economy is practical knowledge of the power of investment-return compounding.

By the time many get to the point of contemplating this law of building wealth, they are in their 40s or 50s and wondering how they are going to manage retirement. By then, it is largely too late to take full advantage of it.

Thatís all the more reason for parents and grandparents to make it the centre of their focus in congratulating their youngsters on their well-earned graduations.

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at and he can be contacted at

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©2004 Wayne Cheveldayoff