10/11/2011 10:45 PM ET|
Is your kid saving for retirement?
Yes, teens -- and even younger children -- should be putting some of their earnings into retirement accounts. Plus: How parents can persuade them to do it.
Jackson Landry, age 6, is already saving for his retirement. He's way ahead of his sister, who didn't open a Roth individual retirement account until she was 11.
Seem strange that a kid not old enough to cross the street by himself already pictures his golden years? Consider:
● U.S. life expectancy (at birth) is 77.9 years and rising, according to the latest data from the national Centers for Disease Control and Prevention. Who knows how much retirement will cost today's crop of youngsters?
● No one knows what Social Security will be like 50 years from now. (Read "The coming Social Security shortfall.")
● How often do you hear about jobs with pensions? When it comes to retirement planning, you're on your own. (See MSN Money's retirement section.)
Most important: The earlier your kids open these accounts, the better off they'll be. Thanks to the magic of compound interest, an über-early start sets them up nicely later on -- even if they have to reduce or stop retirement funding for a while.
Your initial reaction may be: "Save for retirement? What about saving for college?" Certified financial planner Brian Wagenbach looks at it this way: You can't finance retirement.
"There are other ways to make up for shortfalls in college savings: loans, scholarships, grants. Those aren't available at retirement," says Wagenbach, who works for Charles Schwab in Minneapolis.
However, there's no reason you can't do both if you're willing to be creative and/or sacrifice a bit. Here's how.
An easy way to save
Some of the financial experts with whom I spoke touted other forms of retirement savings, such as life insurance policies.
This column focuses on the Roth IRA because it's within reach of just about any family. Since it's Junior who will be socking away the dough, a Roth doesn't need to cost parents a penny. (That's unless they do a matching program; more on that later.)
Any child with a verifiable source of income -- a newspaper route, fast-food gig, role on a daytime soap -- can put money into a Roth IRA. Your kid is allowed to deposit as much as he or she earns, up to $5,000 per year.
However, the money need not come directly from your kid's earnings. For example, a teen who earned $2,000 could contribute $1,000, and parents or other relatives could add another grand.
If a mutual fund is the vehicle of choice, the account must be a custodial Roth IRA -- that is, held by you until your son or daughter hits age 18. If you're investing in certificates of deposit, the account can be in the child's name. Talk to a financial planner to decide what's best for your situation.
Good money habits learned early
"Income" means "verifiable income." Certified financial planner Kimberly Foss, the mother of 6-year-old Jackson, hires him to do chores at her company, Empyrion Wealth Management in Roseville, Calif. The youngster shreds documents, empties wastebaskets and organizes office supplies.
Foss created a job description and time sheets, and she files a W-2 for her young employee. The idea is not just to ensure her son's retirement but also to help him understand "the correlation between physical work and earned income."
"The habits that are instilled about money in our childhood are the way we look at money the rest of our lives," Foss says.
Her 19-year-old daughter, Madison Erickson, also started out working in the family business. Now she's a psychology major at William Jessup University in Rocklin, Calif. Erickson works as a nanny for two families, and, while her peers tend to spend most of what they earn, she lives on a budget so she can max out her Roth.
"I know it will benefit me in the long run," she says.
Long-term savings with a twist
In fact, the Roth has already benefited Erickson: She took out some money recently to help pay for a car to get to and from her jobs. Original contributions can be withdrawn at any time, since they were made with after-tax dollars. (A different set of rules applies to earnings.)
Impress on your teen that the account is not a first choice for funding. Because of strict annual contribution limits, it might not be possible to put the money back in later. The longer the money remains untouched, the better off he or she will be.
Time is on their side
Relatively few parents are in a position to hire their children. But even if your daughter is a relatively ancient 15 or 16 before she gets a job folding tacos, she may still manage pretty well upon retirement.
"The greatest moneymaking asset anyone can have is time, and teenagers have plenty of that," says Ed Slott, a nationally recognized IRA expert and the author of "The Retirement Savings Time Bomb and How to Defuse It."
His own daughter got her first summer job at 15, earning $350 at a library. Seven years later, with a few additional contributions, her Roth now stands at about $5,000.
"Look how many years she has to grow it," Slott says. "You don't have to put in a lot of money, but doing it early gives you a real head start."
Too far off to be real?
Of course, the average teen feels 10 feet tall and bulletproof. Retirement is something that will happen, oh, 200 years from now. You can't blame him for that, since more than a few 50-somethings haven't saved a cent for their post-work lives, either.
That's because it's tough for human beings to appreciate a goal that's still decades away, says Robert Brokamp of The Motley Fool, an investing website. "We're just not wired for it. We're wired for instant pleasure and instant consumption."
Brokamp's suggested motivators are greed or fear, such as: "Even a small amount will someday be huge" or "If you don't save, your last years may be spent in penury.
"Some people are motivated by what they could have," Brokamp says, "and some people are motivated by the idea of what they won't have."
Expect some resistance, especially if you haven't already instilled good money habits in your teen. (Read my column "8 crucial money lessons for teens.") Even if you have, your kid might still be tempted to take his or her first paycheck straight to an electronics store.
Don't let that happen. Right now Junior might not be able to process the idea of small amounts of money growing bigger or the possibility of an impoverished old age. He might not "get" speed limits either, but you insist that he obey traffic laws. Similarly, it's your job to insist that he save at least some of his earnings.
How to get the kids on board
Sweeten the deal by offering a funds match: "Save at least half your wages, and I'll save the other half." The Internal Revenue Service doesn't care where the money comes from.
If you can swing this financially, your teen will be able to enjoy some of the fruits of his or her labor while developing the habit of saving for the future. This is a great tactic but still relatively rare, according to Ira Rubenstein, a New York principal at MBAF-ERE CPAs.
"(Parents) just don't have the money, and they're worried about their own retirements," Rubenstein says.
He suggests two possible solutions:
- Pay what you can. Just because you can't entirely match the kid's contribution doesn't mean you shouldn't contribute anything. Remember compound interest? Even a few hundred dollars will grow exponentially over the decades. For ideas on finding extra money in your current budget, read "9 sneaky tips for saving more."
- Get more relatives involved. Is Grandma interested in gifting beyond holidays and birthdays? Putting some money into the grandkids' Roth accounts could be part of her estate planning. Or when Great-Uncle Mike asks what Junior wants for Christmas, your reply could be, "He doesn't know it yet, but he wants a contribution to his retirement fund."
Life (and money) lessons
Prepare for Junior to be a little disappointed when he gets a holiday card reading: "Congratulations! I put $50 into your Roth so you won't have to eat cat food when you get old like me!" He might have preferred a new video game or an Old Navy gift card.
That's natural. Haven't you ever felt a twinge of disappointment when you got a useful gift versus a fun one? You got over it. So will he.
As adults, we need to look out for our children. Who knows what awaits them in 50 or 60 years? Starting retirement accounts now will, with luck, get them in the habit of saving for a secure future.
Requiring your child to start a Roth is an act of love. Besides, it gives us the chance to say something parents love to say and kids hate to hear: "Someday you'll thank me." And they will, even if we're not around to hear it.
Correction: In an earlier version of this column, the name of Ira Rubenstein, a New York principal at MBAF-ERE CPAs, was misspelled, and the company was misidentified.
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