10/11/2011 6:49 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."
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Excellent article! My parent (depression kids) were ahead of their time when I came around – I still have the whole life insurance they took out for me when I was young (in my mid 40's now). They taught me to save for my life, not just college, and not rely on anyone. It was reassuring growing up that I understood money and how to make it work via mutual funds, savings and insurance. When I became an adult I realized we were poor but my parents installed me with lots of knowledge to take care of myself no matter what.
Heck, when I was young, I cut grass during the Summer & shoveled driveways in the Winter for cash. I don't see many kids doing this today. Yes, I saved it, but it was not for retirement, but it was used for school clothes & school supplies. Later on, I worked during the Summer saving to pay for College, Room, & Board. Now, I work & save for retirement.
I suppose you can start kids early to save for retirement, but there will be things along the journey that will come up that will be needed or wanted before retirement. Warren Buffett started early, but he has yet to retire, & just like most of you will most likely work right up until you either get sick, hit the hospital, hospice care, or death. Unfortunately, that is the grim reality.
Great Idea! So, should I explain to my toddler about Roth, traditional, and/or 401k before or after his Dinosaur train show? I think this is such a good idea, maybe I should also have him save and invest in a whole life insurance policy too. This way, he is not only planning on retirement in his early years, he can plan beyond too.
Feh. Soon there will be "means tests" for Social Seciruity benefits, Medicare benefits, etc. Those with retirement savings will get lesser benefits. The savers must take care of the non-savers, you know.
Put your money in a pickle jar in the basement, off the books, where the Tax Man can't see it. Preferably in the form of pre-1964 silver dimes & quarters.
The wee tykes should be exporing the wonders of life, not learning to covet money. This article is crap.
what do you suggest, we should have our little ones investing so they can lose their little saving, or maybe putting it into the bank and drawing nothing in interest. should i tell my little 7 year old grand daughter to invest her little $5 a week allowance so she can retire?
what a crappy article
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