retirement savings for my young kids?
retirement savings for my young kids?
My wife and I are both age 40, with Target Date funds at Federal TSP and Vanguard. We have minimal debt, regular payroll contributions to retirement etc. and decent emergency fund. I think you could call us middle class, reasonably knowledgeable but "lazy" investors that like to keep things simple and automatic through TSP & Vanguard. I am very committed to teaching our kids about finance so that they don't repeat the mistakes that we have made However, I want to do more than just teach them, I want to get them started financially for retirement, now. Our kids are ages 2, 6, and 8.
So how do I go about this? I don't want them to have control of any savings when they hit 18 - so UTMA/UGMA is definitely off the table for me. They don't have any earned income like child modeling etc. so they can't have their own IRA. I prefer for them to not just have a bank account since the interest rates are so low. I would like each of them to have at least $10,000 by the time they hit age 18, and financially we can do that (currently have small automatic payroll deductions going to online savings for now).
I'm thinking to open three separate Vanguard Roth IRA's (Target Date or LifeCycle Fund) that would be in our name, but they would each be the beneficiaries for when we die. That way they are "in the market" starting now and hopefully earning more than a bank savings account, but can't access the money when they're 18. Or maybe I SHOULD keep the money in a savings account, and use it to match their savings when they get jobs as teenagers and open their own Roths? But say for the 2 year old, I just hate to have money sitting in a bank account for the next 12+ years earning so little when it could be in index funds....
This has been pretty frustrating for me and I'm not sure what to do. I would very much like to hear any advice, information, or personal experience that anyone has in this area. Thank you, Greg in Oregon
So how do I go about this? I don't want them to have control of any savings when they hit 18 - so UTMA/UGMA is definitely off the table for me. They don't have any earned income like child modeling etc. so they can't have their own IRA. I prefer for them to not just have a bank account since the interest rates are so low. I would like each of them to have at least $10,000 by the time they hit age 18, and financially we can do that (currently have small automatic payroll deductions going to online savings for now).
I'm thinking to open three separate Vanguard Roth IRA's (Target Date or LifeCycle Fund) that would be in our name, but they would each be the beneficiaries for when we die. That way they are "in the market" starting now and hopefully earning more than a bank savings account, but can't access the money when they're 18. Or maybe I SHOULD keep the money in a savings account, and use it to match their savings when they get jobs as teenagers and open their own Roths? But say for the 2 year old, I just hate to have money sitting in a bank account for the next 12+ years earning so little when it could be in index funds....
This has been pretty frustrating for me and I'm not sure what to do. I would very much like to hear any advice, information, or personal experience that anyone has in this area. Thank you, Greg in Oregon
- Dale_G
- Posts: 3466
- Joined: Tue Feb 20, 2007 4:43 pm
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Re: retirement savings for my young kids?
I think the Roth IRA is a good idea for this purpose, but I would not open 3 Roths with each child as the primary beneficiary. If the Roth owner dies prematurely, the kids will have to start taking RMDs, perhaps defeating the plan.
Better to start a Roth in your name with the spouse as primary beneficiary and the kids as contingent (secondary) beneficiaries. The spouse can do the same thing. This provides a lot more flexibility. If desired, the IRAs could later be split, or withdrawals of contributions could be made for any purpose. The beneficiaries can be changed at anytime.
Dale
Better to start a Roth in your name with the spouse as primary beneficiary and the kids as contingent (secondary) beneficiaries. The spouse can do the same thing. This provides a lot more flexibility. If desired, the IRAs could later be split, or withdrawals of contributions could be made for any purpose. The beneficiaries can be changed at anytime.
Dale
Volatility is my friend
Re: retirement savings for my young kids?
Your 2 year old doesn't have a job yet?
What's with kids these days?
Most UTMAs are 21 now
What's with kids these days?
Most UTMAs are 21 now
Re: retirement savings for my young kids?
If you don't want it to be in a 529, or a UTMA account, then you could open up an account in your name at several different places that have cheap etfs/mf. So you could have one at schwab, one at fidelity, one at TDAmeritrade say (of course since you are a boglehead then your account is at Vanguard There you invest in whatever you want, perhaps a 2 fund portfolio so you can tax loss harvest.
Certainly that causes some paperwork hassles. I think the ROTH accounts are best reserved for YOU, you are the one that needs to have money for retirement.
I guess another option is that you could just pick a fund at your Vanguard account for each of them. I don't know your usual investments, but lets say you pick three low cost index funds that you don't own for yourself . Say S&P 500, Mid cap index, small cap index. Invest in each yearly, and every year when you contribute more money, put the total amount in such that the total amount in each fund stays about even. This way, you can show the kids the way diversification works.
Or else just invest the money in the market, then when they reach 18 and you want to give them money just give it to them out of your taxable investments.
Mike
Certainly that causes some paperwork hassles. I think the ROTH accounts are best reserved for YOU, you are the one that needs to have money for retirement.
I guess another option is that you could just pick a fund at your Vanguard account for each of them. I don't know your usual investments, but lets say you pick three low cost index funds that you don't own for yourself . Say S&P 500, Mid cap index, small cap index. Invest in each yearly, and every year when you contribute more money, put the total amount in such that the total amount in each fund stays about even. This way, you can show the kids the way diversification works.
Or else just invest the money in the market, then when they reach 18 and you want to give them money just give it to them out of your taxable investments.
Mike
Re: retirement savings for my young kids?
There is this interesting thing called a will. You invest the money, and it goes to your kids when you die.
It is even then possible to give the money to them before you die, if one day you decide you trust them.
Seriously, give the kids their own UTMA accounts, tell them what you are doing and that it's for college. Later on, match their earned income with IRA contributions in their own names.
We did that, it has turned out wonderfully.
L.
It is even then possible to give the money to them before you die, if one day you decide you trust them.
Seriously, give the kids their own UTMA accounts, tell them what you are doing and that it's for college. Later on, match their earned income with IRA contributions in their own names.
We did that, it has turned out wonderfully.
L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
Re: retirement savings for my young kids?
1) Max out your retirement accounts so they can inherit them some day.I think you could call us middle class,
So how do I go about this?
2) Save up enough to that they will never have to support you when you are older even if your financial plans go terribly wrong. I have happen to several people when they had career, health, or life setbacks. If you can't quit work tomorrow and be financially secure, then you are not there yet.
3) Save up to be able to pay for their college so they can graduate without a lot of debt.
Re: retirement savings for my young kids?
The boy turned 16 back in December. By March he got a job - and now in Summer he's working 30 hours a week.
He grosses almost $500 each paycheck and only takes $100 out in cash for walking around money. We did buy him a car (1998 Civic EX coupe) and he does get $10/week gas allowance to travel between the two households.
So far he has been surprisingly good with his money. I credit him seeing two sets of parents making really good money living well below their means but not so cheap they can't spend some to have a good time.
I can't wait to open a Roth IRA for him and fund it mostly with parents' money but with him kicking a token amount to get the idea that you can not start saving for retirement too soon.
I was happy he got his job - but my response was - "welcome to the rest of your life". His grandmother sent him a card when school let out. Cover of the card said "School's out for the summer". Inside it said "And work keeps sucking along".
Lead by example.
He grosses almost $500 each paycheck and only takes $100 out in cash for walking around money. We did buy him a car (1998 Civic EX coupe) and he does get $10/week gas allowance to travel between the two households.
So far he has been surprisingly good with his money. I credit him seeing two sets of parents making really good money living well below their means but not so cheap they can't spend some to have a good time.
I can't wait to open a Roth IRA for him and fund it mostly with parents' money but with him kicking a token amount to get the idea that you can not start saving for retirement too soon.
I was happy he got his job - but my response was - "welcome to the rest of your life". His grandmother sent him a card when school let out. Cover of the card said "School's out for the summer". Inside it said "And work keeps sucking along".
Lead by example.
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Re: retirement savings for my young kids?
We did UGMA and joint accounts.
I think you would be able to determine if your child would be responsible enough by age 16. If you believe otherwise, start spending down by charging food, clothes, transportation. Etc. Having a Retiremen fund for children only guarantees their eventual ownership although when they make an early withdrawal, it will be their responsibility to assume taxes and penalties.
We funded his college via loans (9/11.aftermath), used the UGMA to pay the P&I, and when he did summer work, he got to keep his earnings while I transferred UGMA money to his ROTH. Last week he sold much of the remainder of the UGMA for his house down payment.
I think you would be able to determine if your child would be responsible enough by age 16. If you believe otherwise, start spending down by charging food, clothes, transportation. Etc. Having a Retiremen fund for children only guarantees their eventual ownership although when they make an early withdrawal, it will be their responsibility to assume taxes and penalties.
We funded his college via loans (9/11.aftermath), used the UGMA to pay the P&I, and when he did summer work, he got to keep his earnings while I transferred UGMA money to his ROTH. Last week he sold much of the remainder of the UGMA for his house down payment.
Re: retirement savings for my young kids?
Those of you that have gone the route of UTMA - did it cause problems for your children's eligibility when applying for college financial aid?
Re: retirement savings for my young kids?
I don't see how anything mentioned so far teaches the kids anything. Maybe you want them to be entrepreneurs and set up a lemonade stand? I had very good lemonade (and watermelon) a few days ago from entrepreneurs who were about your kid's ages. The youngest one didn't say anything the whole time I was there but I told the older ones that she was a very important part of the team since she was the "advertising". People are more likely to buy from kids if there is a little cute one in the group.grsimmon wrote:I am very committed to teaching our kids about finance so that they don't repeat the mistakes that we have made However, I want to do more than just teach them, I want to get them started financially for retirement, now. Our kids are ages 2, 6, and 8.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
Re: retirement savings for my young kids?
One thing to consider; if you open accounts in their individual names, they get married and subsequently divorced, the money you saved them will be part of the marital estate and split with their future ex.
I know you're only talking about $10k but it might make sense to either set up a trust or keep the assets in your name and gift them later
I know you're only talking about $10k but it might make sense to either set up a trust or keep the assets in your name and gift them later
"Discipline equals Freedom" - Jocko Willink
Re: retirement savings for my young kids?
As my daughters get to working age I (with their help) am going to fully fund their Roth/IRA's as they have an income. From 15-65 is a pretty good investment horizon.
Max out your tax sheltered retirement accounts with inexpensive, well diversified, index funds and you will beat 90% of all investors.
Re: retirement savings for my young kids?
Do a UTMA. You said $10,000 at 18, who cares. It's not like they are going to retire on $10k.
If you setup a trust for $10k I believe you have failed. That makes no sense.
If you setup a trust for $10k I believe you have failed. That makes no sense.
Re: retirement savings for my young kids?
It doesn't, but it's not the point of my inquiry. For now I'm only interested in the actual plan/logistics of how to start my kids early in their retirement savings. There's plenty of information out there for other finance topics, not so much for this one (It's too bad because a parent can have a huge impact on their child's wealth and essentially intergenerational wealth by doing this). For the financial eduction aspect, I'll be conducting that informally over time, and formally by making my kids take my Boglehead "class" in high school that I've already prepared - I know crazy but true. For now there's not much point in teaching my 2 year old about indexing when I'm dealing with sippy cups and how to share.celia wrote: I don't see how anything mentioned so far teaches the kids anything.
As I read replies so far, I feel more open to a UTMA, but still think that it can be the white elephant in the room with regard to student financial aid. Noone has commented on that aspect so far and there may be a reason for that, I don't know. If you google the topic 'UTMA regret" you get some interesting hits.
Re: retirement savings for my young kids?
Pick up a copy of "Make Your Kid a Millionaire" by Kevin McKinley.
Re: retirement savings for my young kids?
I would be putting all towards your own retirement now. Then when your kids are older you can cut back on your personal retirement savings and direct part of the income you earn towards their college expenses, matching their savings, etc. Money is fungible. I think this is by far the most flexible and tax efficient way to do things.
Re: retirement savings for my young kids?
Go and fill out the FAFSA form. Imagine you have an 18-year old. Convince yourself your kids are extremely unlikely to qualify for need-based aid, so stop worrying about it. The PITA is that you have to fill out the forms for merit-based aid and for loans as well.grsimmon wrote: As I read replies so far, I feel more open to a UTMA, but still think that it can be the white elephant in the room with regard to student financial aid. Noone has commented on that aspect so far and there may be a reason for that, I don't know.
I'd recommend your goal should be that your kids graduate debt free.
L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
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Re: retirement savings for my young kids?
The answer cost me then 8.5% sales commission on the MFs, 1985. I'm glad and fortunate to get that bit of advice. You are getting it for free.grsimmon wrote:Those of you that have gone the route of UTMA - did it cause problems for your children's eligibility when applying for college financial aid?
"Are you going to limit your child's future because you wouldn't prepare for post higher education? ...
Now that you understand how the Rule of 72, Time-Value-of-Money, are you going to take this knowledge and have it work for you at $smallmonthly, for 16-18 years, or would you saddle your Child and You with $BIG future debt, paying $HugeMonthly for 20 years?..." (Financial guy said it nicer)
Our investment in DS and in Money and DS's efforts has paid us and him very well.
Re: retirement savings for my young kids?
At the risk of piling on:
Take a look at what it really takes to get needs-based college financial aid.
Take a look at what it really takes to have student loans forgiven.
Trust me, those are financial places you do not want to be.
L.
Take a look at what it really takes to get needs-based college financial aid.
Take a look at what it really takes to have student loans forgiven.
Trust me, those are financial places you do not want to be.
L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
Re: retirement savings for my young kids?
Paul Merriman had an interesting article on a related topic http://paulmerriman.com/2014/02/12/an-a ... r-a-child/. Essentially he suggests to contribute $365/year ($1 a day) and then convert those funds into a Roth IRA when the children are of working age so that the money compounds until their retirement (which over the course of a life time should be significant ). Pushing the kid to even contribute more as they grow and not touch the money until retirement is a good opportunity or gift as Paul suggests.
For the education aspect of it, I've opened up a custodial account using money my son has saved up from birthdays, allowance, etc and had him invest in a low cost ETF (VTI I think) to show him the power of investing and having him understand how to make (or lose) money in your sleep. Clearly not an exercise for a 2 year old but depending on the child, 9+ should be enough for them to see the difference between a savings account, CD and the market. Good luck!
For the education aspect of it, I've opened up a custodial account using money my son has saved up from birthdays, allowance, etc and had him invest in a low cost ETF (VTI I think) to show him the power of investing and having him understand how to make (or lose) money in your sleep. Clearly not an exercise for a 2 year old but depending on the child, 9+ should be enough for them to see the difference between a savings account, CD and the market. Good luck!
Re: retirement savings for my young kids?
A bunch of great replies and helpful posts, thank you all -
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- Joined: Thu Apr 05, 2007 8:20 pm
- Location: New York
Re: retirement savings for my young kids?
How do you figure that? Assets outside of the marital estate that are NOT co-mingled are not/do not become part of a fair and equitable part of marital dissolution.Meaty wrote:One thing to consider; if you open accounts in their individual names, they get married and subsequently divorced, the money you saved them will be part of the marital estate and split with their future ex.
I know you're only talking about $10k but it might make sense to either set up a trust or keep the assets in your name and gift them later
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Re: retirement savings for my young kids?
My 16 year old son has been saving diligently and through part-time employment managed to save $5k in cash. He knows his old man is a saver and has done OK with his investments (thank you Jack Bogle and fellow Bogleheads). He's been bugging me for a while to help him invest it, so I set up an "in trust" discount brokerage account. Together, we transferred his $5k into the account. We then made some purchases:
$2k Total World Stock Market
$1k Vanguard Canadian Stock Market
$1500 Total Canadian Bond Market
$500 Money Market-- pays 1.25% interest
I've told him he'll never go wrong with a 60-40 split. He can follow this basic "recipe" ad nauseum throughout his lifetime and he should do ok. He has a part time job that pays well and I've told him every time he saves a grand or two we can add to his investments (we're in Canada so Vanguard ETFs are the only option I'd consider).
He's learning at a young age how to save. He's also learning that he can and should do it himself and that a "helper" will only skim his hard earned money.
Hope that example helps!
BC Doc
$2k Total World Stock Market
$1k Vanguard Canadian Stock Market
$1500 Total Canadian Bond Market
$500 Money Market-- pays 1.25% interest
I've told him he'll never go wrong with a 60-40 split. He can follow this basic "recipe" ad nauseum throughout his lifetime and he should do ok. He has a part time job that pays well and I've told him every time he saves a grand or two we can add to his investments (we're in Canada so Vanguard ETFs are the only option I'd consider).
He's learning at a young age how to save. He's also learning that he can and should do it himself and that a "helper" will only skim his hard earned money.
Hope that example helps!
BC Doc
Re: retirement savings for my young kids?
I'm certainly not a family law attorney but I'm aware of some pretty unusual outcomes from divorce proceedings. A judge can basically do whatever he/she wants and it's up to the individual to appeal.Grt2bOutdoors wrote:How do you figure that? Assets outside of the marital estate that are NOT co-mingled are not/do not become part of a fair and equitable part of marital dissolution.Meaty wrote:One thing to consider; if you open accounts in their individual names, they get married and subsequently divorced, the money you saved them will be part of the marital estate and split with their future ex.
I know you're only talking about $10k but it might make sense to either set up a trust or keep the assets in your name and gift them later
Separately, there are plenty of community property states where my understanding is everything is marital property
"Discipline equals Freedom" - Jocko Willink
Re: retirement savings for my young kids?
Are you going the next step, to match his earnings in a tax-advantaged retirement account?BC_Doc wrote:My 16 year old son has been saving diligently and through part-time employment managed to save $5k in cash. He knows his old man is a saver and has done OK with his investments (thank you Jack Bogle and fellow Bogleheads). He's been bugging me for a while to help him invest it, so I set up an "in trust" discount brokerage account. Together, we transferred his $5k into the account. We then made some purchases:
$2k Total World Stock Market
$1k Vanguard Canadian Stock Market
$1500 Total Canadian Bond Market
$500 Money Market-- pays 1.25% interest
I've told him he'll never go wrong with a 60-40 split. He can follow this basic "recipe" ad nauseum throughout his lifetime and he should do ok. He has a part time job that pays well and I've told him every time he saves a grand or two we can add to his investments (we're in Canada so Vanguard ETFs are the only option I'd consider).
He's learning at a young age how to save. He's also learning that he can and should do it himself and that a "helper" will only skim his hard earned money.
Hope that example helps!
BC Doc
I match my son's earnings in a Roth IRA. What he actually earns is his to use as spending money at college.
L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
Re: retirement savings for my young kids?
@Leerar:
No, I'm just helping him invest his own money.
We have a family RESP set up (registered education savings plan) plus a family trust which we can use to fund university costs when our kids reach college age. Our kids are working to fund their own way as much as reasonably possible. Higher education costs are much more affordable here in Canada-- so far, with one in university, it's been pretty stress free.
No, I'm just helping him invest his own money.
We have a family RESP set up (registered education savings plan) plus a family trust which we can use to fund university costs when our kids reach college age. Our kids are working to fund their own way as much as reasonably possible. Higher education costs are much more affordable here in Canada-- so far, with one in university, it's been pretty stress free.
- dbCooperAir
- Posts: 1107
- Joined: Tue Jan 07, 2014 9:13 pm
Re: retirement savings for my young kids?
This is a short term problem!
Your kids are 2,4 and 8. Just wait until all the sports fees, band fees, school fees and the cow you have to buy every other week to feed the little devils kicks in.
Sorry could not resist.
Your kids are 2,4 and 8. Just wait until all the sports fees, band fees, school fees and the cow you have to buy every other week to feed the little devils kicks in.
Sorry could not resist.
Neither a wise man nor a brave man lies down on the tracks of history to wait for the train of the future to run over him. |
-Dwight D. Eisenhower-
Re: retirement savings for my young kids?
Oh, it's already started.....viva Costco, Goodwill, etc. !
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Re: retirement savings for my young kids?
A UGMA/UTMA is a great tool, since the money we're talking about is not enough to ruin their lives, but it's still 'their' money. However the financial aid is a problem. A 529 solves that problem.
I think a trust is overkill for $10k.
We have a few different ways we save for our kids:
- in 529s (parent owned)
- in joint savings accounts
- in UGMAs (transferred from the savings accounts whenever balance exceeds $x); however, we won't be eligible for financial aid so that is a non-issue
- in our own brokerage accounts, and we will just give them money down the road if we want to. Don't see a big reason to title specific funds under their names.
- they are beneficiaries (in trust) of our various retirement accounts, and our wills.
I think a trust is overkill for $10k.
We have a few different ways we save for our kids:
- in 529s (parent owned)
- in joint savings accounts
- in UGMAs (transferred from the savings accounts whenever balance exceeds $x); however, we won't be eligible for financial aid so that is a non-issue
- in our own brokerage accounts, and we will just give them money down the road if we want to. Don't see a big reason to title specific funds under their names.
- they are beneficiaries (in trust) of our various retirement accounts, and our wills.
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Re: retirement savings for my young kids?
In 1995 my mother wanted to give her grandchildren each $5,000 and wanted to do something that would impact her grandchildren so they would remember her in 50 years. So I put the money in a Vanguard variable annuity. That $5,000 plus another $5,000 that I have put in over the past 10 or 15 years has grown to about $75,000 for each of my 2 children who are now in their early / mid-20's.
I am not a big fan variable annuities because they are the best way to turn long term capital gains into ordinary income.
Every year when we go over their balance sheet, I remind them of what their grandmother did for them. I'm sure that in 40 years when their annuity is worth $1.0-$1.2 M, they will remember her!
bill
I am not a big fan variable annuities because they are the best way to turn long term capital gains into ordinary income.
Every year when we go over their balance sheet, I remind them of what their grandmother did for them. I'm sure that in 40 years when their annuity is worth $1.0-$1.2 M, they will remember her!
bill