Helping a niece begin investing

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MN-Investor
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Helping a niece begin investing

Post by MN-Investor » Thu Apr 26, 2018 11:19 pm

My brother and his wife have four daughters. My brother makes a good living, but he and his wife haven't been the best at saving and investing. They are committed to paying for their daughters' college educations. One daughter graduated last year, one has a year left of college, one begins college next year, and the youngest is 14. The oldest daughter finished college in 3 years. The two next daughters will follow suit, so that does help.

The oldest daughter is now 22 with a biology degree. She's really underemployed and is considering going to graduate school. Because her college was paid for, she has a paid off used car and $12,000 in the bank. I was giving her a little education during supper last night about investing and IRAs. She does not have an IRA yet, but, like many young people, is wary of tying her money up where she can't get at it, or investing only to watch the value drop.

As I was going to sleep last night, I came up with an idea and I would like to get feedback from you.

My niece can put $5,500 into a Roth IRA (I like Roths, I wish I had much more in mine and less in my traditional). I would like to help my niece fund a Roth IRA. I would propose donating anywhere from $2,750 to $4,000 and she would contribute the remaining $2,750 to $1,500. That way she would not deplete her money for grad school nor would she be overwhelmed if the stock market took a dive. I would propose doing this for three years, then she's on her own.

I would be willing to do this for the other daughters too as the time came. Yes, I can afford it.

What do you think of this idea? Do you have any suggestions? Possible drawbacks?
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student
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Re: Helping a niece begin investing

Post by student » Fri Apr 27, 2018 5:42 am

It is nice for you to do this. I do not see any drawbacks. I do have a comment regarding graduate school. If she plans to go to graduate school in biology, she should only go if she receives a teaching assistantship with tuition waiver and stipend, where the amount should be sufficient to support a "graduate student lifestyle" with no borrowing.

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Watty
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Re: Helping a niece begin investing

Post by Watty » Fri Apr 27, 2018 5:57 am

One problem with your plan is that Roth contributions can only be made if she has earned income which she might not have if she goes back to school. I don't remember the details but apparently not all grants and stipends count as earned income so she would need to look into that.
MN-Investor wrote:
Thu Apr 26, 2018 11:19 pm
She does not have an IRA yet, but, like many young people, is wary of tying her money up where she can't get at it, or investing only to watch the value drop.
You can withdraw your contributions, but not earnings, from a Roth without penalty so the money is not tied up. Some people use a Roth as their emergency fund.

https://www.bogleheads.org/wiki/Roth_IR ... gency_fund

RickBoglehead
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Re: Helping a niece begin investing

Post by RickBoglehead » Fri Apr 27, 2018 7:57 am

Roth contributions can be withdrawn at any time without penalty (but not earnings). So what's her downside for contributing, then deciding to go back to school and needing the money?

Also, be careful on giving a niece some funds when you haven't done that for other nieces or with their parents' approval.

Fan23
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Re: Helping a niece begin investing

Post by Fan23 » Fri Apr 27, 2018 2:43 pm

I have kids this age. They have ideas about their own direction in life and I try not to impose my expectations and don't want to make them feel they are not living up to my priorities. A young person thinking about grad school might not feel like contributing to a retirement plan right now. But then again, she might! Instead of presenting her with your detailed plan, you might think of telling her that if she's interested in starting a retirement plan, you'd be happy to help her set it up and you'd like to chip in a little, too. Then just wait and see if she takes you up on it before getting into the nitty gritty and laying out a specific plan.

Everyone is different, but thinking of the people I know at that stage of life, they are fiercely independent and do not like older people directing them. Your niece might be of a different personality. The fact that she's willing to reveal how much money she has saved seems to indicate she might not mind, but still I would be cautious. Anyway, finishing college in three years and saving all that money bodes well for her financial future, so I think she'll do well whatever you choose to do in this situation.

Hukedonfonix4me
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Re: Helping a niece begin investing

Post by Hukedonfonix4me » Fri Apr 27, 2018 3:18 pm

Send them this 16 page pdf by Bill Bernstein:

https://www.etf.com/docs/IfYouCan.pdf
"While some mutual fund founders chose to make billions, he chose to make a difference." | -The Bogleheads' Guide to Investing

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Meg77
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Re: Helping a niece begin investing

Post by Meg77 » Fri Apr 27, 2018 3:28 pm

I would make sure her parents are OK with it first. You don't want to step on their toes, even if your niece is technically an adult already.

I think this is a fine idea, but it doesn't sound like she can afford to contribute to a Roth. I would argue that a $12K emergency fund is a very good idea for a young person who is considering getting more education. If you encourage her to move money to a Roth, you may be effectively causing her to simply borrow more than she otherwise would in student loans.

Also, there's nothing preventing her from liquidating the Roth down the road without you knowing, so this is a bit tricky.

I might lean toward a smaller goal. Tell her if she opens a Roth IRA, you'll match her contributions dollar for dollar up to $1,000 (you can repeat this annually or not). The point isn't the amount of money, it's getting her in the habit of investing. You can always give more later, and she can always save more than you'll match.
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mak1277
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Re: Helping a niece begin investing

Post by mak1277 » Fri Apr 27, 2018 3:42 pm

Meg77 wrote:
Fri Apr 27, 2018 3:28 pm
I think this is a fine idea, but it doesn't sound like she can afford to contribute to a Roth. I would argue that a $12K emergency fund is a very good idea for a young person who is considering getting more education.
This. I would never suggest someone lock their money up in investments (retirement OR taxable) who is underemployed (your words) and with only $12k to their name.

youngpleb
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Re: Helping a niece begin investing

Post by youngpleb » Fri Apr 27, 2018 4:46 pm

I don't know, offering to fund most of her Roth contribution sounds a bit too over-the-top in my opinion. In my experience, people who really want to invest and save come to be interested in it only by themselves, and no amount of poking or nudging will "get the horse to drink" so to speak.
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Grt2bOutdoors
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Re: Helping a niece begin investing

Post by Grt2bOutdoors » Fri Apr 27, 2018 5:01 pm

youngpleb wrote:
Fri Apr 27, 2018 4:46 pm
I don't know, offering to fund most of her Roth contribution sounds a bit too over-the-top in my opinion. In my experience, people who really want to invest and save come to be interested in it only by themselves, and no amount of poking or nudging will "get the horse to drink" so to speak.
Let’s be honest here, if your employer offered to match you dollar for dollar in a retirement account, you would not be enticed by it? A match is “free money” and a nudge is an ideal way to get the emancipated and financially dehydrated horse to drink.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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arcticpineapplecorp.
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Re: Helping a niece begin investing

Post by arcticpineapplecorp. » Fri Apr 27, 2018 5:45 pm

Grt2bOutdoors wrote:
Fri Apr 27, 2018 5:01 pm
youngpleb wrote:
Fri Apr 27, 2018 4:46 pm
I don't know, offering to fund most of her Roth contribution sounds a bit too over-the-top in my opinion. In my experience, people who really want to invest and save come to be interested in it only by themselves, and no amount of poking or nudging will "get the horse to drink" so to speak.
Let’s be honest here, if your employer offered to match you dollar for dollar in a retirement account, you would not be enticed by it? A match is “free money” and a nudge is an ideal way to get the emancipated and financially dehydrated horse to drink.
True, but I see two concerns (one already discussed) the niece has mentioned outright:

1. "is wary of tying her money up where she can't get at it,"
2. "investing only to watch the value drop"

Problem with #1 already mentioned. She might raid it and not let it grow. Did that really achieve the lesson of investing/compounding interest, building savings habits not learned from parents, etc? No.

Problem with #2 is that:
a. she might not invest in a target date 2065 fund as the OP would want. She might put it all in a money market fund. Did that achieve the OP's desired result? No.
b. If she instead buys a 2065 fund and it does drop (we all know it will, it's not a question of if) will she panic and want to sell it all? Possibly.

I know it's a catch 22 that in order to understand investing you have to have experience with it. But I think she should at least have an interest in it. Without an interest, curiousity, etc. I'd say it's easy to set her up to fail. It's like giving someone a ferrari without having taken a driver's course or practiced in a used beater car first.

I applaud the OP's idea. But I think there should also be a natural motivation. Like the niece saying "I hear people talk about the stock market and making money. How does that work?" Then there's a way in that if she gets interested can grow over time. Just my 2 cents worth.
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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msi
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Re: Helping a niece begin investing

Post by msi » Fri Apr 27, 2018 10:40 pm

You could buy her a book on investing first and see how that does rather than starting with a contribution.

BagelEater
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Re: Helping a niece begin investing

Post by BagelEater » Fri Apr 27, 2018 11:16 pm

OK - I am going to go against most of the responses above.

I would definitely do what you are talking about - some sort of match, whether it be 1:1, 3:1 or whatever. I applaud you for getting her to look at her future. We all know it is not timing, but time in.

If you really want to make it zero risk for her (making it so she cannot say "no") you may even say "if you put $1,500 in and you need(legitimately) that money I will loan it back to you at zero percent interest indefinitely" This makes it a zero risk propostion for her - how can she say "no."

I am assuming a couple of things -
*she is very responsible
*in the big picture the amount of money you will give her(and her sisters) means nothing to you and your spouse
*she is genuinely interested in this and it is not a fleeting thought for her

msk
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Re: Helping a niece begin investing

Post by msk » Sat Apr 28, 2018 1:43 am

I had huge problems getting my 65 to 75 year-old sisters to open brokerage accounts to invest some inheritance from Dad that I distributed to them recently, 6 figures to each. Most people are simply too lazy. Only half did. 22 year olds are too distracted by today to worry about tomorrow. Retirement? That's in like, forever! One way of helping her get started is to get her to actually open a brokerage account and you simply fund it initially. You can do the same for each of her siblings as they come of age. In the meantime the funds available remain with you and are, simply, best left to accumulate in your name. What I am launching for my own adult kids: I am invested in stocks worldwide and I will give each a monthly stipend that they are welcome to fritter away. Basically I am doing the "investing" for them, in my account, until I pass away. I left them a letter of instruction following my demise. Unfortunately that involves each opening a brokerage account. Some will, others will not; but at least as long as I am alive all the available funds are invested to the best of my ability.

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