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Funding Child’s Retirement: You Can Lead a Horse to Water

Mar 3, 2016 12:33:24 PM
Author: Hanson McClain

Is funding your recently graduated children’s retirement the best way to teach them about saving and investing? Scott and Pat outline the pros and cons.

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Scott: Let's go to Denver, and we'll talk with Mike. Mike, you're with Hanson McClain.

Mike: Thanks for taking my call. I've got two children, 25 and 21, both out of college.

Scott: The 21-year-old as well?

Mike: Yeah.

Scott: Wow.

Mike: She graduated a year early, yeah.

Scott: Wow.

Mike: And they both work for companies that do not offer employment contributions into a 401(k), for example. So I'm trying to help them seed and start a retirement fund.

Scott: Yep.

Mike: So my question, in general, is what's the best way to do it? What I've been doing --and I don't know if it's the best way-- is the last couple of years, I created a Roth IRA for each one of them. And based on their income that year, I put in the maximum that I could by law, and so they both have Roth IRAs. I've been funding it every year. I just, here in January, put in another $5,500 for each of them. And just wondering if there's anything else I should be doing or doing something different.

Scott: Mike, that is the exact thing I do with my kids, 100%. It's perfect. My daughter's 20, and she just got her 1099 in the mail the other day coming to the house. She's in college. Because I told her I would match her up to the maximum, and she earned a lot more last summer than I thought. Of course, she didn't save any of it, and she still needs money for dorm expenses.

Pat: No, it makes perfect sense. It absolutely makes perfect sense for that. And what are you investing inside the Roth IRA?

Mike: Well, that's the next level of detail. You know, it's in a big mutual fund company, so I moved it out of the Money Market and just into... I can't even tell you. I made the decision about 18 months ago, and I haven't even looked at it.

Scott: Yeah, I mean, the nice thing, they're 25 and 21.

Pat: So are you buying the Total Market Index in there, or...?

Mike: I really can't tell you what.

Scott: Okay.

Pat: Yeah.

Scott: That's what I would buy. That's what I would buy. Yeah, I would--

Mike: Okay. Move into a Total Market Index fund?

Scott: But actually, I'd probably say 70% Total Market and 30% International.

Pat: Some international in there.

Mike: Okay.

Scott: That's how I would handle it there, Mike.

Pat: Yeah, yeah.

Scott: So this is great, Mike, to get them seeded for their own savings. And if you think you're gonna pass some dollars down to them, this would be the best dollars to pass down, money that's in a Roth, right, because it's gonna be tax-free of anything you own, Roth. So this is the way you can get some Roth to them. The challenge here is they don't offer savings plans through work. What is just as important as you giving them some money is for them learning the discipline to save on their own and living on less than what they make.

Mike: Yes. I've been trying that since high school and still trying that.

Pat: How's it working?

Mike: Still trying that. Well, for one thing, one of them's not making very much money at all, right, just out of college, liberal arts degree, just really struggling. So I have some empathy for that, really working hard to try to find a job or two to pay all the bills, but having a challenge.

Scott: So one of the things, at a minimum, you should actually be reviewing these statements with them on an annual basis, just so that they understand that there's volatility in the marketplace and that they're long-term investors and actually what this is doing for them. And unfortunately, some kids will take to it easier than others. I have four children, I've been funding accounts for them since they were little, and I've tried to introduce them to this whole concept of investing. And out of the four kids, two of them took onto it right away, no problems, and the other, as soon as I turn my back, they'll liquidate, right.

Mike: That's right, that's right. Yeah, well, I think, also, the older one has a better appreciation because he was thinking of buying a house and he might want some assets to put into it. And so I think the age thing makes a difference.

Scott: That helps, that helps, that helps. No, but I think you're doing the right thing.

Pat: All right, well, good luck, Mike.

Mike: Thanks, guys.

Pat: You've got the right heart, that's for sure.

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