When the baby boomer generation was growing up, Social Security was a mainstay of retirement planning, and many of them had grandparents who were reasonably comfortable living off a combination of their investment income and government checks.

But times have changed.

Today, we have seen both Wall Street and the housing market take a significant hit and Social Security is on its way toward being broke. So, while parents scramble to salvage their own retirement income, should they also be thinking about planning their kids’ retirement?

FBN TOOL: Are My Current Retirement Savings Sufficient?

The simple truth is that starting now can help teach kids the importance of saving, and at the same time, secure their long- term future.

The thought of saving for more than one retirement in the current economic climate is downright daunting, but not impossible. Here are two very important reasons you should really consider starting a fund for your children’s nest eggs. 

First, time is your biggest ally in any investment plan--no matter what the goal. Retirement is decades away for your children, so even a small amount of money set aside on a consistent basis can grow to be a significant sum. 

Just $100 a month invested in the stock market at the end of 1992 would have grown to $40,000 by the end of 2010. If you were to let that money grow untouched for the next 42 years it would grow to $1 million (assuming an 8% return).

Secondly, the habit of saving something from every source of income, every time, is crucial to financial independence. Require your children to save each time they receive money for a birthday or a holiday and insist they save part of their income when they start working, this will lay a solid foundation of savings. Learning to live below your means is almost a forgotten virtue in our society today; too many Americans are living paycheck to paycheck.

Most parents will tell you that they want their children to have a great life, and teaching them to be responsible with money is one of the best ways to help them in their adult life. 

Here are 5 ways to create a retirement fund for your children while still maintaining your own nest egg and current lifestyle.

Open a Mutual Fund and Spread the Word

Open up a mutual fund and tell relatives. Most mutual funds will accept $50 or more after an account is opened, so let grandparents, aunts and uncles and other family members know about the account and how they can add money to it for your child.  Instead of spending money on gift buying, encourage them to send at least part of what they were going to spend on gifts to the fund.

Trim Gift Giving and Step Up Saving 

Examine your annual budget for gift giving to your children and cut it in half. Take the leftover money and invest it in a mutual fund for your children. The Gallup Organization estimated that Americans spent close to $1,000 on gifts during Christmas last year. Think about it: An additional $500 per year saved in a mutual fund will have a bigger impact on your child’s financial security than the toy long-forgotten by February.

Let Uncle Same Help

The current child tax credit is $1,000 per child until they reach 17.  Discipline yourself and deposit the credit into your child’s account when it is returned to you as a refund.

Let the State Government Help

Most states have college savings plans called 529s that offer tax benefits. Many states that have an income tax will allow residents to deduct part of what you save in their 529 from their state income tax.  This is another source of tax refund that can turn into additional savings at tax time when you discipline yourself to invest the refund.

 


Rick Rodgers, CFP® is an author, keynote speaker, wealth manager and president of Rodgers & Associates, “The Retirement Specialists,” in Lancaster, PA. Rick’s articles on retirement planning have appeared in Wealth Manager magazine, CPA Magazine and Physician’s Money Digest. He is also the author of a new book, The New Three-Legged Stool: A Tax Efficient Approach to Retirement Planning, and also writes a column for Lancaster County Magazine titled “It’s Your Money."