I want to share strategies to help your kids get off to a great start in retirement. Many of my clients wish they had started saving at a younger age and worry their children will make the same mistake. As such, many of them want to teach their children how to manage their own money.
One of the most important lessons to be taught is how important it is to save money. Most people don’t realize how much they need to save for retirement. For example, assuming a typical retirement sustainable withdrawal rate of 4% for him, he would need to save $1 million by the time he retires to have a sustainable retirement income of $40,000.
This savings goal can be quite daunting, especially for young people. But the biggest advantage young people will get after retirement is that they will have plenty of time to increase their savings. The sooner you start saving and investing, the more wealth you can build.
Sign up for Kiplinger’s free e-newsletter
Receive the best investment, tax, retirement, personal wealth management and more expert advice directly to your email to help you profit and prosper.
Receive the best expert advice directly to your email and get profitable and prosperous.
(Image credit: David McClellan)
But let’s be real… I’ve yet to meet a teenager who’s thinking about retirement. A simple strategy parents can take to boost their children’s retirement savings is to help fund a Roth IRA.
Let’s say your child earns $3,000 at work in 2023.Income is W-2, they can donate 100% of their earned income up to $6,500 or $3,000 to the Roth IRA. If your income is 1099, your contribution limit is reduced by 7.65% (half self-employment tax) or $229.50, allowing you to contribute $2,770.50 to your Roth IRA.
They probably don’t have the cash to donate themselves (even if they want to), but here’s a parent giving them a tax-free cash gift (up to $17,000 per person in 2023). can intervene with To fund the Roth IRA. In most states, if the child is a minor, they must start with a minor Roth IRA where the parent is the administrator of the account, after which the account can be converted to a regular Roth IRA owned by the child. legally an adult.
How big an impact can this have on your children’s lives? Let’s assume they donate $3,000 a year as middle and high school high school students, and $6,000 a year through their four years of college ( (So the total donation is $30,000). Earning annual returns of 6.8% for ages 16 to 40, 6.4% for ages 41 to 60, and 6.1% for ages 60 and above (80% equity, 70% equity, and 60% equity, respectively) expected return from allotment), d has at least $600,000 in tax-exempt retirement savings by age 65, and potentially $21,000 or more in sustainable tax-exempt income long after retirement.
*For simplicity, assume an investment account as follows: 6.8% annual net of fees return with 80% equity allocation between ages 16 and 40, 70% equity between ages 41 and 60 6.4% annual return after deduction of fees on allotment, 6.1% annual return excluding 60% stock allocation fee after age 60. All figures shown are forward-looking amounts and are net of a 1% advisory fee. ** Sustainable annual retirement income assumes an annual withdrawal rate of 4%.
(Image credit: David McClellan)
It also creates an opportunity to teach children basic investment concepts such as what a retirement account is and the time value of money. Hopefully, they will get used to giving annually and carry that good habit into their adult lives.
It’s a legacy you can be proud of.