I’m concerned for the financial future of most of our young people. The pensions that were common when I began my career are largely gone and replaced by retirement plans that are mostly employee-funded.
Additionally, employees are being asked to make investment decisions on their own. Some are qualified to make those decisions, but most are not.
The good news is these young people are smart, and they can be taught how to take better care of their retirement investments. The first goal of my financial education foundation is to help young people be smarter about the simple steps that can be taken to give them a brighter financial future.
The two most important ways we can “be smarter” are to save more and to start saving sooner. No matter what happens to the laws or the economy, we’re better off if we have saved more money. And as most thoughtful investors know, time is a very powerful tool for generating long-term gains.
Despite the hundreds of breathlessly exciting articles and videos to the contrary, there is really no “secret” to saving more money. The way to do it is spend less and save more. I’ve never met anybody who regretted having saved more money. And I doubt that you will be the first.
I know of some creative and very effective ways to be smarter by starting earlier.
If you are reading this article, the probability is high that you’re past your early or mid 20s – the age bracket that will benefit the most from saving early. But if you’re in your 30s, 40s, 50s or beyond, the probability is very high that you have children, grandchildren, nephews or nieces who are young.
If you have the desire and ability to help a young person, you have an amazing opportunity to create a tax-free investment that can change someone’s life.
So here are four ideas.
Idea No. 1
The first idea is simple, and I’m still doing it for my two youngest daughters. Each one is in her early earning years and not making a ton of money. Each is maxing out her 401(k) contributions, as she should.
In addition, each daughter is eligible to contribute $5,500 a year into a Roth IRA, and the money and the earnings on it will never be taxed (unless the government retroactively changes the rules, which seems unlikely).
My wife and I are funding these daughters’ annual Roth IRA contributions, which I’ve done for all my kids over the years. This does not take them off the hook; they still must max out their 401(k) contributions from their pay.
The result is that my kids have Roth retirement savings working for them while they are relatively young.
Simple math tells me this is a good investment. At 10% compound interest, every $1 invested at age 25 is worth about $45.26 at retirement age (presumably 65); by contrast, every $1 invested at age 40 is worth only $10.83.
Some parents will naturally be reluctant to make such a gift, knowing that their children could withdraw the money any time and spend it.
Knowing this possibility, I have made the following deal with my kids: If they cash out their IRAs before they are 59 ½ years old, while I’m alive that will be the last money they ever get from me.
This is more than fair, and they have agreed to it.
Idea No. 2
My second idea, which I’ve actually put into practice for each of my grandchildren, is much more audacious. I described it in detail in my book “Live it Up Without Outliving Your Money” in a chapter called “My 500-Year Plan.”
In a nutshell, here’s what I did. When my first grandson was very young, I gave him a $10,000 variable annuity in a form that prevents him from withdrawing any of the money until he is 65.
The money is invested in an all-value equity portfolio that will not be taxed until the distributions are made. When my grandson turns 65, he is to receive a lifetime “pension” from the annuity equal to 5% of the prior year’s ending value.
Otherwise he cannot withdraw the money. Upon his death, the remainder will be given to charities that he chooses.
This doesn’t take him off the hook for earning a living and saving for his own future. But it buys him a much more comfortable retirement than he would otherwise have.
This also allows for the possibility that he could retire on his own savings at age 55, knowing there will be another source of income when he’s 65.
(It also encourages him to do everything he can to live to be 65!)
This audacious plan flies in the face of conventional wisdom in several respects, and it’s not for everyone. But so far it has worked well.
Idea No. 3
My third idea is more suitable for a very young child, even a newborn. I call it turning $3,000 into $50 million.
The basic idea has been around forever: Invest $1 a day, starting on Day 1 of your life, and you’ll eventually have a nice nest egg.
Obviously a baby can’t start saving on Day 1. But a grandparent can, and $1 isn’t much. Neither is $365, which could be put away in the first week of a child’s life, then once again every time the child has a birthday.
Carried out through the 21st birthday, that plan would cost a grandparent a total of $8,030. Compounded at 10% (and ignoring taxes) on the child’s 21st birthday the account would be worth about $26,000
If Roth IRAs are still available and the $5,500 contribution limit still holds and the investment continues to grow at 10% that’s enough money to fund a Roth IRA for seven years or more.
As you can see in the article linked above, if this plan is carried forward for many years, the ultimate payouts could be astronomical.
It’s a great boost to a young person.
Idea No. 4
My fourth idea is also fairly simple. Loan a young person $5,500 to max out a Roth IRA, then make an additional $5,500 loan each year for another nine years.
Treat it as a real loan, with a written note, an interest rate (perhaps 3%), and a repayment plan.
If you begin this when the young person is right out of college at 23, by the time she’s 33 she will have invested $55,000 into the IRA.
She could probably afford to make interest-only payments for the first 10 years, then begin repaying the loan over a period of 10 to 20 years.
Your generosity will put her way ahead of the game and you may even get your loans repaid. That loan could be one of the best investments you will ever make.
Richard Buck contributed to this article.
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