Wouldn't It Be Nice If Someone Paid For Your Retirement!?

Photo by Torsten Dederichs on Unsplash

The longer you delay thinking about your retirement and crunching the math, the scarier it will get! Sooner or later all of us are forced to face this scary task. But what if someone had already secured your retirement before you even knew that you needed one! What most people fail to realize is that the greatest accomplishment with investing isn’t something we can do for ourselves but rather for the little people in our lives. I’m talking about our children. Now I realize that not everyone has children, but I would bet most of us have nieces or nephews or some extended family or friends with kids.

The greatest power of investing is time, and who has more time ahead of them than children. I have two kids myself, a niece and nephew and many more children within my extended circle of family and friends. If you have kids of your own or within your circle of family and friends, let me scare you with how cheap it can be to give them an unimaginable amount of money in retirement. Now, they likely won’t appreciate this gift at the time and perhaps you won’t be around to hear the heartfelt thank you. But the best gifts are given out of kindness and without expectations.

Most of you should know what a Roth IRA is and maybe you even have this type of account in your broad investment portfolio. Did you know that children can have Roth IRA’s too, there is no minimum age limit. Much like with a Roth IRA for adults there are certain requirements that kids must meet as well.

First off, the IRA has to be a custodial IRA until the child turns 18 or 21 or 25 depending on where you live. At that point the custodian can transfer control of the account to the child. To make contributions the child must also have earned income. There are no restrictions that the account must be funded with the child’s income though.

Let’s say for example your daughter earns $1,500 this summer from babysitting. If she claims this amount as earned income on her tax filing, Mom or Dad can fund her Custodial Roth IRA with the equivalent amount. Ideally you would want to also use this situation as a learning experience to introduce your daughter to saving and investing.

It worthy to note that while tax situations will vary based on the individual, most children that earn a trivial amount of income may not end up owing any taxes at all.

Most children will have some type of earned income before they become adults and start their careers. You can use this as an opportunity to not only teach them about the benefits of investing but also to give them one heck of a tax free retirement package.

Let’s take a look at the scary math.

For your child to have a million dollars by the age of full retirement (67) they would need to have a balance of around $8,600 at age 18 in their Roth IRA. Assuming they can earn a 10% average rate of return.

You can start withdrawing money from your Roth IRA, tax free, at the age of 59.5. To reach a million dollars by age 60 your child would need to have a balance of roughly $16,750 in their account at the age of 18, assuming the same 10% annual rate of return.

Both these examples assume that no additional money would be added to this account beyond the age of 18.

The same million dollar balance can be achieved by funding the Roth IRA with $100 per month for the time period between age 13 and 18 to reach this goal by age 67. And $180 per month to reach this goal by age 60.

If your child is a diligent worker throughout the 4 years of high school and they can earn at least $7,000 in earned income each year. And if they or you fund their Roth IRA with that $7,000 (current annual limit) at ages 15, 16, 17 and 18, respectively.

• They should be a millionaire in their early 50’s.

• They should have roughly $2 million for early retirement by age 60

• They should be close to having $4 million by full retirement age of 67

That is some pretty amazing exponential growth for a little bit of effort early in life.

Here’s a table showing you what $100 invested at a young age could turn into by the age of retirement.

The first column is the age at which the $100 was deposited into a Roth IRA. The second column shows the value of that $100 at the age of 60 and the third column shows the value at the age of 67.

Just something to keep in the back of your mind next time you’re struggling to come up with what to gift a child for their birthday! Give them a gift that will keep on giving!