Most of us know the younger we are when we start saving for our retirement, the more money we will have when it’s actually time to retire. But, what some of us may not consider is encouraging our children to begin saving for retirement.
According to the AARP, In the past, advisers have recommended having 70% to 80% of your preretirement income after you finish working. Some advisers now think you will need 100% of your preretirement income each year for at least the first 10 years after you stop working.
Managing director of North Florida Wealth Advisors Christopher J. Conner said there isn’t a particular age when a child should start saving, but saving for retirement is a “better safe than sorry” strategy. “It’s highly probable that today’s children could become centenarians and inflation could erode their standard of living,” he said. “It is hard to predict the future of social security and what type of retirement plan their employers will provide.”
Conner said there are numerous options for kids to save for retirement, including a bank savings accounts, mutual funds and individual stocks and bonds.
If your child has earned income or received a 1099 or W-2 from an employer, you can open an Individual Retirement Account (IRA) or a Roth IRA. There is no age limit for opening an account, and a child or a parent can contribute to the account.
“I would consider the Roth IRA because at retirement, the funds can be withdrawn tax free,” Conner said. Also, once the account is opened, there are clauses for educational expenses and first- time home purchase that lets the owner access the contributions, penalty free.
Perhaps the greatest advantage for someone to start saving for retirement early is the power of compound interest, he added.
If your kids leave their money in their Roth IRA until retirement, they could be looking at 50 years or more of growth.
According to Fidelity, the current maximum annual contribution for a Roth IRA is $6,000, or the total of a child’s earned income for the year, whichever is less.
Getting your child on board with handing over some of their hard-earned paycheck could be tricky. But it might be as easy as opening a savings account at a bank or credit union. You could even provide an incentive by matching a portion of what they save.
Once your child has received their first paycheck, it is a great idea to create a budget and establish an emergency fund before or at the same time as saving for retirement, Conner said.
Whatever you decide, Conner said it’s important to have a comprehensive financial plan as a road map for your individual goals. Make sure to consult with a financial adviser and tax adviser.
MORE WAYS TO TEACH YOUR KIDS ABOUT MONEY
Money Talks: Boosting Your Child’s Financial IQ
Money, Money, Money: Teaching Your Teen to be Financially Responsible