You’ve probably heard me say on this blog that the best way to save for retirement is to start early. The same goes for investing. One of the best ways to teach your kids about the stock market and get them thinking about their financial future is by allowing them to invest in the markets. Many of the major investment platforms offer custodial accounts, which allow parents to set up trading accounts for children under 18 and which require adult permission to complete transactions. Once you have the account, you can decide how to best teach your teenager the importance of risk and investing. If you have more than one teenager involved, maybe make a game out of it and see whose investments perform the best over a set amount of time. If your teenager is more goal oriented, maybe encourage them to use the account as a way to grow money for something like a car or product they want. Whatever you choose to do, be sure to guide them and set some limits. You may want to limit what investments they can put money into (no options, etc.). You will also want to encourage them to use properly vetted resources, such as popular investment books or well-sourced blogs. Heck, you yourself may want to use it as an opportunity to read back up on the latest investing trends and advice out there, if you haven’t already. Of course, you will also want to teach your children about risk as they will most likely experience some loss. It may be hard for them at first, but if you encourage them to be patient and learn from why the investment went down, then it will be a good thing in the long run. Just make sure they don’t lose too much, or for that matter, gain too much without learning about trends and why their investment performed the way it did. With the right guidance and some sound advice, your children can learn about the stock market and hopefully set themselves up for a solid financial future. What did you wish your parents taught you about investing growing up?
Retirement can be a long way off for teenagers, but given how much retirement can cost–and the costs will probably continue to rise throughout future generations–there’s no such thing as getting too early of a head start. No, you teenager might not fully appreciate how much such steps may help in the future, but that shouldn’t be a good enough reason not to at least talk to your teenager about starting to save for retirement as soon as they are able. Of course, you can start off through conversation. However, if you really want to make an impression, you may want to consider setting up a Roth IRA for your teenager once they have a job and earn income. You can teach them the importance of saving for the future by having them make contributions from their income. Now, obviously, it might be hard to get a teenager to part with their money, but you may be able incentivize them by offering something like a matching contribution or a reward for contributions they make. There is a number of things they can do with that money once it’s in a Roth IRA, particularly relating to education expenses or buying a first home. Before you jump right into opening a Roth IRA for your children, you will probably want to speak with a certified financial analyst or wealth manager and possibly even bring your teenager along so that you can hash out a plan for contributions and what the money will be used for. A retirement professional may also be able to better explain what the purpose of a Roth IRA is and be better informed when it comes to helping with such an account–that is if you choose to have a professional oversee it.
I cannot predict the future, but I am very, very comfortable in saying that retirement will be different for future generations that it is for current retirees (and those about to retire). As to how different, I don’t know, but as with many things, it will change with each future generation as it has for past generations. Not only will retirement itself be redefined, but so too will the ways that people save for retirement. It’s already happening. For example, younger generations today have extensive resources and opportunities available to save for retirement, but they are also looking at longer careers and a delayed start to retirement savings thanks to student debt and an unpredictable economy. Their version of what retirement will be like is much different from those of their parents. This is important to keep in mind when you discuss retirement saving with younger generations, such as your children or grandchildren. It can be easy to get lost in the notion that younger generations can pull off retirement just as you and your parents might have with a little hard work and saving. However, that just won’t work. Instead, remember to talk with younger generations about how they view retirement and try to understand why they might view it that way. For those just starting out in the working world, retirement can seem a long way away and saving for something so far in the future may not take top priority compared to paying down student loans or getting a solid financial start to adulthood. If your children are in their 30s or 40s, possibly with a family of their own, they may not feel that they will ever be able to retire given the unpredictability of the economy and the cost of things such as homeownership and still having to pay down student debts. Taking the time to understand the situation of younger generations is important to having a meaningful conversation about saving for retirement and financial stability.
There’s a good chance that you have a will, especially if you have assets that you want to share once you have passed on. If you don’t have many assets or few family and friends to share them with, then you can get by with a simple will (i.e. maybe a page or two long saying who gets what). However, if you have young children–or grandchildren–a simple, boilerplate will probably won’t cut it. Furthermore, if you find that your will may end up leaving a large inheritance to a child or young adult, you will want to consider guidelines and limitations on how the money can be used and when it can be used. This is where a trust comes into play. Since there is a whole section of law devoted to trusts (usually combined with wills and estates), I am not going to get into the legal mumbo-jumbo of the different types of trusts and how they all work. In a nutshell, though, a trust is a legal vehicle that allows for the distribution of money or assets, as overseen by a trustee, to a beneficiary. The trustee may have certain guidelines and rules that he or she must follow when distributing the assets within the trust, which are defined by the settlor–the person who is looking to have his or her assets or money distributed. There are multiple types of trusts out there and each have different ways that they are created and can be used. Why am I talking about trusts? Well, if you have children (or grandchildren), particularly ones that are young, a trust can be an effective way to make sure that they don’t blow through any inheritance they receive. For example, you can instruct the trustee to not distribute the assets or money in the fund before the beneficiary reaches a certain age or that is can only be used for certain purposes. This can protect both the assets you place in the trust as well as the beneficiary and prevent the beneficiary from becoming to reliant on an inheritance. Despite the simplistic approach of this blog post, trusts can be complex. Thus, you will need to speak with an attorney, particularly one specializing in estates or trusts, if you decide you want to set one up as they can legally do so and will ensure that it is done properly.
It’s not uncommon to find young adults in their 20s (or even 30s) living at home or relying on their parents for financial support. Younger generations have struggled in recent years finding their footing in the real world thanks to tough economic conditions and soaring student loan debt. As a result of this, many parents have continued to support their young adult children through various means, whether it be paying phone bills, credit card bills, or helping out with rent. No parent wants to see their children struggle, but as you move towards retirement, you need to be aware of just how much support you are offering and–most importantly–whether you can afford to continue to offer such support. If you find that financially supporting your children past the age of 18 is starting to impact your financial and retirement plans, you may want to consider whether continuing to support your child is a good idea. This doesn’t mean you have to kick your kid to the curb, but it does mean you may need to think about or change just how much support you offer and whether it’s beneficial. Such thinking may seem selfish, but I assure you it is not. You still need to think about yourself and your financial well-being. It may also force your adult children to become more independent and better prepared to live on their own. No, you don’t have to completely cut your children off, but cutting back is perfectly acceptable. If done so thoughtfully, it can be a valuable lesson for your children and allow them to become strong, independent adults.
Whether or not you want to leave a legacy for your children and/or grandchildren can be an important part of retirement planning. If you would like to leave behind a pot of money for your loved ones, then you will want to plan to do so. That may mean saving a lot of money towards retirement or finding ways to fund your retirement needs/expenses without touching your nest egg or being creative when it come to cutting down on retirement expenditures. Furthermore, the decision to leave behind money when you pass away may need to be made early in your retirement saving endeavors as it may influence the way to save. You will also want to put some thought into organizing who gets some of that money and how much. It’s not uncommon for a leftover legacy– whether it be money, an asset, or a piece of property–to have a negative effect on one’s heirs. You most likely want to avoid a situation where family squabbles could arise or bitter feuds could develop. A will that divides up what you leave behind can be an effective way to avoid issues with any money or estate that is left. A will can also give you some control over who gets what and can ensure that your wishes and desires are met when it comes to dividing up any funds you leave behind. If all this seems like too much thought and work, you could also take the approach that many take and try to leave as little money behind as possible. Yes, some people plan to spend all of their retirement savings and leave nothing. This approach also requires planning as you will need to be conscientious of how much you save and also how much you spend once you are in retirement. You will most definitely want to consider ways to cover unexpected expenses that may arise in retirement, such as medical bills, and which can quickly eat into the limited savings you have. Regardless of whether you intend to leave a legacy behind or not, you should speak with a certified financial planner about what you intend to do and develop a plan that allows you to meet those goals efficiently and effectively.
The best way to set yourself up for a comfortable retirement is to start saving as early as possible. This means as soon as you have income, you start putting some of it towards retirement. If your first job is with an employer that offers retirement savings benefits, then take advantage of them. It’s even sweeter if your employer offers matching contributions (extra $$$!). If you are well into your career and have children or grandchildren entering the working world, take some time to remind them of the importance of saving for retirement. They might roll their eyes or talk about how far away they are from retirement, but keeping harping on it. The sooner they start saving, the better off they will be when they retirement decades later. Don’t be afraid to help them with setting up their retirement plans or if they need a little help with making a contribution. If they need to speak with a certified financial planner, help them find a good one. Don’t be afraid to share your knowledge of retirement saving with your offspring!
I’ve mentioned the importance of estate planning here on this blog at times in the past as something that you should include as part of your retirement planning. After all, it will most likely be your remaining retirement funds that are left over after you pass which will need to be divided up. Also, it’s one less thing you will have to worry about once a plan has been put in place (barring any life changes that is). Traditionally, people often think of estate planning as something done later in life, especially once it is clear what your assets are and what you want to do with them. However, estate planning should be something that is done much sooner, especially once you begin a family. This can be very wise if you have young children and have people that you want to care for them should–heaven forbid–you and your significant other both become incapacitated at the same time. This language should set forth who you want your children to live with and any possible custody arrangements. This also ensures that your children will be allowed to stay with people (most likely family or friends) whom you feel are best able to care for them and will help the children cope during that difficult time. I understand that this may not be easy to think about, but it can make a huge difference for both the well-being of your children as well as for your own comfort. If you already have a will and want to add this language, you should speak with an estate attorney who should be able to answer any questions you may have and inform you of any jurisdictional rules regarding such language.
You’ve heard a lot of talk on this blog over the years about consolidating IRAs, particularly as you move through retirement and as a means of maintaining efficiency and control over your money. What we have rarely talked about is actually splitting up your IRAs, which is also a thought you may want to consider–especially if you want to leave money behind for a spouse or children. If that is the case, you should consider dividing your IRA into two, so that the spouse is named as the sole beneficiary of one of those IRAs and your child (or children) named as the beneficiary (or beneficiaries) for the other IRA. This is important because spouses have options with an inherited IRA that other beneficiaries–such as children–do not have. Furthermore, you can divide an IRA with no tax cost if done correctly and it is not required to be done during your lifetime. If your beneficiaries decide they want to, an inherited IRA can be divided into two so long as as it is done before December 31 of the year immediately after the year of your death. One last thing, if you are planning on leaving an IRA to a younger relative (i.e. a grandchild), splitting your current IRA and naming that younger relative as a sole beneficiary of one of the new IRAs will allow the younger relative to use their own life expectancy for any required minimum distributions (RMDs) they may have to take. This can mean lower RMDs for them, which will allow the money in the IRA to last longer. If you do not split your IRA and have multiple beneficiaries, the younger beneficiaries will be required to use your life expectancy in determining RMDs, which could substantially affect the size of the RMDs required to be taken. If you are considering breaking one IRA into two, you will want to speak with a certified financial planner to learn what you will need to do.
Yesterday I wrote about how having multiple IRAs can help you with estate planning as a vehicle for bequests and a way to leave money for friends and family. One thing I left out was how IRAs can provide an easy way for your heirs and beneficiaries to use disclaimers and pass the money on to other heirs. An example of when this might be done is if an adult is named as the beneficiary of an IRA and is in a high tax bracket and does not need the retirement money. That adult, however, may have children who could benefit from getting a head start on retirement saving. The adult can disclaim the IRA, in which case it would pass to his or her children (it would be treated as though the adult was deceased and no longer “in line” for the IRA). Now, you may be wondering why the IRA owner doesn’t just name the children as beneficiaries. That is a possibility, but there may be reasons why the IRA owner wouldn’t do so (i.e. the owner may not feel the children are old enough for one or the IRA owner died suddenly) and this provides an option to the beneficiary to make the decision, which is something they may be better suited to do. While this is pretty straightforward if there is only one beneficiary to an account, things can get complex if there is more than one beneficiary to an IRA. In such instances, disclaimers may not be a possibility or may not allow for the passing along of the money that would meet the beneficiaries intentions and goals.