The #1 Retirement Saving Goal for Teens and Children and the Most Useful Strategy to Get There
What’s the most overlooked answer to solving the looming Social Security implosion? While we’ve previously covered the solution to that specific issue (see “Everything You Always Wanted to Know About The Child IRA,” FiduciaryNews.com, July 12, 2016), that’s only relevant if the child has earned income. In many cases, children do not actively hold paying positions. That doesn’t mean they aren’t in a position to learn the fundamentals required to retire in comfort. While these basics might be obvious to parents, they are less obvious to their children. Just like any other early childhood education curriculum, it’s important for parents, family, and other instructors to regularly and consistently emphasize this savings goal.
What is the #1 retirement saving goal for teens and children?
It doesn’t get any simpler than this: “The #1 goal for children and teenagers is to develop the ritual and discipline for consistent savings,” says Andrew Klein, Financial Advisor at MassMutual Financial Group in Madison Wisconsin. “Ritual is deeper than a habit, it’s deeper than a commitment. It’s religious!”
Remember when your parents brought you to the local branch of the big city bank and had you open an account with just a dollar? That’s the lesson we’re talking about here. “When you are just starting out the best thing you can do is open a savings account at a bank and get in the habit of putting money away each month,” Andy Yadro, a financial planner with Googins Advisors in Madison, Wisconsin.
You learned a lot with that meager savings account, and those same accounts can offer similar useful lessons today. “Open an online savings account and contribute a minimum of $5 a week automatically,” Colin B. Exelby, President and Founder of Celestial Wealth Management located in Towson, Maryland. “That is $260 that can be used for holiday gifts at the end of the year and gets you in the habit of auto-saving.”
What is the most useful strategy they can focus on to obtain the #1 goal?
The best strategies invariable contain an attractive carrot to spur optimal behavior. In the usual case of nominal dollar savings, it’s good to attach an immediately gratifying (relatively speaking) incentive. Remember, the ultimate lesson should teach the value of long-term saving for retirement. In order to eventually visualize a “comfortable retirement” (and the spending that entails), it’s useful to give the kids a small taste in the joys of spending. But just a taste. Because a taste lease to responsible cash flow management.
And that means learning how to budget. Scott Thoma, Principal and Investment Strategist for Edward Jones in St. Louis, Missouri, says, “Often lack of budgeting skills, and not being able to handle money appropriately, is a key issue that persists into adulthood. Using an allowance or chores to help instill lessons about how to handle money, how to save a part of the allowance and budget appropriately, is a skill that is critical in childhood and teenage years. Along with this is proper use of debt/credit – knowing that credit cards are not ‘free money.’ Often credit cards are first obtained in college, and if the child/teenager does not learn about how to use credit (e.g. paying it off vs. only paying the minimum) this can put the person in a difficult position financially from which they struggle for years to come.”
Nothing is more in the best interest of the child. The judicious carrot of spending, when managed properly, actually instills a strong sense of and desire to save and, ironically, not spend. “Developing a discipline of saving,” says Robert R. Johnson, President and CEO of The American College of Financial Services in Bryn Mawr, Pennsylvania, “foregoing consumption in the present to have greater consumption in the future, is anathema to the majority of children and teenagers. A savings mentality is best cultivated early in life.”
Once the child begins earning income through work, the savings options multiply. “A teenager who is working should open a Roth IRA and begin contributing,” says Adam Torres, CEO of Century City Wealth Management, LLC in Century City, California. “The teenager who does this will be well ahead of most due to having 50+ years of compounding returns to potentially aide in their retirement. Especially considering these earnings will come out tax free.”
Those interesting in learning more about opening IRAs for children should read “Who is Using The Child IRA Right Now,” (FiduciaryNews.com, July 14, 2016).
Christopher Carosa is a keynote speaker, journalist, and the author of 401(k) Fiduciary Solutions, Hey! What’s My Number? How to Improve the Odds You Will Retire in Comfort and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on Twitter, Facebook, and LinkedIn.
Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.