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Guidelines for Minor Children: How to Avoid a Personal Retirement Crisis

Guidelines for Minor Children: How to Avoid a Personal Retirement Crisis
September 26
00:04 2017

(The following is an excerpt from a chapter of the book From Cradle to Retirement – The Child IRA – How to start a newborn on the road to comfortable retirement while still in a cozy cradle.)

In a manner of speaking, each generation has a fiduciary duty to protect and prepare the succeeding generation. Parents, grandparents, aunts and uncles strive to teach their children, grandchildren, nieces, and nephews how to survive on thrive by themselves without depending on the government, an employer, or even their own family. Every kid dreams of a time when adulthood arrives and the shackles of childhood melt away. This is the dream of freedom, to make their own decisions, to be accountable only to oneself.

Very soon after our eighteenth birthday, however, we quickly discover that freedom we dreamed of isn’t a switch you can simply turn on. It’s the dividend that can only come from an investment of hard work, discipline, and the passage of time. Some newly ordained adults seize this opportunity to fend for themselves. Others seek ways to short-cut the necessary investment and, instead, rely on others to provide their needs for the long-term. Parents, grandparents, aunts, and uncles can only hope those they teach make the right choice, but once a child becomes an adult, the older generation finds they no longer control the strings.

Those who choose to depend on others may be in for a rude awakening. The lessons of Bethlehem Steel aren’t limited to the 1980s. They are global and we are merely a bit of bad economic luck away from experiencing them. “I don’t mean to be such a downer but the facts are what they are,” says Phil Reames, Founder of Reames Financial in Kalamazoo. “I’ve been writing since at least 2012 or so that the US is just ‘Greece waiting to happen.’ What I mean by the is that countries were willing to keep loaning Greece money to cover their deficits right up until they weren’t willing to loan. There was no warning. Once Greece was cut off from credit all hell broke loose. I have a friend who has relatives in Greece. Retired school teacher. Her pension has been cut twice. From $2,000 a month down to $500. Many say, ‘that could never happen here.’ Really? Why not? The government only has a couple of ways of coming up with additional revenue to cover the shortfalls. Higher taxes or borrow more. How willing are people going to be to pay higher taxes at the same time their retirements are being cut? Think of the class warfare you’ll get when you pit the 50% of the country who has no retirement savings at all against those who have pensions. Do you really think they will be willing to pay more in taxes to bail out those who do have pensions? It sure is going to be interesting.”

It doesn’t take a degree in advanced calculus to see where we’re headed in terms of retirement. “Several studies have indicated that the greatest retirement-related fear of retirees is outliving their savings,” says Robert R. Johnson, President and CEO at The American College of Financial Services in Bryn Mawr, Pennsylvania. “A 2016 study by Transamerica, found that workers’ top retirement fear (51 percent) is ‘outliving my savings/investments.’ A survey released in 2016 the American Institute of CPAs had similar findings, with 57% of financial planners listing running out of money as their clients’ primary retirement concern.”

At the same time, this demographic fact plays into the biggest fear retirees have. “People are living longer,” says Johnson. “According to the Human Mortality Database, the oldest age at which 50 percent of babies born in 2007 are predicted to still be alive in the United States is 104. The good news is that people are living longer and are expected to live even longer in the future. The bad news is that they are likely to be woefully underprepared financially to enjoy these years of life. While Social Security represents an important financial backstop for individuals, it was designed to support much shorter lifespans and to be a ‘pay as you go’ system. It is underfunded and is wholly inadequate for ensuring adequate income in one’s golden years. While I believe that some form of Social Security will be in force for the foreseeable future, benefits are likely to be reduced or to have some sort of means testing attached to claiming.”

People certainly believe there is or will be a retirement crisis. What’s more important, though, is any “retirement crisis” may not impact all people equally. It’s clear a retirement crisis looms, if not for all than at least for those least prepared. Most of the literature on preparation focuses on adults. This makes sense for two reasons. First, adults are in the best position to prepare. Second, adults are in a position to pay for the advice needed to best prepare.

But, as the cliché goes, “What about the children?” Arguably, it is minor children who have the best (and easiest) opportunity to shield themselves from a retirement crisis. They have the advantage of time (to maximize the benefits of compound interest).

It’s not too early for minor children to begin the process of preparing to become self-sufficient during retirement. By not relying on others, they’ll have more control over their lives and greater freedom to live their retirement dream. This begins with avoiding a reliance on one of the most relied-upon methods of securing a strong retirement – intergenerational wealth transfer. “What children should never do is to expect a large inheritance,” says Barry Kozak, Esq., a consultant at October Three Consulting LLC in Chicago, Illinois. “As moms and dads are living longer lives, and as out-of-pocket health care and long-term care expenses keep growing, and as the baby-boomer generation seems to be leaving more unpaid debts upon their deaths and gifting more to charities than did the previous generation, there is an ever-increasing chance that any inheritance that actually passes to the child will be much less than imagined.”

Younger children, less attune to the nuances of estate planning, might not even have begun to think about whether their parents will leave them a tidy sum. What they can do, however, is learn. “Minor children should educate themselves as always,” says Jason Howell, President & Wealth Adviser at Jason Howell Company in Vienna, Virginia. “Higher paying jobs in an economy that is increasingly becoming more ‘robotic’ will go to the people who can run the machines or outsmart them on an emotional intelligence level.”

Aside from learning to get a better job, there’s no reason why children can begin to discover the wonderful world of money and all that it promises. Kimberly Foss, best-selling author and founder of Empyrion Wealth Management in Roseville, California, says, “Children should work on their financial literacy. I think budgeting exercises are important, no matter one’s age, and getting accustomed to budgeting/writing down expenses early in life sets a good precedence. Children need to learn how to discern a ‘need’ from a ‘want’ in life.”

It’s particularly important for children to quickly understand the consequences of debt. Chris Costello, CEO & Co-Founder of blooom in Leawood, Kansas, who often speaks to high school and college students, is very passionate about this topic. He tells kids and teens to stay out of debt when they’ve finish high school. “Debt takes away your opportunity to have choice later in life,” he says. “Many American’s that are underwater from high levels of debt don’t have choices in life such as trying a new career path, starting a business, or working in a non-profit. Stacking on debt (student loans, car loans, credit cards, mortgages) takes away from your ability to sock money away.”

It’s that first item in Costello’s list that has the greatest impact. “Minor children should make sure that they don’t take on burdensome debt in funding higher education,” says Johnson. “Being saddled with large student loan payments often either precludes or makes it much more difficult to invest in retirement plans early in one’s working life. The stories of individuals burdened by student loans in careers with modest income (for example, education) are extensive. The key to building financial security in retirement is to invest ‘early and often.’ Compounding is the key. However, people with student debt have a difficult time making ends meet, much less saving for retirement. They often delay starting to save for retirement, foregoing company matching programs, and not taking advantage of the retirement saver’s greatest advantage – time. And, this phenomenon isn’t just limited to students taking out debt. Many parents are delaying retirement or working well past retirement age to compensate for retirement savings lost by paying a child’s education.”

Unfortunately, the reality is many children will need to accumulate large amounts of debt to attend the college of their choice. One way to insulate them from the worst is by saving early and often. “Savings is a habit,” says Kozak, “and the earlier children start saving, from their baby-sitting and lawn-mowing jobs, to their college work study programs, to their first job, the better chance that they will save on their own. And then, as the GAO study concludes, if they demand careers where the employer provides some sort of retirement plan, then they are even more likely to enjoy their desired lifestyle in retirement.”

Harvey Bezozi, Founder of Your Financial Wizard of Boca Raton, Florida, says, “There are a few steps minor children can do right now to help them from becoming victims of a future retirement crisis. Among them include: Invest in financial education; Find financial mentor(s); Align with smart and motivated peers; Establish financial goals; and, Understand and implement the magic of compounding.”

Bezozi saves the best piece of advice for children under eighteen for last. He suggests they “start an IRA account.”

Christopher Carosa is a keynote speaker, journalist, and the author of  401(k) Fiduciary SolutionsHey! 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 speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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