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Child IRA Chapter Excerpt: “Gaming & Saving”

Child IRA Chapter Excerpt: “Gaming & Saving”
January 23
00:56 2018

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

Long before he was married, Rodney Davis, a systems analyst, knew what his financial priorities were. Making good money and without the financial burden of having a family, the twenty-something-year-old did something rarely found in that age group: He focused squarely on what he wanted, made a plan on how to get there, then carried out that plan. As with many of his generation, the foundation of that plan would have made Lucy Van Pelt (of Charlie Brown fame) proud: Real estate.

Not only did Rodney buy his family home before he had a family (indeed, before he was married), he also invested in rental properties used by full-time students at a popular state university.

Well, time went on as it tends to do. Rodney married Erica, (by coincidence, also a systems analyst), and they had three wonderful sons, Alex, Ray, and Adam. Rodney and Erica continue to work hard at their jobs. Still, they had time for their boys’ activities, from sports to scouts to robotics. The little side business of student rental property continued, too. When the boys got old enough, like all children whose family have their own business, it was the kids turn to toil the earth (or, in this case, wax the floors).

For Rodney, bringing the kids in to work and starting their Child IRAs went hand-in-hand. “There is an old wise tale that you have to hear about something ten times before you realize that you have heard it,” says Rodney. “I had read and investigated opening up a Roth IRA for my wife and myself. Unfortunately, the limitations on how much you could invest into the Roth IRA reduced the amount that we could earn. That small return wasn’t enough to excite either Erica or myself to open an account.”

Then, one day, came that proverbial bolt from the blue. “While glancing through the Bottom Line publication, I read an article about setting up Roth IRAs for your children,” recalls Rodney. “The article spoke about investing $4,000 a year for 10 years (age 15-25) and along with a conservative rate of return, your children would have hundreds of thousands of dollars at retirement age. The amount would even double or triple, if your children continued to invest after age 25. The concept hit me like a bolt of lightning, especially since the oldest of my rug rats had reached 15 years of age and all my kidswere helping me with property maintenance on our rental properties.”

Very quickly, as you might expect from a man of action, Rodney began moving his kids – one at a time – into Roth IRAs. “I started my two oldest kids (Alex and Ray) on their Roth IRA when they were 15 years old,” says Rodney. “It was a perfect combination of teaching them the value of hard work, learning a skill, and investing for the future. Surprisingly, my kids did not see the opportunity that I saw in this endeavor. They focused on the hard work part of the job: cleaning apartments, landscaping yards, and painting rooms.”

Perhaps now might be a useful time to digress with a funny story that many parents whose children help them in their business might recognize as typical with their kids, too. Rodney tells the tale like this:

My youngest child, Adam, a teenager at the time, has a story which epitomizes the hardship of hard work. Alex, my oldest son, and I had sanded down the wood floors in an apartment to prepare for a coat of polyurethane. The plan was for Alex and I to polyurethane the edges of the rooms & hallway while Adam would them spread the polyurethane across the wide-open spaces, a relatively safe and harmless job with little room of getting it wrong. That was the plan, but we all know how plans go.”

My initial mistake was not introducing Adam to polyurethane first. I had popped open a can of polyurethane and began to set up Alex to start coating the edges. Adam decided to get up close and personal with the gallon can of polyurethane. The polyurethane fumes and strong odor caused him to repulse immediately, he ran out of the apartment while screaming, ‘I’m not going near that stuff.’  It took me over a half hour to convince him to come back in and try.”

When we went back into the apartment, he was not ready to polyurethane the floors. I realized that he needed more time to acclimate to the task at hand. While his big brother and I started the edge work, I had him stand behind us and watch. After about a half hour, he was ready to try and coat the floor of the room.”

I took some time to show him how to apply the polyurethane with long, even brush strokes. You know, the kind of things dads all over teach their kids. He’s a fast learning and quickly took to the job. Meanwhile, Alex and I were way behind schedule and we needed to focus on completing the edge work.”

Now this is where the fun begins. Alex and I had completed the edge work in that room, so we moved on to the next room. Adam kept varnishing away, integrating his brush strokes with our edging. Little did we realize that instead of going across the room with his polyurethaning, he was going around the room in a clockwise fashion.  A few minutes later we heard a yell from the other room, and, sure enough, he had painted himself into a circle in the middle of the room.”

Now, keep in mind, Adam is the most daring in the family. He was going to show us that he could jump from the center of the room to the doorway entrance. I had my doubts, but I didn’t have a better idea at the time. He crouched down, like a tiger ready to leap upon its prey. He took one little step forwards and tried to leap. His front foot slid out from underneath him and he ended up on his butt on the newly covered polyurethane floor. To make it more of a catastrophe, he then flipped over onto his hands and feet to get off the floor. He was covered with sticky polyurethane from hands to toes.”

Needless to say, Adam did not care about his financial reward in spending money or in a Roth IRA that day.”

Now that you’ve had your little chuckle at Adam’s expense (in real life, he laughed, too), let’s get back to the real story. The process of opening the Roth IRAs was a piece of cake for Rodney. “This was easy,” he says, “I kept track of the hours and wages paid to my sons. They would take their payroll check to the bank, part was used for free spending (video games, etc.) and part was earmarked for savings. Once they had enough money saved up, they had a bank check drawn and filled out the brokerage form for the Roth-IRA. Voilà! They had opened their Roth IRA.”

Rodney discusses money matters with his children all the time. Unlike opening the Roth IRA, that didn’t start off too easy. It’s dad and mom up against three typical all-American active boys. You might say Rodney didn’t have a fighting chance, but that’s exactly where he wanted his boys.

“When they were very young,” he says, “I pushed concepts on them, saving versus spending. But investment concepts fly over the heads of children. They’re more concerned about their video games and battles. So, I put investing concepts into their video game strategies. You had to build your army first, before you conquer the enemy. One dollar represented a warrior. To build your army, you needed a dividend paying stock which will create more dollars for you, which increase the size of your army. Next, you need to train your warriors to fight and earn an upgrade. A trained warrior is stronger and more skillful, which provides a better opportunity to win. If you buy quality stocks to build your army, you are more likely to receive more dividends or earned capital gains vs. a non-quality stock which stagnates in price or doesn’t increase dividends.”

As they got older, the conversation relied less on the metaphor of the pixelated screen. For the Davis kids, the Child IRA came in baby steps (pun intended). “Before they opened their Roth IRAs,” says Rodney, “I had opened regular brokerage accounts for them. I would discuss buying and selling stocks with them. Whenever, I come across an interesting article, I will forward the article web link to them.”

They got into the groove as boys, but, as men, Alex, Ray, and Adam, can stay in the game with their father. “Now that they are adults,” says Rodney, “when we talk on the phone, I will ask them ‘What is new in their lives?’ Remember, money doesn’t buy love. Later on, at some point in the conversation, I will ask them about ‘How are your investments doing?’”

Each son has developed his own personality when it comes to dealing with his IRA (and his dad). Rodney says, “My oldest son, Alex, who knows more than his father, takes an active role in decision making. For his accounts, he is the one who makes the buy and sell decisions. He and I have enjoyable conversations discussing investment strategy or how to allocate our investments for the future. He enjoys investing.”

“My middle son, Ray, who knows more than his father, does not pay attention to his investments,” says Rodney. “He is willing to let his father manage his investments. At this time, his focus is on his career and working long hours, so maybe things will change as he gets older or starts to raise his own family.”

As he told us during his humorous story, Rodney says, “Adam, my polyurethane hero, is the risk taker in the family. He wants to chart his own course, but will listen to Dad once in a while. We’ll discuss investment strategy and stocks to buy, but we don’t always agree. Recently, he decided that he wanted to invest in Bitcoin, to the disagreement from his father. In the end, sometimes a teacher cannot instill the lesson to the pupil, sometimes the pupil has to learn the lesson for themselves from the School of Hard Knocks.”

Speaking of the School of Hard Knocks, would Rodney have done anything different based on what he now knows? “Life is always throwing new challenges at you,” says Rodney. “With the downturn in the economy and college expenses, the Roth IRA plan for our kids was not executed as prescribed in the Bottom Line article (save $4,000 per year for 10 years). You cannot go back and change the past, so going forward I will strive to accomplish the Roth IRA plan for my kids (i.e., helping them save $4,000 a year for 10 years). Plus, I will continue to discuss & enlighten my kids to value of managing their own finances & investments.”

Rodney and Erica have prepared Alex, Ray, and Adam in ways no school can (perhaps other than that of Hard Knocks). The boys have investing experience and a financial planning perspective rarely found among their age group, or twice their age group for that matter. Therein lies the most important secret of the Child IRA. Sure, it can help your child retire in comfort, but that’s not because the Child IRA grows seven digits (that’s in the million dollar range for those nodding off). The real secret behind the Child IRA is that it helps put your child in the frame of mind that will allow your child to make proper choices regarding saving and investing for their retirement. As a result, they’ll be better prepared to retire in comfort, no matter what happens to Social Security, company pension plans, or public policy.

Establishing a Child IRA benefits the next generation. Given its tremendous power, the Child IRA remains one of the most under-appreciated retirement savings tools available. In the remaining chapters, we’ll present a virtual “how-to” manual that shows how different groups of people can implement and enjoy the advantages of the IRA. Feel free to start with the chapter that best represents the group you’re in, but you might discover some ideas in reading the other chapters, too.

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 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.

 

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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