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The Fiduciary Parent: How to Best Protect Your Child From the Day When the Promise of Social Security Finally Fails

The Fiduciary Parent: How to Best Protect Your Child From the Day When the Promise of Social Security Finally Fails
November 06
00:02 2018

They say it can never fail. They say the politics of the third rail protect it. They say we can always come up with a patchwork solution, kick the can down the road, and other such metaphors.

But mathematics can be a harsh – and unforgiving – mistress. Simply saying “it’s too big to fail” doesn’t mean it will never fail. Just ask the Titanic.

Still, the eventual endgame of FDR’s great Social Security experiment is far from certain. “There’s no guarantee that Social Security as we know it today will exist later for today’s youth,” says Scott Puritz, Managing Director at Rebalance in Bethesda, Maryland. “On the other hand, the assumption that the program ‘must fail’ is an assumption. It has been fixed before, for instance, by raising the retirement age. What a future Congress might do is impossible to guess, so let’s assume that Social Security remains in some form.”

But what form? Most “solutions” assume eventually at least some portion of the population will be cut off from receiving its full Social Security benefit. This can be in the form of taxing those benefits above a certain amount or simply slashing those benefits across the board. “It is unlikely Social Security will completely fail, but children today are unlikely to receive the full benefits promised by Social Security,” says Joshua Escalante Troesh, Founder of Purposeful Strategic Partners in Rancho Cucamonga, California.

So the sky may – or may not – really be falling. What we have is a spectrum of unknown outcomes. When presented with such a case, one is reminded of the famous Boy Scout motto “Be Prepared.” “While we do not know for sure when or if social security will fail,” says Adam Waitkevich, president and founder of Coppertree, LLC in Westborough Massachusetts, “it is a good idea to encourage children to plan for a day without social security.”

When it comes to encouraging this kind of planning, parents find themselves in the fiduciary position of a traditional trustee. They’ve experienced the hills and valleys of the real-world. This gives them veteran insights that no child, not even adult children, can have. Of course, since no two kids are alike, there are multiple strategies for accomplishing this goal. All strategies, however, are based on one single common denominator. “The best way to prepare for retirement is to teach your children how to save consistently and power of compound interest,” says Lori Nadglowski, of Laurel Wealth Management in Tampa, Florida.

It goes without saying that compound interest is in the child’s best interest. As with most of life’s lessons, there’s no time like the present to begin learning. “By teaching your kids how to manage and grow their money from a young age, they will never ever need to rely on Social Security programs,” says Norma LaFonte, co-author of the book Money Monster or Money Master? Teach Your Kids the Basics of Money and Have Them Love Every Minute from Moose Jaw, Saskatchewan. “The key is to give them the skills and tools to do this from an early age. We teach them to walk, talk and brush their teeth – it is our responsibility to teach them these skills as well.”

Sometimes parents will need to take the bull by the horns. They can hold the hands of their children and lead them through the process. “One way is to help them open a Roth IRA,” says Puritz. “As an investment vehicle for teenagers and college students, the Roth IRA is hard to beat. Contributions to a Roth IRA come from post-tax income. Those contributions — but not earnings — can be withdrawn later tax-free. Upon retirement, all of the money in the account can be withdrawn, also tax-free.”

Once your kids graduate to the big leagues of saving for retirement, they’ll need to know the advantages of having a good coach. Sometimes seeing it in action is the best teacher. Parents can offer themselves as the “case study” for their children. Kathleen Burns Kingsbury, Author of Breaking Money Silence® and Founder of KBK Wealth Connection in Waitsfield, Vermont, says, “Teach both your sons and your daughters about investing and work with a financial advisor to role model that taking care of your financial health is a priority and worth an investment of time and resources.”

Ultimately, though, it all comes down to building a consistent savings habit. And by saving, we mean saving in the right vehicles. “The only way to protect against a cut in Social Security benefits is to establish a habit of contributing 10%-15% of every paycheck into a retirement account, whether it be a workplace account or an IRA,” says Troesh. “This habit should start with the first paycheck the child earns.”

“Encourage them to save, save, save!” says Christopher V. Kimball of Christopher V. Kimball Financial Services LLC in Lakewood, Washington. “As they grow, they need to put 15% of everything they earn or receive as gifts first into the piggy bank, then their first bank account, then a ROTH IRA, then the retirement plan offered by their first employer.”

Again, here is where the parent’s experience comes in most handy. They know what to do because they’ve already done it for themselves. They should map out a clear, detailed, and deliberate process from their child. “When your child begins to work and receives a W-2, it is best to establish a Roth IRA,” says Carol Khouri, a financial consultant at Wingate Wealth Advisors in Lexington, Massachusetts. “Have the child make a 10% contribution based on his/her earnings. If the parent can assist in putting money aside, they should make up the difference so that 100% of earnings is being contributed to the Roth IRA.”

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We can’t overemphasize the role a Child IRA can have in protecting children from the possibility of the end of Social Security as we know it. Why rely on the vagaries of Washington politics when it comes to their future retirement when you can teach them to control their own destiny? “Children of any age can open a Roth IRA as long as they’re earning income,” says Puritz. “Think summer jobs, babysitting, dog-walking or mowing the lawn. Since most teenagers and younger kids don’t earn enough to need the tax deduction of a traditional IRA, they should instead deposit whatever they make into a Roth.”

The biggest advantage of the Child IRA – and, again, the parents will understand this before the kids do – is there’s a way to create a virtually tax-free retirement plan. “That’s the beauty of Roth IRAs,” says Puritz. “Thanks to compounding, what starts as a small deposit can, over time, become a small fortune. Or, even better, a big one. How big? Try this on for size: Your teenager, with a little nudge, could end up with $500,000 tax-free just by saving money during high school. Doing odd jobs and babysitting, let’s say your teen banks about $1,000 a year each year of high school. You decide to encourage that behavior by matching that money, so the base amount at the end of high school is $8,000. Nobody puts in another penny. What happens? Over 60 years that money compounds at a market rate of return. In a decade the investment turns into $16,000, then $32,000 and so on, doubling every 10 years. By age 78 that ‘little’ Roth account has $518,534, all tax-free. That’s financial security on autopilot.”

If parents understand the fiduciary role they have with their own children, they’ll understand the goal is to make their children self-sufficient. It’s not to forever hover over your child’s finances. Eventually, they’ll have to leave the nest. It’s just that if they already are on the road to having a sizable nest egg when they do that, any remnants of Social Security they do end up getting will be treated as an unexpected gift. Kalen Omo, owner of Kalen Omo Financial Coaching in Tucson, Arizona, says, “Instill in them that they are in control of their financial future and that programs like Social Security if still around would like the ‘cherry on top’ of the sundae, a great bonus.”

It’s the fundamentals that matter most, the blocking and tackling of finance (or, as LaFonte said earlier, the brushing of teeth). “Teach them to set goals, budget, delay pleasure, invest, and steer clear of debt,” says Dave Ramsey, CEO of Ramsey Solutions, Nashville, Tennessee. “Explain how long-term investing is the best way to build wealth for retirement and if they’ll invest properly and early, Social Security – if it’s even there – will be icing on the cake.”

What the parent ends up with is a child who practices a regular routine of good financial actions. “The key to success is good habits as it relates to earning, saving and investing,” says Waitkevich. “There is a major and exponential advantage to savers who start when they are young (in their 20’s or earlier). The long-term and compounded impact of time is a significant advantage to recognize. If Social Security will not be around at retirement for our children, they will have to save more, earn more, work longer in life or demand more from their investments. By saving early (and continuously), our children will have a better chance to enjoy retirement with or without Social Security.”

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, From Cradle to Retirement: The Child IRA, and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on TwitterFacebook, 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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