Last week we noted that Millennials (usually thought of as Americans age 18 to 35) were aware of the need to save for retirement, but weren’t optimistic about their odds of eventually becoming financially independent.
Much of their pessimism comes from not having enough disposable income to set aside right now for a need that could be several decades away.
Here are some ways that concerned parents, grandparents, and others can help a favorite youngster or young adult save more for the kid’s old age.
The primary requirement to contribute to a Roth IRA for anyone (young and old alike) is that the person have legitimate earned income on which to base the contribution.
That means as soon as a teen-ager gets his first job, he can save $5,500 or his earnings (whichever is less) into a Roth IRA every tax year.
He won’t get a tax deduction on the contribution, but since he’s likely to be in a low-or-no tax bracket, the absence of the tax break won’t matter much, if at all.
In return for foregoing the tax break now, he will generally get to withdraw all of the money tax-free from the Roth IRA after age 59 ½. And in the meantime he can pull the contribution portion of the account back out at any time for any reason with no taxes or penalties whatsoever.
He doesn’t even have to use his own money to make the contribution. A sympathetic adult can put money into the kid’s Roth IRA. The only drawback is that once the contribution is made, it’s now the kid’s money to use as he pleases.
Parents who have saved money in a minor child’s name via a “UTMA” account can use those funds into a Roth IRA for the kid—again, as long as he has real earned income on which to base the contribution.
Match the 401k
Once a young adult gets a “real” job with a real retirement plan (such as a 401k or 403b), there is a new opportunity to develop a lifetime savings habit.
Offer to sit down with her and review her investment choices. Suggest she start by saving enough to make it a little painful now, so that she can avoid a great deal of financial stress and pain later on.
Point out that every dollar saved into a pre-tax plan could save her ten to forty cents off of her subsequent income tax bill, and the gain could be even higher if her employer matches her contributions.
A slightly-cynical but highly-effective strategy is to offer to match her contributions to her at-work retirement plan by depositing your cold, hard cash in her checking account. Maybe 10 to 25 cents for every dollar of her own that she sets aside each year.
Make sure you cap the annual amount of your “bribe”, as an enterprising young saver might be motivated enough to cause you some personal financial pain of your own.
Leave it to them
The least-painful way to help a young adult achieve financial security in retirement is to designate him as a beneficiary of your IRA or Roth IRA.
You can leave some or all of the account to him, or you can split your IRA or Roth IRA up into separate accounts for each beneficiary.
While you’re alive, you are of course free to use or spend the money however you please. But if there’s anything leftover at the time of your death, it will go to the named beneficiary.
He can take it all out at that time, if he so desires. But if he’s wise, he’ll only withdraw the minimum amount required by the IRS each year, and leave the remaining balance to (hopefully) grow sheltered from taxation.
Best of all, as long as you’re alive you can remove him as the beneficiary fairly easily and without his knowledge or permission.
And the more aware he is of this provision, the more likely he is to pay attention to you in your declining years.