.

SmartMoney Blogs

Encore
A blog about living in and planning for retirement

Should You Save For Your Kids’ Retirement?

iStockPhoto

No doubt, your kids are probably in need of some serious retirement savings help — eight in ten Gen Y workers, for example, will not be able to meet all of their financial needs in retirement unless they “significantly” improve their saving and investing behaviors, according to a 2010 study by HR consulting firm Aon Hewitt.  But the question is: should you be the one to give it to them?

The first rule of thumb when pondering this question is to make sure to “put your own retirement savings first,” says Rick Rodgers, CFP, and author of “The New Three-Legged Stool.” In effect: If you don’t have enough saved for your own retirement, don’t start handing over your hard-earned dollars to the children.

But if you’re on track for retirement yourself, it can be personally rewarding, not to mention extraordinarily helpful to your children, to start helping them save for retirement, he says. Rodgers outlines four ways to do it:

  • Ask the “fun or fund” question. For younger children, ask friends and relatives to contribute part of what they would have spent on gifts for birthdays and holidays to a mutual fund account you’ve opened for your child. Furthermore, you should take part — Rodgers recommends half — of what you have been spending on gifts (toys, games, etc.) for your child and invest it in a mutual fund.
  • Save the refund. Currently the child tax credit is $1,000 per child until they reach age 17.  Discipline yourself to save the credit — consider putting it in that same mutual fund you’ve opened for the child — when it is returned to you as a refund.
  • Contribute to a Roth IRA. When your child first enters the work world, it can be extremely hard for her to save because of a low starting salary. But that doesn’t mean you can’t help her out. As long as she has an income, you can contribute to a Roth IRA on her behalf (see rules here). And your contributions can add up: Just $5,000 contributed to a Roth IRA for 10 years starting at age 18 could be worth more than $1,000,000 by the time the reach your child reaches age 65, even if she never adds to it on her own, Rodgers says.
  • Help him get the savers credit. Another bonus of you contributing to an IRA for your child is that he or she might become eligible for the saver’s credit. If your child is single and makes less than $27,750 per year, you can contribute to his retirement account, and he will get a roughly $1,000 tax credit.  He can use this credit as an opportunity to pay down any debts or other impediments to him saving a full 10% of his salary each month into his retirement fund.

Of course, none of this is much use if your kids haven’t learned good savings behaviors themselves and thus might have to raid the account to pay debts or might just pull money from it to fund things like vacations.  To prevent such behaviors, Rodgers advises parents to teach children about saving and investing early on using part of their allowance. Click here for more tips (even for older children).

Comments

We welcome thoughtful comments from readers. Please comply with our guidelines. Our blogs do not require the use of your real name.

Comments (5 of 8)

View all Comments »
    • Raise your kids however you want, preferably so that they are responsible, independent adults who aren’t afraid to work for a living.

    • What a ridiculous opening argument that kids aren’t saving enough right now – what 25 year old IS saving enough… or what 25 year old has ever started saving at that age before? The reality is that generation Y doesn’t despise working as much as the generations before them – and so it’s a losing argument to try and persuade them to defer dollars now to an eventual (maybe) time of not working anymore.

    • That’s not the way tax credits work. The “taxpayer” isn’t gifting $1000 to the child, the child is simply receving a $1000 reduction in taxes owed. It’s a smart way to hold on to more of ones own money at tax time.

    • Elle-Couldn’t agree more. $1,000 should not come out of the taxpayers pockets to help a kid whose parents have enough money to fund little Johnny’s retirement.

About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.

.