Advising teenage daughter

[Keim]

My 17 year old daughter has about $4k she wants to put into an IRA. I am thinking of advising her to open a simple vanguard lifecycle plan in an ira.

FYI: As part of this decision making process we discussed compound interest (that really caught her attention) and i asked her to read a couple of chaoters in The Bogleheads Guide to Investing.

Thoughts on the proposed investment or other bits of knowledge to share with her?

 

[Another Reader]

Does she have enough earned income to do an IRA? If not, she could start a taxable account with her funds.

 

[youbet]

Is she thinking of a TIRA or a Roth?

Rather than a "buy and forget" lifecycle plan, I'd advise getting her interested in something more interesting and educational. $4k is plenty to research and purchase a few individual stocks and maybe some VTI so she can watch and compare. I think 17 is a bit too young to begin "hands off" investing. Make those mistakes, learn those lessons, celebrate those victories, be involved, etc., while you're young.

 

[Keim]

Does she have enough earned income to do an IRA? If not, she could start a taxable account with her funds.

She earned income, yes.

 

[Keim]

So far i have only discussed traditional.
She wants to invest her money. And i suspect she will set up an automatic withdrawal of some niminal amount. But, i would be surprised if she wants to be very hands on with it beyond that for now.

Is she thinking of a TIRA or a Roth?

Rather than a "buy and forget" lifecycle plan, I'd advise getting her interested in something more interesting and educational. $4k is plenty to research and purchase a few individual stocks and maybe some VTI so she can watch and compare. I think 17 is a bit too young to begin "hands off" investing. Make those mistakes, learn those lessons, celebrate those victories, be involved, etc., while you're young.

 

[steelyman]

I think your plan is fine. The important thing is for her to establish and fund an account. There’s no need to overwhelm her with details and give her assignments. Just be patient and let her receive a few statements from the new account. She can ask more as time passes.

 

[Another Reader]

Might be a good idea to start with Fidelity. They have a lot of on-line tools and a broad selection of funds. You can even go in to a Fidelity office and go through the account opening process with her.

 

[youbet]

But, i would be surprised if she wants to be very hands on with it beyond that for now.

Well, you know her and if beginning with a "hands off" approach would work best, then go for it. Don't scare her away.

In the case of my grand daughter, a 19 yr old sophomore engineering student living on campus out of state, she's interested in learning and keeping an eye on things but needs flexibility in her time commitment. We find it convenient for me to have full POA on her Schwab account so it shows up along with my and DW's several accounts every time I log in. Her modest portfolio is relatively simple and I glance at it just to make sure nothing is going off the track. We Face Time with a focus on finances about once a month. Discussion topics include calculating her AA, what's up, what's down and maybe some tidbit about something I'm doing in my portfolio.

But if she just wanted to put her dough in a managed fund and rarely check on it, that would be fine with me too.

 

[Sunset]

Honestly since her income is low, have her put it into a Roth so it can grow tax free. Doesn't seem like she needs a deduction of a regular IRA.


Also, I'd have her put it in VTI or mix of VTI and SCHD.



Maybe she will get into the habit of putting some in every year

 

[Scuba]

I like the Fidelity suggestion as their website is better and she could meet a representative in person. I think she’d be much better off investing in a broad stock market ETF such as SPY or even SPYG or the more aggressive QQQ. Lots of time to make up losses. Also I think a Roth would be better than a traditional IRA.

 

[Bryan Barnfellow]

Wow. I am beyond impressed that she wants to invest her income like this! I assume you were a very positive influence. Kudos to you both!

-BB

 

[DrRoy]

My favorite investing book is "Your Money and Your Brain" by Jason Zweig.

 

[racy]

Knowing what I know now, if I was 17 yrs old, I'd choose a 100% stock fund.

 

[kannon]

A Roth IRA is a great asset building tool. Our kids have had Roth IRAs since their early teens, all funded from funds we gave to them (covered by their own income production), They are now in their 30s, with a real good financial base. Suggest doing a Vanguard long term no fee account and just let money go in and let it go up and down but 50 years from now you will be glad you did.

 

[street]

I think your plan is fine. The important thing is for her to establish and fund an account. There’s no need to overwhelm her with details and give her assignments. Just be patient and let her receive a few statements from the new account. She can ask more as time passes.

I like this approach as well.

 

[Keim]

Wow. I am beyond impressed that she wants to invest her income like this! I assume you were a very positive influence. Kudos to you both!

-BB

She gets the credit. A neighbor helped her start an odd jobs business 5 or 6 years ago to save up for a trip to Europe. Learned the value of hard work and money from that.

 

[sengsational]

Knowing what I know now, if I was 17 yrs old, I'd choose a 100% stock fund.

I'd tell her that her capacity to earn is her ace in the hole, and so to go "all in" now. I'd also promise her that she will be horrifically disappointed sometime in the future when the balance goes to half of what it peaked at. This is the test. A cheap $4K lesson to learn one's mettle. If she doesn't panic out, she's passed the test, and can keep her high equity position going forward. If she sells low, then she learned that she better play it safe.

 

[Another Reader]

She gets the credit. A neighbor helped her start an odd jobs business 5 or 6 years ago to save up for a trip to Europe. Learned the value of hard work and money from that.

Maybe. Mostly she learned the value of hard work and money from you. That kid has initiative and determination, and she will do just fine.

 

[Keim]

Maybe. Mostly she learned the value of hard work and money from you. That kid has initiative and determination, and she will do just fine.

Ok, I will take some credit too.

So, I am hearing:
Make IRA a roth.
Consider Fideliry or Vanguard.
Consider 100 percent stock broad market fund vs lifecycle fund.

...and several good reading tips.

 

[rodi]

I had my boys open Roth's when they first had w2 income. I matched them some. Younger son missed out on the next years match because he found a lucrative under the table job (but he earned enough to fund his month long eurail/hostel trip to Europe this past August.) Older son continues to contribute to his Roth when he has months with a lot of hours.

I advised both to put their money in a total stock fund... The time horizon is long enough that they don't need to worry about market fluctuations. When they get into their 30's or 40's they can start worrying about asset allocation. At their current ages of 19 and 21 they don't need fixed income.

 

[viking111]

Wow that's great.

I would buy her bogleheads guide to investing.

At 17 years old I would go 100% in VTI Or at least 80/20. If she can do it in a Roth then she can adjust it without penalty later. If she goes 80/20 then she would have to learn to rebalance etc. 80 VTI/20 BND or something like that.

An all in funds would work as well. The most important thing is sticking to it and investing and then investing and so on.

 

[Out-to-Lunch]

Consider 100 percent stock broad market fund vs lifecycle fund.

Not that much difference between the two, at her age. The VG Target 2065 fund has an AA of ~90/10.

 

[38Chevy454]

Ok, I will take some credit too.

So, I am hearing:
Make IRA a roth.
Consider Fideliry or Vanguard.
Consider 100 percent stock broad market fund vs lifecycle fund.

...and several good reading tips.

X2 on the three points of: Roth, at Fidelity/Vanguard, and invested 100% stocks.


The absolute beauty of being 17 and 30-40 years or more invested duration is the magic of compounding. You already talked about that, good for you. Show her some sample calculations of $4K invested with various returns, the formula is A=P(1+r)^t. Where A is final amount, P is initial amount [$4000], r is interest rate, and t is years.

a) With long term stock avg of 10% in 30 years = $69,798
b) With long term stock avg of 10% in 40 years = $181,037
c) With 7% in 40 years = $59,898


My three rough numbers shows not only the value of the time factor, but also the rate factor.

 

[potto0213]

So far i have only discussed traditional.
She wants to invest her money. And i suspect she will set up an automatic withdrawal of some niminal amount. But, i would be surprised if she wants to be very hands on with it beyond that for now.

If she will want to set up an automatic withdrawal you should avoid the IRA or set up both an IRA and taxable account. Withdrawing from the IRA would potentially create a penalty.

 

[Keim]

If she will want to set up an automatic withdrawal you should avoid the IRA or set up both an IRA and taxable account. Withdrawing from the IRA would potentially create a penalty.

Whoops. I wasnt clear. Aitomatic withdrawal from bank into ira.