How I secured my kids' retirement.

[Tesla boomer]

When my son was 18, he got his job. I know way late. We didn't know what we were doing as parents. I tell every parent of young children to start your kids earning money around the house as soon as you can and have them work outside of the house for someone else by at least age 16.

Anyway, I had caught on to the power of the Roth IRA brokerage at that time and I told him that whatever money he made at his job, I would match it (up to the Roth annual contribution limit) and we would open up a Roth IRA brokerage and transfer the money into that brokerage and if he wasn't interested in learning about investing at that time, I would just invest it for him. I ended up investing it in $TSLA. A year later, I did the same thing with my daughter. Over the last 4 years I have contributed $19k to my daughter's Roth. About a month ago, her Roth IRA brokerage value was $100k. With a conservative rate of return of 7% in 35 years when she is my age, she will have $1.2M. And that assumes she never decides to contribute to it herself.

 

[target2019]

And then Tesla gets serious competition. Or a serious business blunder results in company takedown. Or...

 

[Tesla boomer]

I'm confident in my daughter's ability to manage her investments over the long term and achieve at least a 7% average annual ROI rate. She can decide to rotate any part of her $TSLA position into an S&P ETF if she wants and be pretty much guaranteed a 10% annual return.

Yes, I may have gotten lucky with my $TSLA pick, but if you start earlier than I did, you can really help establish a decent nest egg by making this deal with your kids. If you start when your kid is 15 and they max out their $6k contribution limit every year for 5 years, and you just pick an S&P ETF with 10% annual ROI rate, when they are 20, you will have contributed $30k and their Roth balance would be at $50,794.20. You can end the deal once they get their "real job" or you can continue doing it as long as you want.

I would even consider starting earlier and pay them $1k each year starting when they were 10 if they did their chores regularly and then bumping it up to $6k when they turn 15 no matter how much they make as long as they have a job outside the house during at least the summer months.

The really cool thing IMO is that it starts a conversation about investing at a very early age. Every year, you and your child can see how much the fund has grown and project how much they will have when they are your age.

And the Roth brokerage account is the perfect investing playground for them to try their hand at picking long-term investments. They/You don't have to worry about capital gain/loss events that are triggered by selling shares like there are with regular brokerage accounts. You can start by letting them pick 50% of the stocks and you pick the other 50% for each contribution. Then when they turn 18, they can pick 100%.

 

[Luvtoride]

Tb, that is an awesome lesson and a great way to get young people started on the right road to retirement and/ or meeting their financial goals.

Yours sounds similar to my story with my younger daughter who worked while she was in High school at CVS and other local businesses around town.
The summer leading into her sophomore year in college, Apple was opening a store in Providence RI where she went to school. She applied and after trekking up to RI for interviews(we live in NJ) she was hired for the opening in September.
When completing her employment and payroll forms w-4 etc, she came to the “employee stock purchase plan” benefit (this was in 2006, the year before the first iPhone was released). She called me up and asked me if she should do this? I said, how much can you contribute and she told me up to 10% of her salary, for which Apple would purchase stock every 6 months at 85% of the market value at the time of purchase!
I told her do the full 10%. this was a part time job while in college and was providing her with spending money while in school. She complained that that was a lot to contribute per pay so I told her that I would supplement 1/2 of her contributions so that she would have more spending money. She agreed.

She worked for Apple for the rest of her college years including during Christmas breaks and summers back in NJ and NYC on a more regular basis until she graduated from college.

I don’t remember the exact number of shares and what the value of her Apple Stock grew to but when she got married in 2011 she and her husband had over the 20% down payment to purchase their $300,000 house in NJ from her appreciated Apple stock!
All from an Employee stock purchase plan that she “wasn’t sure” she wanted or could do!
Valuable lessons!

 

[Life_by_Fire]

Great work!

I have a brokerage account for my 3 year old and one for my 2 year old. I invest each in VTI and contribute a few thousand per year. My plan is to pay for college with these accounts but if they get scholarships or there is extra, it is all theirs for help towards a home or whatever is needed.

Once they start working I will also help with Roth IRAs and will begin educating them on investing once they are around 12 years old. I developed an interest in investing and real estate at around that age and began investing on my own the day I turned 18.

 

[target2019]

I'm confident in my daughter's ability to manage her investments over the long term and achieve at least a 7% average annual ROI rate. She can decide to rotate any part of her $TSLA position into an S&P ETF if she wants and be pretty much guaranteed a 10% annual return.

Yes, I may have gotten lucky with my $TSLA pick, but if you start earlier than I did, you can really help establish a decent nest egg by making this deal with your kids. If you start when your kid is 15 and they max out their $6k contribution limit every year for 5 years, and you just pick an S&P ETF with 10% annual ROI rate, when they are 20, you will have contributed $30k and their Roth balance would be at $50,794.20. You can end the deal once they get their "real job" or you can continue doing it as long as you want.

I would even consider starting earlier and pay them $1k each year starting when they were 10 if they did their chores regularly and then bumping it up to $6k when they turn 15 no matter how much they make as long as they have a job outside the house during at least the summer months.

The really cool thing IMO is that it starts a conversation about investing at a very early age. Every year, you and your child can see how much the fund has grown and project how much they will have when they are your age.

And the Roth brokerage account is the perfect investing playground for them to try their hand at picking long-term investments. They/You don't have to worry about capital gain/loss events that are triggered by selling shares like there are with regular brokerage accounts. You can start by letting them pick 50% of the stocks and you pick the other 50% for each contribution. Then when they turn 18, they can pick 100%.

Both of mine are well on their way, so the basic investing principles were laid down a long time ago. As they hit their jobs many questions came up with each 401(k) etc. 90% or better broad US index fund. One has had 2 ESOPs that resulted in more money than ever imagined.

They each are learning about the dangers of un-diversified investments. I'm a temperate Boglehead, so I encourage them a little to take on the extreme risk of individual companies, and find out what that means. I do this so they can make mistakes once, and hopefully get over trying to pick winners. It's not a playground in my mind.

The older one has income that places him out of reach of Roth. He gets encouragement and advice when he asks from time to time. Younger one has had setbacks due to employment injuries, but has managed to keep in place all of the retirement savings. At 35 he has at least what we have in our 60's.

The younger one will have a pension, Roth, IRA, etc. What she has at 30 is beyond what we had as joint earners at 37.

When they ask significant questions I send an email and copy it into a long google doc that they can read. Every once in a while one or the other will stumble upon this historical document. We then get amazed at how much can change in a year, 5 years, etc. I get extra award points from time to time...

 

[RetiredAt55.5]

And then Tesla gets serious competition. Or a serious business blunder results in company takedown. Or...

Something happens to Elon Musk. That would be my biggest concern if I was heavily invested in Tesla.

That aside, great story and congrats OP!

 

[sengsational]

I did the same thing as the OP, but later, and invested more diversely. I learned of the total money they were making at their college internships and chunked that amount every year into Roth's that I opened for them. Just went into total market or S&P (can't remember, and they're out of college and managing their own accounts now). It's really a no-brainer if you have kids that are driven enough to go to college, because the chances they'll drain the Roth for something "stupid" is pretty low.

 

[SecondCor521]

I agree with the general idea on this thread and did it (except the $TSLA part) with my three kids as they were hitting their teen years and getting miscellaneous part time jobs.

Through last year, I did a Roth matching certificate every year at Christmas where I'd match their Roth contributions dollar for dollar up to some amount. This year I'm not sure what I'll do since two of my three kids have already contributed to their Roth IRAs of their own accord, so no need to incentivize the behavior anymore. And the other one may not have the funds to contribute to his, so why tease him.

I've always let them choose their own investments. My middle one will be interesting to watch, as he sunk his first Roth IRA contribution into NKE, which so far has done really well for him. I think his next investment was in FTEC. The other two are more like me and just invest in the standard SWTSX and similar.

Two warnings regarding this part:

II would even consider starting earlier and pay them $1k each year starting when they were 10 if they did their chores regularly and then bumping it up to $6k when they turn 15 no matter how much they make as long as they have a job outside the house during at least the summer months.

First, I would be cautious about paying your children above market rates in order to give them earned income to qualify their Roth contribution. I doubt the IRS would look highly on that idea. And if they catch it in an audit - unlikely but possible - I am not sure what the taxes or penalties would be.

Second, people can only contribute to their Roth IRA up to the amount of their earned income or $6K, whichever is less. So a 15 year old making $3K on a summer job and contributing $6K to their Roth IRA - even if the $6K were gifted from the parent - would be breaking the law. (Maybe that's not what you meant, but that's how I interpreted what you wrote.)

 

[travelover]

I invested my kid's money in Enron. He lives in a van by the river now.

 

[SecondCor521]

I invested my kid's money in Enron. He lives in a van by the river now.

He had enough money left over for a van?

 

[Go-NoGo]

I invested my kid's money in Enron. He lives in a van by the river now.

Oh that's nothing - I invested my kid's money in Lehman's brothers. He lives IN the river.

 

[travelover]

He had enough money left over for a van?

No, actually it was already there, on cement blocks.

 

[rodi]

I matched my kids on their first $1k saved in an IRA. Younger son then took a more lucrative job that was 'under the table' - so no w2 income he could invest. I pointed out that he was losing the match. Older son I've continued to match at $500/year.

 

[HI Bill]

I invested my kid's money in Enron. He lives in a van by the river now.

I had a friend who, in the early 2000s, had everything in ERON, after the electric company he had worked for was bought out by ENRON. It wasn't much (something like $70K), but short story, there was no diversification, and he lost everything.

 

[38Chevy454]

Good timing on the TSLA investment choice. But the real point of your post is the power of compounding. That is the magic that turns a modest amount when young into big money for retirement.

 

[MC Rider]

I at least got pushed into work well ahead of 16.
Odd jobs, delivering newspapers.
Fast food joint, grocery market. On to college.

Too bad I don't remember any talk of finance. Or Real Estate.

 

[Tesla boomer]

I matched my kids on their first $1k saved in an IRA. Younger son then took a more lucrative job that was 'under the table' - so no w2 income he could invest. I pointed out that he was losing the match. Older son I've continued to match at $500/year.

For Roth IRA contribution, you do not have to prove where the money comes from. Babysitting, mowing lawns, selling weed all count as valid income for determining Roth IRA contribution limit.

And the IRS is not going to waste resources auditing people because they fudged their income from $4k to $6k just so they could max out their Roth.

 

[Dtail]

Oh that's nothing - I invested my kid's money in Lehman's brothers. He lives IN the river.

I worked there, but got out in 2006 and immediately sold my 70k in stock that I had in that company.

 

[Aerides]

I can understand the desire of a parent to ensure one's children are going to be ok financially.

But if I knew at, say 27, that my retirement and financial future were secure, I am pretty sure I would not have done quite as well for myself.

 

[4legsgood]

For my DD I contributed to a Roth for her while she worked W-2 jobs during high school and college and it's grown into a nice chunk of change. I didn't require her to contribute, just me. In her friend group, not that many kids worked so it seemed a little too negative to ask her to put in some of her hard earned wages. I like to think it gives her some peace of mind, as well as, she's observed first hand how it grows if you leave it untouched - though she might be shocked if the market ever takes a dive!

 

[Time2]

I can understand the desire of a parent to ensure one's children are going to be ok financially.

But if I knew at, say 27, that my retirement and financial future were secure, I am pretty sure I would not have done quite as well for myself.

$100,000 at 7% compound for 35 years with 3% inflation, doesn't quite reach the pinnacle of a financially secure future. If it reached the $1.2M in 35 years it will have a buying power of $426,466, to have the same buying power you will need $3,376,635.

The inflation calculator I used is,

https://www.buyupside.com/calculators/inflationjan08.htm
The kids would be wise to continue investing in their future.

 

[VanWinkle]

I invested my kid's money in Enron. He lives in a van by the river now.

 

[Davidhelp]

Invest in AMD. They make computer chips.
I own lots of the stock : ) It allowed me to recently retire.

AMD on Jan 1st for each year. It has almost double every year since 2018.

Jan 2018 $13.74
Jan 2019 $24.41
Jan 2020 $47
Jan 2021 $85.64
Current price 12-27-21 is $154.36

They are waiting on a merger to close hopefully this week and when it is approved the stock will go up and up.

The other option is when Starlink has a IPO then invest and watch the stock price go up like one of Elon Musk rockets. Starlink is a internet connection company. 2ft dish gets you internet anywhere in the world. He currently has approx 1,800 satellites in orbit and he said he needs many more and making a profit before going public.

 

[EastWest Gal]

My dad participated in his company stock purchase plan his entire 40 year career as an oil chemist. My mom used to complain about his frugality, but stopped after he retired. Hmm.

His investments helped fund my and my sister’s retirement.

I helped DS start a Roth IRA, matching the funds so he could keep his earnings. Then one of his part time jobs offered a Roth 401K. I helped him set up his portfolio within that. There is a self directed option. It is all equities, mostly VTI.

With a Roth 401K, there is no maximum percentage, just an annual limit. He’s putting about 40% of his paycheck in the Roth 401K.

In 2021, I gifted him equities in an after-tax account. They were DFA funds. He then sold them and bought VTI. He’ll pay zero tax on the capital gains and his basis is now set at current value. It’s kind of a stepped up basis.

The cool thing about gifting investments is that he sees it as untouchable money, as I did. That is, until I retired. Yet it is available to him should he need it.