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Saturday, April 29, 2017

Why Not Save For Your Child’s Retirement?

Posted by Dave on May 17, 2011

This is a guest post by Dave, who is also looking to retire no later than 45, but unlike Tim has no kids and doesn’t want any.  Dave is from Ontario and is working towards his CGA certification.

My seven-year-old nephew had a very profitable Sunday – it was his first communion  at his church and in total he received $500 in cash.  I don’t know about most people, but I really wouldn’t know what to do with $500 at that age – I couldn’t fathom the amount of stuff that I would be able to buy with that much money .  I don’t think I ever had $500 in my name until I started my first job when I was 11 years old.

I was curious, so I calculated what this amount of money would work out to at a conventional retirement age (65) at 7% interest compounded once per year (just a simple calculation) – around $25,000.  This got me thinking – if I were a parent (which I never plan to be) would it make sense to set up a “retirement” account for my kids?  If for example, you started a DRiP (Dividend Reinvestment Plan) with $1,500 and added an additional $1,500 per year until your child was 18, by age 65 (in an ideal world of course) the dividend account would be worth over $1,000,000*.

I understand that this amount of money may not be achievable for most people, but really any amount of money would work out to a sizable amount of money 65 years later.

To me, a parent starting up this kind of portfolio would have been much more useful than say an education account (something that I didn’t get, but is discussed at length sometimes in many personal finance blogs).   Perhaps I would have appreciated the education account while I was scraping by going to school, but down the road I believe I would appreciate having the “cushion” of a future retirement account accruing money that I’m not having to save right now.

What a retirement portfolio started at age zero would provide is freedom later in life.  If I knew at age 15 or so that I wouldn’t have to save for retirement (or at least not very much) perhaps my life would have been a little different.  Right now I wouldn’t have to work full time, as I would only really need “subsistence” level wages (to pay for current expenses) rather than worry about future expenses.  As long as the parent has provided at least a small amount of personal finance knowledge I think that most people would be able to experience more in life than working the normal 8+ hours a day 5 days a week.

Is this a wacky idea created by someone who doesn’t understand what it means to have kids, or would you parents (or “someday parents”) think about creating an account that would provide for your child’s retirement?  For me, I think I would be more than appreciative as an adult having an account like this.  I personally think that too much weight is put on saving for kids education, something that they should be able to pay for themselves.  This is simply an option that may help down the road.

*I’m not looking at taxes or anything here, this is just the pure compounded portfolio.

Comments

20 Responses to “Why Not Save For Your Child’s Retirement?”
  1. Sandy says:

    You know, I hadn’t thought about doing that. But you’re right – if my child knew she wouldn’t have to scurry and scrape to fund her old age, she might be able to experience more in her life than just a job to keep her body and soul together. How would I open an RRSP for her? I would open a TFSA, but they cannot be used by anyone under 18. I could save for it in mine, but then how would I transfer it tax-free to her? It’s certainly something to think about though – thanks for a fresh perspective!

  2. Chris says:

    It’s an interesting idea. It would probably be hard or complex to save that much money in a tax efficient manner under a child’s name. And it’s probably not a good idea to prevent a child from learning how to save money…

  3. Ross says:

    Do you advocate this approach in addition to education savings? or in the alternative?

    I think helping your child through school is a much greater benefit to both parent and child. By having the money there for that purpose it will hopefully create an extra drive for the student to excel, go farther and hopefully create their own wealth.

    If the retirement account is in the alternative to an education fund then you are simply ignoring the huge financial stress that education debt will play on your child. I spent seven years in university, work two jobs in the summer and worked part-time during school and still ended up with $35,000 worth of debt (I know other people that were in my program that are $80,000-$100,000). Your child may not be have to save for retirement but all of that extra income will go to debt repayment.

    I think it is better to save for education to give your child the tools to help themselves and plan for their own retirement.

  4. M says:

    It is an interesting hypothetical. A lot also depends on the temperament of the child. With my teenage son we’ve chosen to focus on building financial literacy. He’s receptive at this point and recognizes the consumption trap we all get lured into. And we try to model frugality. None of this is anything new, but through our actions, building his awareness/money-skills I hope to give him tools to create a fulfilling life on less income and financial independence later in life.

  5. Dave says:

    Sandy: There are a couple of ways that this could be set up – a trust (which isn’t really tax efficient because it would be taxed at the highest marginal rate), through a normal taxable account (the income wouldn’t be high enough for quite a while to amount to that much in taxes). Because the child wouldn’t have any “room” for an RRSP that really isn’t an option.

    Chris: It doesn’t necessarily need to be tax efficient, no more so than how you’re saving for your own retirement – the idea is to have the money there at (or around retirement) using your kid’s excessive time (in some cases a full 65 years) to compound the investments.

    Ross: I wasn’t (and many people aren’t) helped through school. I understand that parents would like to help their kids with education, but if at some point in the future they didn’t have to save somewhere between $500,000 and $2,000,000 (depending on how much they need at retirement) they would have a significant amount of freedom in jobs/trades that they could take part in. I see more value in this than at 17 theoretically working towards a degree that may not lead to work they want to do when they are finished.

    I left school with a degree in Economics and around $25,000 in debt. The degree I chose while still in highschool (which is too young in my opinion). It was interesting to learn, but looking back there were probably other things that I could have been doing or learning to do that I could have tried instead of going into debt at that age.

    If there is no burden from school then there’s really nothing to worry about – there are a lot of jobs out there that you don’t really need a University degree for – if you don’t have to save for retirement you simply need money to live now, which makes for a significantly cheaper lifestyle.

  6. Sandy says:

    Okay, so I did a cursory check into transferring money to my child when she is an adult – I think it can be done tax free according to this info:

    http://www.changinggears.ca/articles/legal/legal35.html

    I would definitely want to see what the CRA has to say about it before I do it, but I could start saving now (I already contribute to an RESP, but I could save other monies for her in my own TFSA) and then withdraw it and gift it to her when she grows up. I still think I’d like to help her through a bit of school, although she will have to pay for some herself, but I think the gift of retirement would be pretty amazing too.

  7. Steve says:

    A couple of thoughts:

    A retirement ‘gift’ account sounds like a great idea if you have the financial means to create it . . . BUT

    Given a choice of spending money for my child’s education and retirement I’ll take education every time. For me it’s like the parable of teaching someone to fish instead of giving them a fish. I’d much rather help give them the tools to succeed in life.

    A lot depends on the child’s financial acumen. If a child turns out to be financially irresponsible then I’m not certain I want my hard-earned gift to be squandered early or for foolish desires. Though I guess that’s dependent on how such a gift was set up initially.

    Anyway, as the father of two young kids – I want to have the means to help out my kids within reason and funding a small retirement account and watching it grow could be a good lesson for them.

  8. dilbert says:

    I agree with some of the comments where the education savings are more important than retirement at that time. Also an extra $1500 a year isn’t always easy to find. As a father of a one year old I’ve had multiple times over the last year where his grandparents buy something for him (like a $100 pair of shoes…) and all I can think is how much better he would appreciate that money in the future for school.

  9. Dave says:

    @ Steve / dilbert: I guess it comes down to what you see your child doing with their life. Personally, I was pushed to go to University to get an education (really any education) where if I had the choice now, I would probably learn a trade or travel and work to gain experience. Spending thousands of dollars on education is fine if you foresee your child being a desk-jockey for the rest of their life (generally speaking). I’m talking about providing your child the freedom to choose perhaps a less lucrative course while having the ability to not worry about their future.

    I just think there’s too much emphasis being put into saving for “education” rather than allowing an 18 year-old to experience the world. I would be a much better student at 30 if I would have waited to go to school than I would have been at 18 and gained experience and knowledge around what specifically I wanted to do in the world.

  10. Shaun Somers says:

    I want my children to understand hard work and the need to save for the future. I also don’t want them to worry excessively about what will happen to them while they’re old.
    When my kids are 65, I’ll be pretty close to dead, most likely. I’ll put that extra cash in my own retirement account, and if they’ve been responsible with money in their lifetime then they’ll be getting a larger inheritance than otherwise.
    Giving it to them in an RRSP or other account doesn’t prevent them from withdrawing it to pay for lifestyle or debt at age 26 (or whenever, though I hope to teach them enough that they don’t do that).

  11. This is a similar concept to a post I just wrote on Sunday called You Can’t Catch Me: How To Be Wealthier And Smarter Than Others. I totally agree with you. I’m not sure if the money should be tagged specifically to the child, after all it’s basically “family money” and would go to the child eventually, but the concept of saving very very early is powerful. Works with money, but it also works with learning (for those above who are concerned about the child’s education). You invest in their education right from the very early years through the time you spend and environment you create. By the time they get to university it’s too late to have a huge influence on either their money or their brains!

  12. Tara C says:

    I think this is a great idea – think of all the extra compounding advantage if you started when the child is born until waiting until their 20’s to start saving! I paid for most of my own education anyway, so I would love to have had a retirement account already in progress instead.

  13. Retiredat44 says:

    First priority should be saving for our own retirement, then the child’s education, the child’s retirement should be very low in the list. Even if I am financially able to do all, I would rather donate the money to help other children’s education

  14. dilbert says:

    Also if the child goes into a trade, many trades now involve some kind of formal training. So it’s not like you have been saving for ‘education’ and then since they’ve decided to be an electrician all the money you’ve saved disappears.

  15. The Other Dave says:

    Dave, if you born into “family money” or at least you knew your future retirement finances were not a concern, and you knew you had a cushion/safety-net if you ever had troubles, I’m guessing that you would not have developed the same survival instinct that you have today, your keen sense of fiscal responsibility.

    The other day I was having a conversation with my friend. He was saying he wanted be able to give each of his kids a house when they were adults (they are currently 4 and 7) I references four of his adult friends and family who had been basically setup by their parents (didn’t have to word hard to get where they were in life) and asked him if could point to any one of them and say that’s who I hope my kid grows up to be like… He responded with a confident NO! and the conversation continued… he concluded that he would much rather invest the best possible education that his kids wanted to pursue, and let them make their own way in life.

  16. Retired Syd says:

    I don’t have any kids, so am hardly qualified to opine. But the book The Millionaire Next Door explores this question in detail. The findings there were that kids who were just provided education (as much as they wanted) did far better in life than those that were supported in other ways in their adult lives. Knowing that you had all that money for retirement would likely put them in the latter camp. The kids that had to work for their money in life, felt better about themselves, and were more successful as a result.

  17. Maureen says:

    I have 2 kids in university. I think it would be preferable to help them with their education costs and let them worry about their own retirement. It’s better to launch them successfully.

  18. Dave says:

    Maureen – I guess what I’m saying is, what if University isn’t the best way to launch them into a happy, fulfilling adulthood? What if instead the 4 plus years in University, your kids did something else? Yes they may not make as much money down the road, but that’s the thing – they wouldn’t have to because all they would have to worry about it today’s expenses, not those down the road.

    If I didn’t have to save for my own retirement, I would basically not have to work more than 2-3 days per week all through my 20’s and 30’s and onward (more if I had a lavish lifestyle). There is a lot of stuff I could get into the rest of the time.

  19. sarah says:

    I am in love with this idea.

    It’s brilliant.

    I know people that come from money and are still hard workers and know the value of money. You can give your kids retirement and still do the teachings that will enable them to appreciate it. Perhaps they will learn the same strategy and save for their own kids that way.

    Also loved the comment about grand-parents giving their grandkids random shit.. it’s so true. If the gifts were cut in half and the rest of the money put into an account.. wow!

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