It can be tempting for new parents to think about starting a retirement fund for their children so that the kids are financially protected in the future. Sure, retirement savings are important, and it's true that many people wait too long to begin saving for their retirement days. Does it make sense for parents to focus their investment dollars on a retirement fund for a child that is still in diapers?
Providing a Head Start is Helpful
It's a fact that you will have a better chance at saving enough money for retirement if you begin investing as early as possible. In theory, that would mean that starting a retirement fund for an infant would guarantee the biggest possible return on that investment by the time that infant is ready to stop working. Parents are always looking for ways to help their kids succeed in life, and building a massive retirement cushion can relieve a child's financial burden when they do not have to invest as much in retirement on their own.
Teach Children About Saving Early
Beginning to save for a child's retirement fund early in life is a good way to teach your children the importance of saving money. When the child is old enough to understand, you can sit down with them and explain how much you invested and how that investment has grown over the years. Your children will have the chance to go through life confident knowing that they will be taken care of in their older years, and you have an opportunity to impress them with the value of saving money during their formative years.
Take Care of Education First
Before you open that infant IRA, though, think about the other big expenditures your child will face long before they are ready to retire. Higher education expenses can be exorbitant, especially if your child has the good fortune of being accepted to a more prestigious school. Think about the fact that your child might choose to stay in school for a master's or doctorate degree. Investing in your child's fundamental education can be more powerful than investing in your child's eventual comfort because education is what your child's entire career will be based on.
Help Yourself, Then Others
When you ride in an airplane, the flight attendants always tell you to put on your oxygen mask before you help anyone else with their mask. The same is true for financial security. Make sure your financial needs are met before you begin contributing toward your child's retirement. Is your retirement fund secure? Is your mortgage paid off? If you neglect your own investments in order to put money into your child's retirement fund, there is a good chance that your child will end up supporting you financially as you get older and are unable to work any longer.
Concrete Investments for Your Child's Future
Consider contributing to your child's financial stability in a way that will give them a better beginning rather than a better ending. Putting money in a mortgage fund, for example, will allow your child to purchase property earlier in life and gain equity on that property much faster than they would be able to do on their own. Think of ways to invest that would ease your child's financial needs during earlier phases in their lives so that they can build a more solid foundation for the later stages in their lives.
More Flexible Savings is Safer
Retirement savings plans charge a hefty fee and carry a heavy tax burden if they are withdrawn before retirement. Tying a big chunk of your money up in an inflexible savings plan makes that money virtually inaccessible if something happens and your child needs the money today rather than tomorrow. It is better to invest your cash in a way that will allow you or your child to access the funds in case of an emergency. Unexpected events that can be incredibly expensive can happen in a person's life. Having a financial safety net in place that is accessible can be the difference between drowning in debt as a young adult or handling a crisis in a reasonable manner.
Kids Have More Time to Contribute
The truth is that your toddler has a lifetime to earn money toward retirement. Established retirement investment funds are designed to maximize a person's savings potential during that person's working years. It is the parent's job to impress upon the child the importance of saving for retirement so that the child establishes a solid plan early in their working career. If your child begins a retirement fund as soon as they begin working, they should be able to retire in comfort on their own.
Jessica Bosari is a freelance writer and blogger for various publications and her own blog. You can read more of Jessica's work here. If you have any comments or questions about SavingTools or about saving money, leave your comments in the form below or email firstname.lastname@example.org. Thanks!