Raising the Next Generation of Investors

What if your children could be well on their way toward funding retirement before graduating from high school? A crazy thought? Impossible? Maybe not. Consider the following scenario: Your child (or grandchild) has $2,500 saved by age 16 and invests it aggressively. By age 72, they could realistically end up with over $500,000. And that assumes they never add another penny to the account.

While they should be encouraged to participate in their future employer’s workplace retirement plan as well, imagine all the benefits your kids would experience from having this huge head start on saving for retirement. They would be free at a young age to save for other goals, such as a car or a house. Perhaps they’d feel freer to pursue a career in full-time ministry, teaching, or something else that typically doesn’t come with a high salary. When they get married, there might be less pressure for both spouses to work, providing more flexibility in child-rearing.

Never easier

Today, with the advent of no-commission and fractional-share trading of exchange-traded funds (ETFs), your child could put as little as one dollar into an S&P 500 index fund. Think of that. They could create a widely diversified investment portfolio with only $1. That’s incredible!

By age 16, let’s say they have $2,500 in their portfolio and stay with the S&P 500 fund. Assuming the index generates its historical +10% average annual return, by age 72, your child will have over $500,000 — more than most people have after working for an entire lifetime!

Your child could just as easily and inexpensively follow Just-the-Basics or Dynamic Asset Allocation. Both strategies use three ETFs, each one of which may be purchased for just $1. (See this article for another ETF to consider.)

Show me the money

In one of my favorite Saturday Night Live skits, Steve Martin and Amy Poehler play a husband and wife who are trying to figure out how to get out of debt. Suddenly, an infomercial announcer appears in their kitchen, promoting a new debt management program called, “Don’t Buy Stuff You Can’t Afford.” One of its recommendations is to buy things with savings. Looking very confused, Martin’s character says, “And where would you get this saved money?”

Where would your kids get $2,500 by age 16? If they’re very young, banking a healthy portion of what they receive from relatives each birthday or Christmas could get them part of the way there. If they receive an allowance, teach them to set aside a significant portion for saving and investing. By their teen years, earning opportunities expand dramatically as part-time jobs become available.

This is also a great opportunity for parents or grandparents to support their efforts. Matching the child’s contributions may add motivation while expanding their starting investment capital.

Where to start

In the Bell household, our three kids have had custodial investment accounts since they were 9, 11, and 13. As soon as they began generating earned income (from babysitting, mowing lawns, taking care of neighbor’s pets), we opened custodial Roth IRAs for each one and began transferring the money from their taxable accounts to those IRAs. Unless Congress gets in the way, the money they accumulate in their accounts will be available to them tax-free in their later years.

We started with Schwab but eventually switched to Fidelity when fractional-share no-commission trading of ETFs became available. Plus, Fidelity provides excellent access to the funds needed to implement any SMI strategy.

Hands off!

The success of this plan largely hinges on the child’s commitment to stay with it for the next 50+ years. As their account balance grows, the temptation to tap those funds will likely grow as well. While you might control the account initially, the money will become legally theirs when they reach the “age of majority,” which is 18 in most states. As a parent (or grandparent), this gives you a relatively short window to impress upon them the importance of leaving that money alone!

This is a great opportunity to ingrain right from the beginning the idea that these accounts are for retirement. To drive this point home, help them set up other savings/investment accounts for other goals, such as buying a car or paying for college.

Keep it real

Another key to success is making sure your kids are investing mostly their own money. When our oldest was 14, I remember a time when he wanted to review his account online. There he saw many unfamiliar terms, such as “unrealized gains” and “cost basis.” He was sincerely interested in finding out what those terms meant. I doubt he would have been as interested if I had brought up those topics without him having his own money involved.

That same night, our then 10-year-old surprised me by handing over $100 and asking me to add it to her investment account. All of our kids are in the habit of giving the first portion of all they receive to Christian ministries, but beyond that, she had saved much of her entire summer’s worth of allowances and money she received for her birthday. We had been discussing investing quite a bit recently and apparently she got inspired!

Perhaps most beneficial of all, our kids have experienced firsthand the market’s ups and downs. It’s one thing to understand the fluctuating nature of the stock market on a theoretical level, but it’s something altogether different to see their own account balances change.

Keep it biblical

As with all that we teach our children, it’s important that they learn the biblical principles behind these lessons.

The point of investing isn’t to build wealth for the sake of building wealth, but to provide for their future family’s long-term needs (“Anyone who does not provide for their relatives, and especially for their own household, has denied the faith and is worse than an unbeliever.”– 1 Timothy 5:8). Using mutual funds instead of individual stocks provides diversification (“Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land.”– Ecclesiastes 11:2). And it takes time for compounding to have its greatest impact. We want them to be long-term investors, not short-term traders (“Steady plodding brings prosperity; hasty speculation brings poverty.”– Proverbs 21:5, TLB).

Earlier is better

Hopefully this has motivated you to get your children started with investing as soon as possible. That way they can take full advantage of the invaluable asset they have in abundance — time. They have time to let compounding work its wonders, and they have time to build the emotional fortitude they’ll need to be successful long-term investors.

Image used with permission