Dear Rick:
I have three grandchildren who I would like to help out financially. They’re all in their early 20s, single and they all have decent jobs. They make between $30,000 and $50,000 a year. I want to help them save money for their retirement. The question is what is the best way of going? I want to give them about $5,000 a piece every year. All three of my grandchildren have no idea how to handle money and I’m afraid that if I just give them the money it will be gone relatively quickly. Therefore, I am looking for something that will sort of lock them in. Do you have any suggestions?
Paula

Dear Paula:
I think it is great that you want to help your grandchildren with their retirement. Even though I am sure they would prefer to have the money today, I can almost guarantee you they’ll be very appreciative of your decision down the road because they will have a nest egg which will help them in retirement. What I think would be an excellent vehicle to use for your grandchildren would be a Roth IRA.

Considering the ages of your grandchildren, they are eligible to invest yearly, $5,500 in a Roth IRA. The beauty of the Roth is that the money grows tax free. Therefore, eventually down the road when your grandchildren withdraw the money in retirement, they will not have to pay any taxes. Just think how much that money will be worth at the time they need it for retirement. Therefore, I cannot think of a better investment for a grandchild than investing in a Roth IRA.

I also believe there is another opportunity that you should take advantage of that may be as valuable if not more so, than the money you are contributing. As difficult as it is, I believe you should also take this opportunity to try to teach the grandchildren about the importance of investing and how investments work. The sooner they learn about investing and its benefits, the better it will be for them. Maybe getting them involved in where and how the money is invested can be a good start.

It is more important than ever that when people enter the real world and have to be accountable that they know the basics of investing. They don’t have to be Warren Buffet, but at the same time, we want them to avoid Bernie Madoff. It would be nice if by the time someone graduated from high school or even college they had an understanding of investing; unfortunately, the reality is they don’t. For whatever reason, investing and personal finance are sadly neglected. As a result, if you don’t teach your child or grandchild about personal finance, more likely than not they won’t acquire those skills; thus, putting their financial future in jeopardy. Obviously life would be difficult if you couldn’t read. Trust me, life is also difficult if you don’t know how to take care of your finances.

For those parents or grandparents who want to help their adult children in a way other than retirement, some other good options for money will be to pay down outstanding debt such as a student loan or charge card debt. Typically, I would say charge card debt first because it is non-tax deductible and usually the interest rate is substantially higher than other types of debt.

One last note – if you want to encourage your adult children to invest, even think of a matching program where you’ll provide some sort of match if they invest their own money. I know you shouldn’t have to provide a match to encourage your adult children to invest; however, it is what it is.

Good luck!
If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com.