Fund your kid's retirement at age 18?

[TexasHusker]

So just for kicks, what would be wrong with tossing $20K into Vanguard S&P 500 at age 18 in your kid's name, and when he's trying to raise a family, say "Hey no need to worry about retirement...you should have a couple $ million in the kitty at age 65. Enjoy your life."

You'd need to fetch 10% annual - the S&P's average annual return since it was tracked - over a 45 year period, but it would seem like an awfully nice gesture, and worth far more than a cheap wedding or a used car.

But like a lot of things, the S&P average can be very misleading:

For example, the average annual return from August 1982 to March 2000 was 12.2%. That was a long bull market.

But from March 2000 to July 2016 the return was less than 3% annual!

[kork13]

$20k, 10% return, 45 years growth... That'll end up around $1.5M, but inflation would eat alot of that... Assume around 3% inflation, that $1.5M would be worth ~$400k in today's dollars.

Even still, that would definitely be a good start, if the kid was smart enough to leave it alone.

Now, drop the $20k in at birth, and that'll get you to the $1.5M in today's dollars over 65 years (almost $10M in future dollars!)

..... As I think about it, that actually does seem like a pretty awesome idea for a graduation/wedding/whatever gift for the kids.

[corn18]

I've thought about doing this, but funding it in a Roth IRA. My youngest daughter works during college and the summer and earns about $4k / year. She could make a deductible contribution to the Roth of say 15% of her income ($600). I would then max it up to her earned income with another $3600. Now it can grow tax free forever and never have RMDs. Unless they change the law. Do that for a few years until there is $20k in the account and then let it grow until 59 1/2. She can then withdraw it tax free.

Haven't implemented it yet, but your post has me thinking about having a chat with her today about it.

[Fishindude77]

I did something like this for my grandkids a couple years ago, ages 1 & 3. Put $10,000 each in similar investments intended for the long term. My daughter and son in law were thinking this will be great come time for college, which is true, but my suggestion was for them to pay for college by other means if possible (assuming the kids go?), and let this money ride for retirement.

[greenskeeper]

I'd have the kids start contributing to their OWN retirement starting at 18, whether though an employer 401k or roth IRA. I was lucky in that my first job offered a 401k with match that I started contributing as soon as I was 18. I'm 20 years into my 401k account through multiple employers that either matched or put profit sharing into the account.

Texas your kids are probably set with their inheritance from you, either with the businesses or your nest egg (provided you don't touch the principal in retirement)

[scfr]

So just for kicks, what would be wrong with tossing $20K into Vanguard S&P 500 at age 18 in your kid's name, and when he's trying to raise a family, say "Hey no need to worry about retirement...you should have a couple $ million in the kitty at age 65. Enjoy your life."

You'd need to fetch 10% annual - the S&P's average annual return since it was tracked - over a 45 year period, but it would seem like an awfully nice gesture, and worth far more than a cheap wedding or a used car.

But like a lot of things, the S&P average can be very misleading:

For example, the average annual return from August 1982 to March 2000 was 12.2%. That was a long bull market.

But from March 2000 to July 2016 the return was less than 3% annual!

The core of the idea (offering a gift of long-term independence & security in lieu of a consumer good or one-day event) is great.
Since you ask "what would be wrong" ... a couple things come to mind:
1. If it's in your kid's name, they'd need to know about it at 18.
2. Going all-in on the S&P 500 might not be the most prudent choice.
3. There seems to be an implied promise that the kid would be set for life, and that seems perilous.

[moneybags]

I've thought about doing this, but funding it in a Roth IRA. My youngest daughter works during college and the summer and earns about $4k / year. She could make a deductible contribution to the Roth of say 15% of her income ($600). I would then max it up to her earned income with another $3600. Now it can grow tax free forever and never have RMDs. Unless they change the law. Do that for a few years until there is $20k in the account and then let it grow until 59 1/2. She can then withdraw it tax free.

Haven't implemented it yet, but your post has me thinking about having a chat with her today about it.

I've put funds into my kids Roths for several years (when they had earned income). Sometimes they contributed their money, sometimes it was just me. The risk is that your child won't be as frugal/savvy with money as you are. They can take the money out at any time and do whatever they want with it. I feel pretty confident that my kids are going to be smart with their money (I hope I keep having this feeling).

[~bs]

it's a nice chunk of change to have, but not likely to be enough for them to retire on. I would assume a real rate of return of 4% to be more conservative. That would put them at $112k over 45 years.

[LivingAlmostLarge]

I would love to do that. But how to get earned income from birth is a bit hard. I can see like high school from summer job.

[corn18]

I would love to do that. But how to get earned income from birth is a bit hard. I can see like high school from summer job.

You could hire your newborn to be a fertilizer factory for the flower beds. That's worth at least $5500 / year and they are prolific poopers.

[Singuy]

So what's the difference between gifting 20k for your kid into a retirement account vs you putting 20k into yours and then just pass down the wealth after death?

[corn18]

So what's the difference between gifting 20k for your kid into a retirement account vs you putting 20k into yours and then just pass down the wealth after death?

You might live too long.

[moneybags]

I would love to do that. But how to get earned income from birth is a bit hard. I can see like high school from summer job.

Child modeling/acting . My son worked when he was 6 weeks old (but it was a short career).

[Gailete]

I was thrilled in 1988 at age 33 I finally got to sign up for a retirement account for the first time when I became a nurse.

For those whose babies aren't going to be models or produce enough manure, you may want to look into gift trust accounts if they are still around. I had one for both of my boys that even though I couldn't put much in, they still ended up with $1K+ when they turned 21. What 21 year old couldn't use $1000?