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How To Retire (Your Kid's Edition): An Absurdly Unrealistic Goal

by: Colorado Wealth Management Fund

Shifting your parental focus from saving for college to saving for your child’s retirement.

We are in the middle of a retirement savings crisis.

Experts continue to repeat the conventional advice, but, clearly, nobody is listening or they simply lack the ability to act.

Mimic your retirement savings plan to fund your child’s early retirement, not a college fund.

Buck social convention and focus on retirement planning from birth. Source

In How To Retire (Your Kid’s Edition): Make New Rules, we discussed the seemingly foreign concept of not creating a college fund for your child, but opting to start saving for their retirement at or around birth.

Ultimately, we’re talking about labels on accounts. Sure, you might face tax and withdrawal restrictions based on the vehicle you choose for your money, but, that aside, the label you put on an account doesn’t restrict, theoretically, how you can spend the cash. If you label a savings account “college fund,” you can instantly turn it into “Derek Jeter rookie card fund” when your kid turns 18.

However, in this conversation, labels matter. Because labels can dictate mindset and influence decisions. There might not be a savings-related label that merges popular culture, being a parent, and investing like “the college fund.” So it’s natural for these societal forces to condition us into not only feeling required to have a college fund, but to not even consider spending that chunk of money on anything else.

To this end, labels influence your investment method, style, and decisions.

While we’re not asking you to completely discard college or the attendant college fund, we are asking that you entertain different ways of thinking.

Talk Retirement From Birth

As it conventionally stands, we’re not talking retirement with our kids from birth. We’re talking college.

What if we talk retirement? What if we conditioned our children to live life with all roads leading to retirement? What if we drilled the notion of a retirement fund into their heads from birth? To top it off, what if we gave them an 18-to-20 year head start on their retirement savings?

We need to ask these questions because the prevailing retirement mindset is idiotic. And we wonder why so many people don’t have enough money saved in their 40s, 50s, 60s and, worse yet, beyond. The present mindset puts the college fund first, the retirement fund second, and says, theoretically, you’ll start saving for retirement after college at or around 25-years-old.

A recent CNBC article reports the following disheartening data:

  • Half of the 18-to-34 year-old population isn’t saving for retirement at all.

  • Of those saving for retirement, only 39% started in their 20s.

We obviously have a problem. For one reason or another, large numbers of Americans experience difficulty getting into the habit of saving for retirement.

Maybe they’re all just undisciplined fools who spend every last penny they have on things they don’t need. Giving the benefit of the doubt, maybe we have a collective problem we can’t simply chalk up to the lazy frivolousness of financially illiterate individuals. Or, just maybe, we’re not doing enough to plant the seed of retirement saving in young people’s heads super early on the way we do with the college fund.

Whatever is going on, the data on when people start to save for retirement is bad. What’s even worse, however, are the expert recommendations that follow the stark statistics.

In that very same CNBC article, we see the same response to the retirement epidemic regurgitated yet again:

To hit $1.7 million by 65, you would need to save $486.97 per month starting at age 25, assuming an 8% rate of return.

Talk about going through the motions. Throwing these numbers in every single article about how people aren’t saving enough for retirement has worked about as well as the “Say No To Drugs” campaign.

Think about it - we’re asking 25-year olds to save $500 a month, every month, for 40 years. A vast majority of people are not doing this, yet all we do is a) write articles about how bad things are and b) tell people to do the very thing they have proven they’re incapable of doing again and again.

Given the sad state of affairs, should our parental roles of responsibility shift? Should we buy our kids the time almost all of them are blowing off in their 20s and almost as many continue to disregard in their 30s? Shifting our mindset from a college-focused and obsessed one to a retirement-focused and obsessed one on behalf of our newborns could go a long way to fixing the retirement crisis. And, who knows, we might help stem the flow of new student loan disbursements along the way.

If you save half of that $500 a month, the experts absurdly and unrealistically tell your 25-year old to save and get a slightly lower 6.0% annual rate of return, you’ll hand nearly $100,000 off to your 18-year-old. Up the number to $500 a month at 6.0% and your kid has a roughly $194,000 retirement fund to forge ahead with at age 18.

Earmark this for retirement and you have given them a headstart on retirement no college education can buy at that point in their life cycle.

So exactly how should we set out to accomplish this absurdly realistic goal?

How To Set Up Your Child’s Retirement Account

In the spirit of keeping it stress free, we suggest you simply mimic whatever you're doing for retirement in an account set aside for your child.

Step one. Create a custodial account with a brokerage.

A custodial account allows you to manage and control the funds, however you cannot touch the money for your own personal reasons or gain.

At age 18, your child gains legal control of the account. Until then, you can only use the funds to benefit her or him. This does not include covering daily expenses and other costs you, as a parent, are generally obligated to cover. So you're not drawing from a custodial account to buy school clothes, however, you could justify tapping custodial account cash to fund an immersion trip to France between sophomore and junior year.

You will not receive tax deference in a custodial account, however, because the money belongs to your minor, the IRS taxes all income at his or her tax rate.

Of course, you'll want to treat the money in that account like any other earmarked for retirement. As in, don't touch it unless you have no choice in the matter.

Step Two. Shadow your own retirement account.

We’ll cover specific and strategic investment-related considerations in our next “How to Retire” installment. But, no matter what you choose to invest in, make sure you have a plan that requires minimal thought to execute. This account shouldn’t take much of your time. It doesn’t need to. In fact, it’s probably best if you mimic what you’re doing in your retirement account in your son’s or daughter's custodial account.

If you’re an income-focused retirement investor, there’s absolutely no reason why you can’t make the same moves in your kid’s retirement account as you do your own. Exceptions will come up, particularly if you’re nearing or in retirement and making withdrawals or taking a defensive stance in preparation for needing to access your money. However, with respect to what to buy, when to buy it, and how to fit it all together, your buy-and-hold, income-focused mission can be your offspring’s mission as well. There’s no logic in keeping it separated.

We often discuss such long-term income-generating strategies in The REIT Forum, where we offer a variety of portfolios using real estate investment trusts (REITs) and preferred shares. We’ve been doing this for years, so we know how to structure our portfolios to maximize income using these two investment types in particular.

But if you’re just starting out and going it alone, you might be asking: What’s the best way to follow our unconventional advice to start saving for your kids’ retirement at birth?

Start with an initial investment. Direct whatever cash your child receives early on to the custodial account. As your child gets older, you might devise an agreement whereby they get to keep some of the money they receive for birthdays, informal work, and such, with the rest going toward their retirement. Here again, we reiterate a major theme of this series. You’re conditioning your kid from a young age to think retirement, rather than brainwashing college.

Assuming you’re making monthly contributions to your own retirement fund(s), look at your budget and see what fraction of what you’re saving can duplicate the strategy in your child’s account.

Say you’re investing $500 a month into a basket of dividend-paying stocks and another $500 into a diversified REIT portfolio. Can you swing doing the same, but at rates of $250 and $250, in your child’s account?

At first glance, you might think, “that’s $500 a month I could be using for my retirement or to fund some other endeavor.” But it’s probably not. In fact, it’s probably the money you would be saving for college. And, as we have indicated in this series, there’s no reason why you can’t ultimately use this “retirement” fund as the “college” fund if that ends up being the best route to take out of high school. They’re just labels.

We’re talking about two things:

  1. Changing a mindset that leaves parents and children with virtually no options other than the traditional one society and culture puts in a box for us.

  2. Giving your children a fighting chance to retire with the money they need to retire comfortably as early as possible in their life. And doing it from birth.

An Example Portfolio

If you're building an income-producing portfolio, you might pick stocks like these:

Ticker Company Name Dividend Yield
VGSH Vanguard Short-Term Treasury ETF 2.26%
SCHO Schwab Short-Term U.S. Treasury ETF 2.21%
AGNCN Preferred share from AGNC 6.79%
ANH.PC Preferred share from ANH 7.56%
CHMI.PA Preferred Share from CHMI 8.07%
NWN Northwest Natural Gas Company 2.74%
PG Procter & Gamble Company (THE) 2.42%
EMR Emerson Electric Company 3.02%
MMM 3M Company 3.71%
ESS Essex Property Trust 2.37%
CINF Cincinnati Financial Corporation 1.93%
KO Coca-Cola Company (THE) 2.95%
JNJ Johnson & Johnson 2.85%
CWT California Water Service Group 1.51%
TGT Target Corporation 2.43%
SWK Stanley Black & Decker, Inc. 1.97%
MO Altria Group, Inc. 8.15%

While listing the stocks and dividend yields is a starting point, we want to provide a better demonstration by putting the positions into our Classic Dividend Portfolio Tracker:

Source: The REIT Forum's Classic Dividend Portfolio Tracker

The portfolio provides a weighted average yield of 4.19% based on current market prices. The tool includes our outlook on shares we cover.

However, we can tell at a glance that the income from this portfolio structure is a little too concentrated in the preferred shares:

Getting over 20% of the income from AGNCN and ANH-C would be too much, so we would want to increase the diversification. The preferred shares from Annaly Capital Management (NLY) would be another great source for steady income.

However you decide to design your portfolio, it's important to consider the long-term flexibility of your goals and the diversification within the overall portfolio.

Disclosure: I am/we are long ESS, MO, AGNCN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.