Start investing for you, your kids and your retirement

As you remain obsessed with your career progression or raising your kids, the precious days of your retirement planning eventually slip by. Amid high inflation and an increased cost of living, how do you plan to allocate funds for your retirement or your kids? How do you start investing for your kids?

An informed investor can strategize early on to ensure a worry-free retirement. As you juggle your priorities, you may find it increasingly challenging to save for your retirement or even your kids after covering your living expenses. Well, you aren’t alone. Currently, around 55% of US citizens are lagging in their retirement savings.

Now, you might have heard financial experts touting “Start saving for your future as early as you can” time and again. But how exactly do you plan to allocate funds for your short-term goals, kids’ investments, and retirement goals?

Below are some suggestions on how to start investing to address all these financial priorities.

How much do you need to save for your retirement?

That’s the million-dollar question. What would you consider to be your tentative lifespan? 70 something? 80 something? Older? For how many years are you planning to save?

This is where you need the basic knowledge of generating recurring income from different avenues. Besides, investment experts would advise you to invest in accounts generating compound interest. This way, you can be better poised to save for your retirement.

With the inflation rate reluctant to drop to pre-Covid levels, it’s logical to start saving for an expensive lifestyle. With strategic investments, you can prepare for rising costs in the coming decades.

Again, some ongoing expenses like childcare and mortgage might be lower as you near retirement. While calculating expenses, it’s important to factor Social Security costs, rental income, and other expenses into your equation.

While you calculate your retirement savings, don’t overlook the following expenses.

• An average couple will likely need around $295,000 in medical expenses in retirement.
• Factor in expenses like transportation, clothing, and food.
• Consider entertainment expenses such as movies, special events or eating out.
• Consider travel expenses, stays at hotels, flights, and gas expenses if you drive
• Include the cost of life and health insurance policies

In the past, US citizens could comfortably retire with $1 million. However, with rising inflation and correspondingly higher living expenses, this amount is now inching toward the $2 million mark.

How to start saving for your future

Here are some ways you can start saving for your golden years.

Defined contribution plans

Defined contributions plans are currently the most popular workplace retirement schemes. If you are an employee, talk to your employer regarding these plans. Employees generally have individual accounts where they contribute to the organization’s plan. Typically, the amount is transferred by payroll deduction.

These plans have been around since the early 1980s. In 2019, more than 85% of the Fortune 500 companies offered defined contribution plans rather than other pension schemes.

A Roth version like Roth 401(k) may also be available. Here, you can deposit your after-tax funds. On retirement, you can withdraw the amount tax-free. It’s logical to go for Roth only if you expect a higher tax rate during your retirement compared to the period when you contribute to the account.

IRA plans

The US government has developed a valuable retirement plan for its citizens. Workers can contribute a maximum of $6,500 to these accounts in 2023. The contribution limit for those aged above 50 is $7,500 per year.

American citizens can approach a financial institution to set up an IRA. The IRA plans enable workers to save bonds, cash, mutual funds and stocks for a secure retirement.

In general, you can choose from seven types of IRA plans. Depending on the plan you choose, the tax norms would differ. The common types of IRA plans include:

• Traditional IRA
• Spousal IRA
• Roth IRA
• SEP IRA
• Rollover IRA
• Simple IRA

Guaranteed Income Annuities (GIAs)

Since your company is not likely to offer GIAs, it’s wise to create one of these for yourself. These annuities generate guaranteed income, replicating pensions. So, if you don’t have a regular pension scheme, it makes sense to go for GIAs.

As you approach your retirement, you can purchase an immediate annuity to generate a monthly payment consistently for the rest of your life. This would require you to shell out a lump sum amount. However, individuals prefer paying for these annuities over a period of time.

So, if you plan to retire at 65, start paying for your GIAs when you are 50. GIAs can be purchased on an after-tax system. So, the contributor will owe tax only on the earnings of these plans. Alternatively, there’s a provision for purchasing your GIA within an IRA to enjoy an upfront deduction of taxes. However, when you withdraw the funds, you must pay tax for the entire annuity.

The Federal Thrift Savings Plan

If you happen to be a government worker or serve the community as a part of the uniformed services, the Federal Thrift Savings Plan is worth considering.  

You have five low-cost options of to start investing for your kids to choose from. These are:

• An international stock fund
• A small-cap fund
• An S&P 500 index fund
• A bond fund
• A fund investing in Treasury securities (specially issued)

Federal workers also have the privilege of picking from a number of lifecycle funds. These funds have different dates for target retirement investing in the core funds. As a result, you can make informed investment decisions.

Employers can contribute up to 5% to the Thrift Savings Plan.

Start investing for your kids

Your child has a few options to invest as a minor. As a responsible parent, it’s your discretion that defines the financial stability of your kid in the future. So make sure to reap the benefits of compound interest by investing for your child when they are young enough. This way, they can avoid expensive education loans or other financial liabilities.

Here are a few accounts you may want to consider for your kids.

Custodial Roth IRA

A Custodial Roth IRA account is a great choice for a child savings account without any age limit. Kids of any age can contribute to this account with their earned income. The contribution limit to this account is the child’s earned income, or $6,500, whichever is lower. Most importantly, your child can withdraw the contribution penalty without taxes at any age.

In general, Roth IRAs are individual accounts for retirement where you can use your after-tax dollars for contributions. While a minor can hold a custodial Roth IRA, the parents or guardian can manage these accounts.

However, there’s a catch: the income must be generated by your child. .

If your child wants to withdraw both the earnings and contributions without paying taxes and penalties, they need to hold the custodial account for at least five years. Beyond that, they need to wait till the age of 59.5. Before retirement, they enjoy the privilege of drawing a maximum amount of $10,000 to manage expenses like buying a house.

529 College Saving Plans

Parents looking for a child savings account to manage their educational expenses should explore the 529 College Saving Plans. There’s no limit to contributing; anyone can open these plans.

The savings accumulated in these plans can be used to manage educational expenses. This also includes repaying student loans up to $10,000 and managing apprenticeship programs. Based on your state, you may also be eligible for tax deferrals, tax benefits, deductions and tax credits. 529 plans can be of two types.

• Prepaid tuition plans: This plan enables you to purchase college credits that your child can use in the future at the current prices.
• Education savings accounts: In this account, one can build a balance and channel the money for investment in the market, such as ETFs and mutual funds.

As long as you use the money for qualified educational purposes, you can withdraw the amount tax-free.

UGMA/UTMA Trust Accounts

Parents looking for more flexibility while managing their child’s savings accounts may want to consider UGMA/UTMA trust accounts. With these saving schemes, parents retain better control over how their children use the funds.

Parents have the option to diversify the funds across asset classes, such as mutual funds, stocks, or bonds. These investments can help cover the increasing cost of education for your child in the future. Compared to other investment accounts for children, these accounts are easier to set up and manage.

UGMA/UTMA trust accounts don’t have specific contribution limits. However, individual contributions exceeding $17,000 per individual and $34,000 per married couple jointly filing per year invite a federal gift tax.

Although contributors don’t enjoy any tax benefits initially, you can qualify for an exemption of $1,250 (maximum) on the earnings as the federal income tax. Besides, another $1,250 gets taxed at the rate applicable to the child.

Although the guardian or parent opens these accounts, the child can take them over at an age ranging between 18 and 25. One of the perks of these trust accounts over the 529 plans is that your child can use the money for expenses beyond education, such as purchasing a house.

Certificates of Deposit

CDs continue to be one of the safest investment options for those starting to invest for their kids, given that each account is FDIC-insured up to $250,000. Compared to traditional savings accounts, CDs yield more interest as your deposits enjoy compounded growth.

The parent or guardian must open a custodial account with the minor child if they are under 18. However, CDs come with a maturity period, and withdrawing the amount early invites additional fees.

In case your child earns anything less than $1,250 through this account through dividends, interest, and other earnings, there’s no tax implication. The child’s tax rate would be applicable on earnings ranging between $1,250 and $2,500. Beyond this, the parent’s tax rate will be applicable on taxes.

Being a custodian of a CD, you can contribute a maximum amount of $15,000 to your kid without shelling out gift taxes.

 

This article was written by Max Palmer from Due and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to legal@industrydive.com.