Why should you be worried if your kids invest early?
Let’s face some facts. Most people are not preparing adequately for their retirements. 57% of people working today don’t even have a retirement account. For those that do have a retirement account, 80% have a balance that is less than one year’s pay (nirsonline.org. “New Report Finds Nation’s Retirement Crisis Persists Despite Economic Recovery.” Sep. 17, 2018.).
Many employers and some states have recognized the problem and have taken steps to improve the situation. Companies often auto-enroll employees in the company’s 401(k) plan when they join the company. This automatic enrollment is usually set with a contribution amount of about 5% (equal to the company match) and invested in an S&P 500 index fund.
States are also picking up on the idea. Colorado offers an automatic IRA to the employers in its state. Similar to the 401(k) plans above, under this plan, employers automatically enroll their workers and set up payroll deductions.
In both plans, the employee can easily opt-out by choice, but few do so. So, we might be on to something. If a plan is set up for people, then they might let it ride and beat the odds of the poor retirement saving performance of most Americans.
What if your kids invest early?
What if you did something similar for your kids? If kids invest early, the power of compound interest is amazing. Not only that but when kids invest early, there are other advantages. They first learn how to save money so they have some to invest. This teaches budgeting and separating wants from needs.
They also learn the basics of stocks and mutual funds and how the stock market works by becoming shareowners and following their investments. When they leave the house as young adults (or sooner if they are earning a part-time income), then they can take the money in their Daddy401k and use it to start their own IRA or preferably Roth IRA.
The most important benefit is that they will have developed the good habit of investing regularly. You taught your kids this good personal finance skill and they will be more likely to beat the odds. For them, there is a clear path to a retirement nest egg. It’s even possible that they could achieve the goal of becoming a millionaire in their early 50s!