Social Security has played a crucial role in supporting the elderly and disabled since the program's creation in 1935. However, it's usually not enough to give recipients a comfortable retirement; many are struggling to make ends meet in an economy that's currently seeing soaring living costs.
Giving your children a head start on financial security is one of the best things you can do for them. Here is why parents should consider helping their kids start saving for retirement, and an excellent tool for doing it.
Recipients are struggling today
According to the Social Security Administration (SSA), approximately 37% of elderly men and 42% of elderly women rely on Social Security benefits for 50% or more of their income. About 12% of men and 15% of women depend on it for 90% or more of their income. In other words, Social Security is a core financial support system for many retirees in America.
However, it's not necessarily a sound system by itself. Social Security does many great things for the elderly and disabled, but it's often not enough. The average monthly SSA benefit for retired workers was $1,669 in June, equating to an annual total of $20,028. That's the equivalent of working a full-time job for $9.62 per hour.
Today the average renter pays $1,326 per month, which doesn't even get into utilities, food, transportation, unexpected healthcare, or other expenses. Not having a secure retirement threatens to put the financially vulnerable at risk of harm or hardship.
Things could get worse
It's hard enough making ends meet for oneself, but the generations behind you could have it even harder. The latest Trustees Report Summary indicates that the Old-Age and Survivors Insurance (OASI) Trust Fund's reserves, which fund benefit payments, could be depleted by 2034. Social Security wouldn't go bankrupt; benefits would rely solely on incoming payroll taxes. The report estimates that incoming payroll taxes would fund 77% of benefits, with that declining to 72% by 2096.
This signals that the program will struggle to cover its projected outflows as it's currently structured. Of course, the government could do something between now and then to increase funding, but that's just hoping for something to happen. Meanwhile, social security isn't getting the job done by itself, to begin with.
The U.S. population is slowing to its lowest growth rates in decades, as people have children later in life, and fewer of them. Fewer people working and paying payroll taxes could also stress the financials of the OASI fund if that trend continues. Ultimately, it's a good idea to use the power of compounded returns to set your children up for financial security when they retire.
Set up your children with a custodial Roth IRA
If you start early enough, setting aside money for your child doesn't have to be a substantial financial commitment. A custodial Roth IRA is an excellent tool for the job. It functions like a typical Roth IRA, except it can be set up for a child, and transfers to their control once they reach the appropriate adult age, often 18 or 21 depending on where you live.
There are some rules to follow; for example, a child must have earned income to use a custodial Roth, so the custodians should keep a log of the minor's earnings if they don't file an annual tax form. The custodial Roth also has the same contribution limits as a regular Roth IRA, which are capped at $6,000 per year.
Any adult knows how life works: Kids have a lot going on throughout their school and college years, and most don't even think about retirement until they are well into their 20s or 30s. However, starting early can have a tremendous impact later in life.
If you open a custodial Roth when your child is 15 and contribute just $100 per month at a 9% annualized return, that account would have $1.3 million by age 65. That's almost 15 times the median retirement account value of those age 65 and older. Let's say that the person waited until age 30 to start saving; they would need to contribute $400 per month to get the same $1.3 million by age 65.
You don't need a massive income to set your kids up for their golden years if you start early enough. Giving your kids a boost when they're too young to think about retirement is one of the best things a parent or guardian can do for a child.