Chances are, if you're a dedicated Fool, you're looking hard at your retirement. After all, the point of investing Foolishly and living below your means is to get money working for you so you can enjoy your later years. Robert Brokamp's Rule Your Retirement service is designed to help you on your way to sipping pina coladas on a white-sand beach somewhere far away from traffic, pollution, and the boob tube, if that's your heart's desire.
There are many gotchas out there that can keep one from achieving retirement goals -- the sting of taxes, unbalanced portfolios, or sheer lack of discipline in saving. Robert has some great advice on how to navigate all these areas. But one thing our retirement guru can't do for you is turn back the clock.
If you chose to delay socking away money for your golden years, you'll have to do some extra work to catch up with the interest you would have been making -- or make some compromises in your retirement lifestyle. OK, so maybe you'll have to downgrade from the 120-foot yacht to an inflatable dinghy.
Many a seasoned Fool has learned that starting early in saving for retirement can put you way ahead of the game thanks to the magic of compounding. I was fortunate enough to have a professional mentor point me to my corporate 401(k) when I was in my mid-20s, enlightening me to how much easier my retirement savings would accrue if I started at that time, rather than five, 10, or 15 years later.
At the time I was 25, assuming an 8% annual rate of return, I could be sitting on more than $400,000 by 55 if I skimmed a paltry 8% of my salary into my 401(k) plan each year. I was blown away -- 30 years of diligent savings could build a sizable nest egg. But what blew me away more was the thought of what that nest egg would look like had I started only a few years sooner. Surprise, surprise -- adding just 10 more years made me a millionaire. Maybe I could upgrade from that dinghy after all.
The exercise intrigued me. What if I had been like famed investor and Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) Chairman Warren Buffett and started investing as a teen? What if I had saved more money from my job at the pizzeria instead of blowing it on Asteroids and Space Invaders arcade games? I guess it wasn't all wasted -- I do relish all those Pac-Man high scores that lasted for weeks. But wait! Maybe I can't turn back time for myself, but I could give my kids this incredible boost of compound interest.
Time is money
It doesn't take a sleuth to figure out that even small amounts invested for young children would grow tremendously by adding another decade or two of compounding. Even prior to having little Mocks myself, I built elaborate spreadsheets calculating how much money I could endow to my younglings with only a small cash start.
It's quite easy to see how a little saving diligence early in a child's life could make them a millionaire at a very early age -- even factoring in inflation. New daddy Shannon Zimmerman shared his plan on how he will supplement his new daughter's financial state with a well-selected and periodically subsidized fund. His goal was to give her full freedom to pursue any career interest -- even poorly paying jobs -- after college.
However, I would suspect that few parents can afford to sock away significant sums of money for their kids. Robert Brokamp has even penned recently that simply providing for children's basic needs can mean delaying or scrapping altogether the parents' own plan for retirement. Kids simply cost a lot, and the additional sacrifice of consistently funding investments for them may be over the top for many couples.
But I would even go one step further. Squirreling away a financial horde for your child may not only be difficult but potentially counterproductive if you're not careful.
Tough love, Fool style
I always cringe when I hear people say they don't want their kids to have to worry about money. You bet I want my kids to worry about money -- not the "can't pay the bill to keep the water on" kind of worry, but certainly some concern about how they're going to pay for life's basics plus their fun extras. Basic necessities don't come free or even on a prepaid plan.
Necessity forces discipline. Take away necessity and you need a very powerful motivator to take its place -- and believe me, "just because I said so!" does not work with kids of any age. Trying to teach kids about financial discipline and dollar smarts while lining their pockets with Franklins often leads to lackluster results once the money pot goes empty.
In my case, the lack of any significant cash pile showing up magically in my bank account spurred me to work hard at buying my own cars, paying the majority of my college costs, and planning an enjoyable career. Contrary to popular belief these days, a parents' unwillingness to drop six figures for their brood's education does not destroy a budding life. In many cases, the school of hard knocks trumps any Ivy League education (just ask Microsoft (NASDAQ:MSFT) baron Bill Gates).
So first and foremost, investing for your children should be used as an opportunity to teach, not just a simple gift of liquid assets.
Less can be more
While I don't want to compromise my child's Foolish development, I also don't want to pass up the chance for my children to build wealth. For me, this simply means helping them save what is already theirs.
I started out setting up a dividend reinvestment plan (DRP) for each of my children -- Pfizer (NYSE:PFE) for Joshua, 3M (NYSE:MMM) for Rebecca, and (soon) Wrigley (NYSE:WWY) for Nicole. After purchasing their first share, the accounts get periodic deposits with birthday and holiday gift monies, which we usually ask for anytime the kids already have way too many toys on hand. These shares are held under their names in a Uniform Transfer to Minors Act (UTMA) account with me as the custodian. Upon their age of majority (18 years old here in sunny California), the children will gain full ownership -- and responsibility -- of the shares.
And this scares me a little. Each of my children could reap large financial windfalls before they are prepared to properly deal with this level of responsibility (I consider 18 years to be a questionable "age of maturity" at best). Yet having set this in motion for my kin, I now feel the onus to properly prepare them for their age of financial freedom. We still put the kid's birthday money into their stocks -- after all, the gift is given to them -- but instead of contributing additional funds, I put the effort into teaching Foolish money lessons.
In this vein, they'll learn about their stock accounts as soon as they learn money concepts. I'll teach them about the investment, how they're accruing dividends, and as early as possible give them a chance to start adding to it themselves. I'll not think for them nor invest for them purely to provide a financial benefit. I'll let their own level of necessity and worries build their motivation while encouraging financial discipline through the delayed gratification of saving.
So contrary to popular belief, the best way to care for your children's financial future may be to not provide money for it at all -- simply set a Foolish example, be a scrooge with your own retirement money and let the natural laws of human nature and economics play out. I'd bet they'll be happier regardless of their overall net worth.
For more long-term investing and planning ideas, take a free trial to Robert Brokamp's Rule Your Retirement newsletter or pick up a copy of his Motley Fool's Guide to Paying for School .
Fool contributor Dave Mock washed dishes to pay $700 cash for his first car. That's a lot of dirty bowls and plates. He owns shares of Pfizer and 3M. The Motley Fool is investors writing for investors.
