Think back to last year and all the presents you gave your relatives, especially the younger ones. Remember the stuffed animals, video games, books, and fondue sets? Great. Now ask yourself this: How many of those gifts are still appreciated and utilized -- and how many are collecting dust in a closet?
Likewise, recall the gifts you received last year and ask yourself whether you wouldn't rather have -- a year later -- a more secure retirement?
That's right: I'm suggesting that rather than giving a pile of things that a year from now will not be appreciated, you instead give an asset that will appreciate all by itself. This year, give the gift of retirement.
OK, so opening up a confirmation slip from a brokerage or mutual fund company isn't as exciting as unwrapping something that makes noise or dinner. But a contribution to a loved one's retirement will be valued for decades.
The kids will (eventually) love it!
Helping a younger person save is especially powerful. Time can be an investor's greatest ally, and who has more time than kids? Given several decades, a modest investment can turn into tens, even hundreds, of thousands of dollars. Consider the following chart, which shows how much a $1,000 gift today could add to Junior's nest egg at age 67, depending on his age now and the investment return.
|
Annual Return |
Initial Age of Investor |
|||
|---|---|---|---|---|
|
5 |
10 |
15 |
20 |
|
| 6% |
$40,883 |
$30,310 |
$22,471 |
$16,659 |
| 8% |
$140,264 |
$94,147 |
$63,193 |
$42,415 |
| 10% |
$480,251 |
$291,147 |
$177,408 |
$107,826 |
You won't only be enriching your progeny's retirement, but -- perhaps more important -- you'll be teaching valuable lessons about the power of investing.
Here are some ways to put the next generation on the road to riches:
Open a Roth IRA
Anyone who earns an income -- even if it's only from babysitting or mowing lawns -- can be the beneficiary of an IRA. If your kid earned $1,000 over the year as a lifeguard, you can contribute $1,000 to his IRA. He doesn't have to make the contribution himself to enjoy the tax-free growth. But do keep paperwork of his earnings as proof and don't let the contribution exceed his earnings.
Give shares of stock
Perhaps the cheapest method is through a dividend reinvestment plan (Drip) or direct stock purchase plan (DSP), which allow investors to buy stock directly from the company with little or no commission. Thousands of publicly traded companies, such as Home Depot
Give shares of stock you already own
If you own shares of stock, you don't even have to open your wallet to invest in future generations. Just share your shares. If they've increased in value since you purchased them, you won't have to sell and pay capital gains taxes. (The beneficiary will, since he or she will retain your cost basis. I bet they won't complain, though.) Exactly how to do this will depend on how you own the shares. Call your broker or the "transfer agent" listed on your statements and on the stock certificates.
Pay them for saving
If you like the idea of helping out young relatives, but you don't want to hand them cash (for fear they'll spend it on Moon Boots), you can set up your own matching program: For every dollar they save, you contribute a dollar (or $0.50 or $0.25). Studies show that 401(k)s with matching features have the highest participation rates. It'll work on kids, too.
Potential pitfalls
Also, if the beneficiary of your largesse is a minor, follow state rules about account ownership. Chances are, you'll have to serve as a custodian or guardian on the account. Contact your preferred broker, bank, or mutual fund provider to find out the rules in your state. It can be a bit of a hassle, but it can be worth it. After all, nothing says "I love you" like a better retirement.
Robert Brokamp, editor of The Motley Fool's Rule Your Retirement service, would like a castle for Christmas. Otherwise, just send cash. For your present, he's offering you a 30-day free trial to Rule Your Retirement. Home Depot, Microsoft, and Mattel are Inside Value recommendations. Disney is a Stock Advisor pick. The Fool has a disclosure policy.
