If you've read any financial news outlet for long enough, you likely know that America is in the middle of a retirement crisis. However, the crisis isn't affecting everyone: While many seniors are understandably struggling due to an inability to save or a forced early retirement spurred by health reasons, this is simply not the experience of others.

In 2016, a Merrill Lynch study found that 75% of adults aged 65 and above reported often feeling happy -- the highest of any cohort -- and having the lowest rates of anxiety. Last year a U.S. Census Department study found that the poverty rate among adults aged 65 were lower than that of adults aged 18 to 64, and nearly 40% lower than that of Americans under 18.

And while Social Security is a key reason for lower poverty rates among seniors, with some estimates noting it led to a 31.7-percentage-point reduction in poverty in elderly populations, another study found that most seniors were able to maintain or increase their spendable income after claiming Social Security. For many seniors, the Golden Years are truly golden!

Grandson hugging his grandmother.

Image Source: Getty Images

My mother's wise financial move

Count my mother among the group of seniors whose fortunes have improved. We lived in what could be favorably considered a lower-middle income household, with her being a single parent for the bulk of my childhood with little external support. Understandably, my mom was forced to work multiple jobs, and could spend little on herself.

The strong work ethic forced on her continues to this very day: She still works at her full-time job despite being at full Social Security age because she likes "staying busy." When she does retire, she will receive a pension from her employer and be one of the seniors above able to increase her spendable income.

Her situation has changed, but her thrifty mindset has not. Now that she's found herself with extra spending money, she has decided to gift a portion to her grandson (my son) by contributing to his Uniform Transfers to Minors Act (UTMA) account.

Perhaps I'm biased, but I believe it's the smartest move she could make with her Social Security check.

Three reasons why gifting is smart

There are a few reasons to gift money to your grandchildren:

  1. You are allowed to gift up to $15,000 per child every year without filing for the gift tax ($30,000 if married), which reduces the amount of your assets eligible for the estate tax. Federal estate taxes only kick in above $11.7 million, but many states have lower estate-tax-exemption levels. As a bonus, by transferring directly to your grandkids, you skip a generation and prevent your kids from having the same estate issues if they retire wealthy.
  2. Although everyone should have a will and transfer-of-assets plan in place, many do not. Gifting money to your grandkids while alive helps to ensure your directives are followed, and simplifies later estate planning.
  3. There's a major factor that Albert Einstein is rumored to have called "the eighth wonder of the world" -- compound interest. My 3-year-old son will have decades to allow his investments to grow, and longer if I do a good job of instilling my love of investing.

For comparison, the chart below allows you to easily calculate the value of an investment today based on expected annualized returns and years invested. For simplicity's sake, I used common milestones in a person's life as age references.

To see the wonder of compounding, simply multiply the figures inside the box by the principal amount of the prospective gift. For example, a single dollar invested with a 35-year-return of 10% annualized would grow to be $28.10. Therefore, our son's UTMA account of $20,000 growing under the same conditions would be worth (20,000 x 28.10) = $562,000 -- pre-tax. Even modest 6% annual returns will create a nest egg of $154,000 with no further contributions (though my wife and I do contribute monthly). Our son would be nearly 40 at that time, and even the lower amount stacks up favorably to what the average 40-year old currently has saved


18 Years

21 Years

35 Years

65 Years
















Author's Calculations. Note: These figures are not returns, they are total value calculations, as they include the initial principal.

Admittedly, the figures above don't include taxes or fees, but we're attempting to limit both by avoiding actively managed mutual funds or excessive trading. In fact, we're investing my son's UTMA across three low-fee broad-based ETFs.

The largest holding is the iShares Core S&P Growth ETF (IUSG 1.00%) with about a 55% stake, followed by the iShares S&P 500 ETF (IVV 0.82%) with a 43% stake and a small starter position in the Vanguard Extended Market Index Fund ETF (VXF 0.73%).

Not for everyone

It's important to note this strategy isn't for everyone. Seniors facing retirement shortfalls would be better off using their Social Security money to fund their own retirement.

Other seniors are wary of the limited nature of UTMA accounts and want to establish other wealth transfer vehicles like trusts. Finally, there are individuals that want to leave wealth to charities or other organizations instead of their families.

That said, your grandchildren have the greatest asset in investing -- time -- and a small gift now could make them a fortune in the years ahead. It's a smart move, but as a grandparent, you already know that.