It’s the time of year many perfectly sincere people dread. Here we are smack dab in the middle of June. You know what that means. It means we’ve spent the last several weeks celebrating college graduations and will spend the next several weeks celebrating high school graduations. And with all that fun and excitement—and let’s not forget earned pride and honest accomplishment—comes the commemorative joy of the event: the ubiquitous graduation party.
Ah, but finding the perfect gift … aye, that’s the rub. It often represents a great challenge for the average invitee, and an even greater challenge for the parent or grandparents. Let’s run down a few of the “easy” parental gift options: a new car, a new computer, a sizable check to help defer college costs. These are all fine, time-honored gifts. In addition, they’re all very practical. Yet, they also all suffer from the same unfortunate trait: planned obsolescence.
A car, while it offers the promise of great experiences, eventually wears down. A computer, while it can make life more efficient, soon becomes frustratingly outmoded. And that money meant to help pay for college? It’s gone in a wisp.
No, if you want to give a gift that has great meaning, a gift that endures through the lifetime of the recipient, a gift that will at some point be appreciated beyond all expectations, you have only one option: Give the graduate an IRA.
Technically you can’t “give” an IRA. You can’t even give money to set up an IRA if the graduate has no earned income. Graduates who do have earned income are eligible to start IRAs. Most don’t, often using the money for living expenses. After all, the need to fund those expenses prompted them to seek paid employment in the first place. They’ve earned enough money to contribute to an IRA, they just needed to use it elsewhere.
That’s where you come in. Instead of forking over two grand to buy some computer, give the graduating wage earner an IRA application—and a promise to write a $2,000 check for deposit into the account once it’s opened (assuming the graduate has earned at least $2,000 in the relevant tax year). If you really want to impress your child or grandchild, promise to provide the same $2,000 on his or her birthday, Christmas or other suitable event each year for the next five years (after which time they’d presumably have a job where they can assume responsibility for their own retirement saving).
And saving is the whole idea. Most young people don’t even consider saving for retirement (it’s so far beyond their horizon it’s almost impossible to imagine). The earlier parents and grandparents can get them in the retirement-saving habit, the better off they’ll be.
Here’s what I mean (if you don’t like numbers, go immediately to the next paragraph): Let’s assume a high school graduate earned at least $2,000 and you offer $2,000 to start an IRA as a graduation gift. You then promise to give the new college matriculant (who will have a work-study job while attending college) $2,000 each year of college (there’s your five years). After that, the (now) college graduate contributes $2,000 a year. Let’s say, for whatever reason, this young retirement saver stops contributing after 18 years of annual contributions. After earning 8 percent a year (that’s 2 percent below the market average), how much will that person have when they retire?
Someone investing $2,000 a year for 18 years after high school graduation will amass a nest egg of nearly $1.2 million upon retirement at age 70. That’s a pretty good return for a $36,000 investment. And to think, it’s all because they started saving for retirement earlier than most.
How important is starting early? Imagine a 40-year-old saving $6,000 a year for 18 years. That person will have only about half of what the 18-year-old saver has despite saving three times more.
More interesting, what if it were possible for a newborn infant to save $1,000 a year for 18 years? That’s half of what the 18-year-old saved. That infant, after saving only $18,000, would have more than $2.2 million upon retiring at age 70. Talk about a cure for Social Security!
But, that’s a story for another day.
Christopher Carosa, CTFA, operates a registered investment adviser headquartered in Mendon. He is the author of five books, including his latest, “Hey! What’s My Number?—How to Increase the Odds You Will Retire in Comfort.” And, yes, his three children all started their IRAs when they were teenagers.
6/19/15 (c) 2015 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email email@example.com.