Forget college -- banks are offering parents ways to save for their kids' retirement

IRAs for Kids

You've probably heard that it's never too early to start saving for retirement.

The new "Roth IRA for kids" hammers that point home.

Fidelity is the latest on the list of major banks like Charles Schwab and Vanguard who offer retirement-savings products for kids under 18, reports Dan Kadlec at TIME.

The "Kiddie Roth IRA" is a custodial account, where parents maintain control and children are the beneficiaries of investments that grow tax-free.

"I think it's an awesome way to give a head start to your kids," financial planner and founder of XY Planning Network Alan Moore tells Business Insider. "If you can put some money in when they're 16, by 65 it will be substantial savings. Compound interest is a wonderful thing."

He's referring to the fact that since retirement accounts are invested, not stored in a regular savings account, savings earn interest — and then that interest also earns interest, so the balance grows exponentially over time. The longer you can leave your money to grow, the better, which is why a few extra years at the outset of saving for retirement have more impact than a few extra years at the end.

However, Moore notes, a kid-friendly IRA has existed for some time.

"It's not new," he says. "It's just a marketing title on Roth IRAs — it's not different than anything we already had." He points out that these custodial accounts have the same rules as any other IRA: The parent has to open it for a minor and keep control over it until the beneficiary turns 18, account-holders (in this case, kids) can only contribute up to the income they earn — and they must be earning something — and contributions are limited to $5,500 a year in 2015/2016.

TIME notes that prior to this offering, Fidelity in particular did not allow retirement accounts for minors.

While he doesn't anticipate custodial IRAs necessarily taking off, Moore has found that some parents like to "match" their child's earnings from a summer or weekend job by letting the kid keep the cash, and depositing the equivalent amount in an IRA.

The fact that custodial, "kiddie" IRAs aren't brand new to the market doesn't mean they're without merit. "Parents often ask how to give more money to their kids," Moore says. "If people are looking for a way to jumpstart their kids' savings, this is awesome."

But, he cautions, if you want to open a custodial account for your child, you have to know that your kid is well-educated enough not to make a major misstep with the money. "At 18, they get access to the account and can drain it if they want," he cautions. "In my experience, 18-year-olds don't usually understand taxes and penalties. You have to be sure you're clear: This money is for retirement, not for college or for buying a house. If you're educating them and having those conversations, I think it's a great way to help them out."

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Forget college -- banks are offering parents ways to save for their kids' retirement
After decades of accumulating enough money to retire, it can be psychologically and emotionally challenging to spend down that money and watch your nest egg get smaller each year. "They are going to feel like they spent a lifetime accumulating this pile, and the idea of spending this down is just repulsive to them," says Alicia Munnell, director of the Center for Retirement Research at Boston College and co-author of "Falling Short: The Coming Retirement Crisis and What to Do About It." "For anyone who is retiring, I would give them permission to spend their money," she says.
Saving enough to retire is not your final goal. You should also develop a plan to make that money last the rest of your life. "You need to understand how you can minimize your risk in the portfolio, but you also need a component of that strategy that gives you growth because you need to stay ahead of inflation and taxes," says Laura Mattia, a certified financial planner and wealth management principal for Baron Financial Group in Fair Lawn, New Jersey.
Social Security is a significant source of income for most retirees. Almost all retirees (86 percent) receive income from Social Security, and Social Security payments make up at least half of the retirement income of 65 percent of retirees and comprise 90 percent of retirement income for 36 percent of retirees. "Most seniors do not have much income other than Social Security," says Nancy Altman, co-director of the Strengthen Social Security coalition and co-author of "Social Security Works! Why Social Security Isn't Going Broke and How Expanding It Will Help Us All." The average monthly retirement benefit was $1,282 in December 2014.
High medical care bills don't go away once you qualify for Medicare. Although Medicare covers a large amount of the medical treatments older people need, there are several popular services that it doesn't. For example, Medicare won't cover routine eye exams, eyeglass, dental care or hearing aids. And Medicare only covers up to 100 days in a nursing home. Retirees who require additional long-term care will need to find another way to pay for it. And while many preventive care services are covered by Medicare with no cost-sharing requirements, if something concerning is found, additional tests and procedures will be considered diagnostic, and copays and coinsurance are likely to apply. "You really need to understand what health benefits you can receive from Medicare and check how it will cover any ongoing health issues," says Christopher Rhim, a certified financial planner for Green View Advisors in Norwich, Vermont.
Without a job to go to every day, you could find yourself spending an increasing amount of time alone. Some 44 percent of Americans ages 65 and older live alone, according to U.S. Census Bureau data. Unless you sign up for a volunteer position or make an effort to socialize on a regular basis, you could become bored and lonely.
If you outlive your spouse or divorce, you might find yourself single again in retirement. While just over half (55 percent) of Americans age 65 and older are married, the rest are widowed (28 percent), divorced (12 percent), separated (1 percent) or never married (5 percent), according to census data. Some of these single seniors begin meeting new people and dating. There are a variety of online dating services that cater to people over 50.
As attractive as it sounds to move to the Sunbelt, most retirees don't relocate for retirement. Only 5.7 percent of Americans age 65 and older moved to a new residence between 2009 and 2013, and the people who do move most often relocate to the same state and even the same county, the Census Bureau found. Only 1 percent of retirees moved to a new state, and just 0.3 percent went overseas. Relocating to a new community in retirement often means leaving behind family and a support system that can be difficult to rebuild in a new place.
While the act of aging is an expected part of retirement, the loss of independence typically isn't as welcome. There may come a time when you can't drive, shovel your own walkway or climb on a chair to change a light bulb. You may even eventually need help with meals and bathing. Although the beginning of retirement is often full of fun and adventures, it's also a good time to make contingency plans for later down the road when you might not be able to care for yourself.
Retirees spend over half of their leisure time watching TV. Seniors ages 65 to 74 tune in for 3.92 hours on weekdays, and those 75 and older watch TV for an average of 4.15 hours each day, according to the 2013 American Time Use Survey by the Bureau of Labor Statistics.
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