“Invest early and often” is a message that seems to be landing on unresponsive ears, at least among those in the best position to do it. Only 26 percent of adults under age 30 own stocks, according to bankrate.com, and those that don’t are missing out the most fruitful years of compounded earnings. If a 22-year old invests an initial $2,000 and adds $100 a month to an account earning a 6.5 percent average annual return, the pot would grow to $296,031 by age 65. If savings doesn’t begin until age 40 the account shrinks to $82,401.
As the holiday season approaches gift givers can help give children or grandchildren get a jump on saving for retirement or other goals with a variety of financial gifts to fit every budget.
One way to get the ball rolling is to open a Roth IRA, which allows for non-deductible contributions and tax-free earnings growth. This makes them ideal for grandchildren, who are likely to be in a lower tax bracket now than in retirement.
For those under age 59 1/2, withdrawal of contributions at any time is always tax and penalty-free. After five years, earnings receive the same favorable treatment if used for specific purposes, such as qualified education expenses or a first home purchase (up to a $10,000 lifetime maximum). Because Roth contributions are limited to earned income, be sure the recipient will be making at least as much as the contribution. The contribution limit for 2018 is $5,500 for single filers under age 50 earning less than $120,000.
Minimum investment: Depends on the financial institution. Many have no investment minimum or a very small one.
Regardless of whether you’re investing in a Roth IRA account, a number of investment options require a modest investment. These include:
With target date funds investment managers craft an asset allocation and investment strategy with mutual funds around an anticipated retirement year, so the younger someone is the further off the date. Target date funds for someone with 30 or more years left until retirement are likely to consist mainly of stock mutual funds, and shift to a more conservative mix as the investor gets older. A good option that gets consistently high marks from fund evaluator Morningstar and carries ultra-low expenses is Vanguard’s Target Retirement series.
Minimum initial investment: Depends on the fund. Vanguard’s Target Retirement funds have a $1,000 initial minimum, which is fairly typical.
These are automated investment services that use exchange-traded funds to put together an investment portfolio based on factors such as age and risk tolerance, and they usually include automatic rebalancing and tax loss harvesting for taxable accounts. Two of the more established players in this area are Betterment and Wealthfront. Both Wealthfront and Betterment charge a 0.25 percent annual management fee.
Minimum investment: Wealthfront has a $500 minimum. Betterment has no investment minimum.
This alternative is for people who want to introduce a younger investor to the stock market without the commitment of opening a traditional brokerage account. It allows you to buy an e-gift of stock or a physical gift card for shares in almost 1,000 companies, including such well-known names as Apple, Coca-Cola, and Google. Fees are determined by both the size and form of the gift, and are similar to those of traditional gift cards such as Visa or American Express.
Minimum purchase: $10.
Another no-fuss alternative for smaller investors with a more conservative investment mindset is good old U.S. Savings Bonds. Series EE Bonds issued since 2005 carry a fixed rate for the life of the bond, and current new issues are yielding a paltry 0.10 percent. A better bet now is Series I Bonds, which have a variable rate of interest that consists of a fixed rate, which remains the same over the life of the bond, and an inflation rate, which is pegged to the Consumer Price Index. The two rates are added together to calculate the composite rate assigned to the bonds, which is 2.83 percent through April 30, 2019. The value of the bond will never go down and any tax on the interest is postponed until redemption unless the owner chooses to report and pay the interest each year. Because they are U.S. Treasury securities the interest is subject to Federal income taxes, but not to state and local taxes. For more information on giving savings bonds as a gift, visit savingsbonds.gov.
Minimum investment: $25
For young adults with substantial higher-cost unsubsidized Federal loans or private loans for education, helping with student loan debt might be the most appreciated financial gift of all. In fact, according to a survey last year by Discover Bank, over 60 percent of parents say they are likely to help children repay at least a portion of their student loan debt. This gift can take the form of monthly payments for a specified amount of time or a lump sum that can help whittle down the total debt more quickly.
Minimum investment: Whatever you feel like giving.
Financial gifts may not elicit the bright smiles of, say, a fully funded vacation. But in the long run, they will give recipients a more solid financial footing and a better understanding of how investing works.
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