Retirement Insights

News and information for current and future retirees.

We Have $7,000 to Invest for Our Grandchild

My 5-year-old granddaughter received a small amount of money—$7,000—from a settlement of an estate. What would be the best way to invest this to get the maximum amount of return for her? A little background: Her father (my son) is deceased, so my husband and I feel it’s up to us to save for her future.

Answer:

First and foremost, our condolences for the loss of your son. Thinking about the future of his daughter is a wonderful way to secure his legacy, and now is the perfect time to get started.

Financial advisors often talk about the advantages of starting to invest in your 20s, as opposed to your 30s or 40s. For example, if you start saving $250 a month at age 20 all the way to 65, assuming 8% returns a year, you’ll end up with over $1.2 million. But if you wait until 40 to start, that figure will be almost a million dollars less.

Starting an investing career at five? Now that’s a real game-changer. And it will have ripple effects for the rest of her life.

There are two basic questions here: What kind of account to choose, and then what to invest in?

For flexibility: A custodial brokerage account

You could stick to bank products such as high-yield savings accounts, which are currently offering juicy returns in the 4% to 5% range. 

But if you want something with real long-term growth potential, you’re probably looking at a brokerage account—a “custodial” version until your granddaughter comes of age between 18 and 25, depending on the state. That means it’s under her name, but you are in control of the account and any trading for now.

Within that account, with such a long timespan ahead, you should be considering equities. The S&P 500 index, for instance, has averaged roughly 10% annual returns since inception in 1957. Based on that level of gains, your granddaughter’s $7,000 could grow to $47,092 in 20 years.

Individual stocks carry a fair amount of risk, so a well-diversified, low-cost mutual fund or exchange-traded fund is the smart path to choose for a large portion, or even all, of this money.

“The simplest, and most cost-effective approach would be to invest in a single broad-based index fund that provides your granddaughter with diversified exposure to the global stock market,” advises Taylor Schulte, a financial planner and CEO of Define Financial in San Diego. 

One example from Schulte: Vanguard’s Total World Stock Fund (ticker VTWAX), which gives you a slice of almost 10,000 publicly traded stocks around the world.

There is potential for volatility here, of course. For all we know, the stock market could crash tomorrow. But the point is that with so many decades of life ahead, your granddaughter will have more than enough time to make up for any dips along the way.

For her education: A 529 plan

If you want these funds to be education-specific, you can also open a so-called 529 savings plan. You own the account yourself, but can name her as the beneficiary. Such vehicles offer tax-free growth on future withdrawals as long as they are used for educational purposes.

“A 529 account could make sense for your granddaughter’s K-12 or college education,” says Autumn Knutson, lead financial planner for Styled Wealth in Tulsa, OK. “But a taxable brokerage account may make more sense if you wish to keep the funds flexible.”

Most 529s operate with a college “target date” in mind: Her investments would consist largely of equities right now, and then shift over time into safer holdings such as bonds and cash.

Just remember that if that money needs to be used for purposes other than education, you will likely pay some penalties to get it back out, with one major exception. Because of new laws, if some of that money goes unused, you can eventually roll up to $35,000 into a Roth IRA instead.

Down the line: A Roth IRA

If you really want to think long-term, consider a retirement account such as an individual retirement account, or IRA. The challenge here is that the account holder needs to have earned income. As bright and enterprising as she may be, five is a tad young for that.

But once she hits her teenage years and starts earning some money—even if it’s just babysitting, dog-walking or mowing lawns—you can absolutely start thinking about a Roth IRA for her. 

“I would choose a Roth over a regular IRA,” says Carolyn McClanahan, a financial planner with Life Planning Partners in Jacksonville, Fla. A Roth takes after-tax contributions, but then you don’t have to pay a penny in taxes for future retirement withdrawals. “The tax-free growth on that could be huge.”

The rule is that she (or you) can contribute up to 100% of her earnings, up to an annual maximum (for 2024 that’s $7,000). So if she earns $1,000 in a year as a teen, up to $1,000 can go into her Roth.

Let’s game this out: Perhaps you put most of her estate settlement in a custodial brokerage account for now, and then use the remainder to start a 529 plan. Then a decade down the line, when the balance in the taxable brokerage account has presumably grown and she has started taking some odd jobs, you can earmark some of those proceeds to start a Roth IRA.

Now she has three investment accounts—while still just a teenager—setting the table for an excellent start in life.

READ @WSJ.COM

ways to give your grandkids money without sacrificing your retirement savings

Offering financial support to a grandchild can be one of the most rewarding parts of being a grandparent. But when that generosity comes at the cost of depleting your own retirement savings, the prospect becomes a lot less compelling.

But it doesn’t need to be such an either/or proposition.

Happily, a little research yields plenty of creative ways to provide for the next generation beyond dipping into your own hard-earned savings.

The alternatives include everything from special investment strategies to estate planning to savings plans that let you save for your loved ones on your terms. In short, there’s a whole host of options that make the ability to help out a family member feel like a positive again, instead of a mandate to sacrifice your own comfort and stability for theirs.

Legacy Financial Advisors’ Kathryn Amorello has several suggestions for the best ways to support your grandkids.

1. Contribute to a 529 plan

If you know that you specifically want to support your grandchild’s education, there’s no better way to make that happen than by investing in a 529 plan. Named after the section of the Internal Revenue Code that authorizes them, a 529 is an investment account that allows your money to both grow and be withdrawn tax-free. (So long as it’s used to cover college expenses like tuition, board, books, and other necessary supplies.)

The plans are state-sponsored, meaning your area will have its own unique options and investment structures. But in the majority of states, contributing to a 529 will earn you a deduction on your taxes, and annual contribution limits are often quite high. (They begin at $235,000 for some states.)

However, it’s important to note that any contribution to a 529 is considered a “gift” by the Internal Revenue Service, so those hoping to avoid the gift tax will want to keep their contributions under $17,000 a year. (Setting up automatic monthly deposits means your money can grow out of sight and out of mind.)

Or, if you have the funds available and you prefer, you can deposit a lump sum upon opening the account; you just won’t be able to contribute again for a few years.

Amorello is a particular proponent of the 529 plan for its flexibility, noting, “Contributing to a 529 Age-Based Investment Strategy gives the grandparents options on how conservative, moderate, or aggressive fund choices should be. As the child nears college age, the balance of investments transitions appropriately, from more stocks to more bonds, in order to help your funds grow predictably.”

Adding to that flexibility is the fact that anyone can contribute to the account and that even if the original beneficiary elects not to go to college or selects a cheaper option than predicted, the beneficiary can be reassigned in order to use up the remaining funds.

2. Write them into your will

The thing about unexpected expenses is that there’s absolutely no way to predict when they’ll crop up. So, one way to make absolutely certain that you won’t end up needing the funds that you set aside for your grandchildren is to write them into your will.

That way, you’ll know you’ve truly set aside all you safely can for your grandchildren without having to grapple with the likelihood of a medical event or stress about the penalty for an unplanned withdrawal from, say, a 529 plan in the process.

It’s like they say on airplanes: Put on your own oxygen mask before attempting to help anyone else. If you run out of retirement money during the course of your life, it doesn’t help anyone — least of all your grandchildren. This is the money that you saved for your retirement, so leaving instructions for its disbursal in your will ensures that you meet that goal before setting another one.

3. Make them your life insurance beneficiary

Along the same lines as recognizing a grandchild in your will, you can also assign a grandchild as your life insurance beneficiary, meaning they would be the one to receive the payout from your insurance company in the event of your death during the covered term.

In fact, many companies let you list multiple beneficiaries who can either divide the payout evenly or receive specific percentages that you set yourself. It’s also easy for you to redesignate the beneficiary, should circumstances change somehow, and you can even specify a contingent beneficiary — a second choice to receive the payout, should your first choice be unavailable.

If you don’t designate a beneficiary, however, the payout will be added to your estate, which opens it up to being argued over by creditors and lenders. And since the whole point of paying into a life insurance policy is to make sure loved ones are financially provided for in your absence, setting a grandchild as your policy’s beneficiary is a no-brainer.

4. Arrange to cover your estate taxes

Speaking of insurance, if you’re a high earner whose estate is going to qualify for estate taxes, Amorello suggests taking out an insurance policy where the funds are specified to pay off those taxes. “That way, it’s no imposition on a child or grandchild’s actual inheritance.”

At current levels, most American families will have absolutely zero interaction with federal estate taxes.

However, some states have their own estate and inheritance taxes, and the federal exemptions are fluid.

But the bottom line is that your insurance is for you, so make sure you’re selecting a policy with fine print and riders that make it work that way: as a cushion between your loved ones and financial hardship.

5. Gift money

Another way to balance out potential estate taxes — which can be as high as 40% — is by gifting money to your grandchildren during your lifetime. Amorello explained: “Gifting money actually can help grandparents lessen their own net worth to lower estate taxes. Because if you’re leaving behind an inheritance, but half of it is going to the estate taxes, that can be a daunting realization.”

She emphasized that if you take this option, it’s crucial to work within federal limits, as gifts exceeding $15,000 per grandchild per year will incur the gift tax. (The donor pays this tax, and it is probably not the way you want your retirement savings eaten up.)

But there are some exemptions to gift tax law: Monetary gifts in excess of $17,000 can remain tax-free as long as they go toward medical or educational expenses and are paid directly to the institution.

6. Do your research

One fail-safe way to help out your grandchildren across the board is by staying up to date on any changes to the law that will affect inheritances. One recent change that Amorello highlighted is buried within the Secure Act, which passed in December 2019 and is intended to help Americans save more and save better for retirement.

You’re probably already aware that the bill made it easier for small business owners to offer retirement plans and raised the required minimum distribution age from 70 1/2 to 72, but you might not have noticed one provision affecting what’s called the stretch IRA.

“Beneficiaries of IRAs used to be able to take income from an inherited IRA over the course of a lifetime, but now there is a 10-year limit,” Amorello explained. Under the new law, anyone who inherits an IRA will have to empty it within 10 years of the death of the original account holder, devastating its growth potential.

As Amorello noted, changes like this one affect income and estate planning across the board, so keeping abreast of them now can help your family avoid a scramble of research and fact-finding during what will already be a traumatic time.

7. Consider a trust

Maybe you’ve mentally ruled out a trust fund, assuming they’re just for the ultrarich, but trust funds are actually an option well worth considering, no matter your income level.

At its heart, a trust fund is an account that gives the grantor control over how and to whom it pays out. Many do require fees to run, and in order to formally set one up, you’ll need to meet with (and yes, pay) an estate attorney. But at the end of the day, what you’re paying for is the assurance that your intentions for your assets will be followed to the letter even after your death, and that peace of mind is priceless.

Establishing a trust fund is a legal way to avoid — or at least defer — taxes, and it can be stocked with a whole range of assets, including real estate, business interests, and even life insurance policies. In essence, it’s a way of consolidating those assets and moving them to heirs swiftly and efficiently without getting the whole process tangled up in the red tape of the probate process.

Amorello specifically recommends a trust for situations where a gradual payout over time might be more ideal than a lump-sum inheritance, like for a grandchild who has struggled with money management in the past.

“A good trust can be very specific about who gets what, when they get it, and how much they can have at a time,” she advised. Much like crafting a will, building a trust gives you the ability to set your own terms for the eventual payout, choosing language that has the best interests of both you and your grandchild in mind.

8. Introduce your grandchild to your financial advisor

You know the saying about giving a man a fish versus teaching him to fish? Nowhere is it better applied than to the practice of building solid money habits.

“Introduce your children and grandchildren to your financial advisor to help them help with saving and planning as soon as possible,” Amorello urged. “A good, family-based practice works with all generations to set everyone up for success. The younger you are when you start working with an adviser, the better off you’ll be in the long run. Especially if you are planning on leaving behind a large inheritance, having a professional guiding your grandchildren toward prudent investment strategies can help grow the funds during a time in their life where they likely don’t yet need it.”

Most schools are woefully lacking when it comes to teaching kids about money management, so tackling that task yourself will likely prove indispensable to your family’s future financial health. Plus, while advisors will take a small fee based on client needs, Amorello noted that most firms will take that fee from the grandparents — the existing clients — to start, turning this invaluable learning opportunity into even more of a gift.

Because ultimately, isn’t that what this is all about? Being able to provide financial support to a grandchild should feel like a gift, because it is. By implementing the suggestions on this list, you can help ensure that that gift goes both ways.

READ MORE @INSIDER.COM

Rethinking Your “Bucket List” In Retirement

As folks approach retirement, they often start mentioning their “bucket list” more frequently. The bucket list is generally an itemized agenda of experiences or achievements that a person hopes to accomplish during their lifetime before they “kick the bucket” or die.

This concept brings to mind the 2007 film “The Bucket List”. In the movie, fate lands complete strangers Jack Nicholson and Morgan Freeman in the same hospital room. They decide to complete a list of things they want to see and do before they die. They go skydiving, drive luxury cars, fly over the North Pole, visit the Taj Mahal, ride motorcycles on the Great Wall of China, attend a safari in Tanzania, visit Mount Everest and the Great Pyramid of Giza, and visit Hong Kong. It was certainly a great list that would warrant the description of “experiences of a lifetime.”

I’ve always been a big fan of being goal oriented and have encouraged clients to jot down a list of their own goals. In fact, a big part of financial planning is determining and refining a client’s objectives in order to implement a strategy to reach those milestones. However, after working with hundreds of clients in retirement, I think many people take the wrong approach to their bucket list. Below is some perspective on this popular retirement concept.

1) Don’t wait until retirement: I don’t believe that people should wait until retirement to check things off their bucket list. In my experience, many people accumulate a list of things they want to do once they are no longer working. Unfortunately, the realities of life may get in the way of that plan. No one knows when they will die or become too sick to do certain activities. It is for this reason that I always encourage clients to do things while they can. If you want to go on a trip of a lifetime, and have the money and time to do it, then you shouldn’t “save” it for retirement. Do it now! If you want to learn a new skill or hobby and can carve out some time during your working years to practice, then you should do it. Unexpected life events occur, so seize the opportunity by tackling some of your bucket list items today.

2) Include a date: A wish list of items with no set date for when you plan to achieve, or work towards, them will likely remain just a wish. On the other hand, if you include a date by which you’d like to accomplish said goal, then you will be more likely to reach it. If you are very serious about certain items on your list, I’d also recommend jotting down a more specific action plan for how and when you will accomplish them. For example, if hiking the 5 highest peaks in North America is on your list, then indicate when you plan to accomplish each peak, but also note when you will buy the appropriate gear and detail a training schedule to ensure that you are physically fit to accomplish these objectives. Goals with no timeline are easier to procrastinate.

3) It should be a living list: People’s priorities and interests evolve over time. That is why a bucket list shouldn’t be written in stone. Things can, and should, move down in priority or even fall off the list as your interests change. For example, you may have wanted to take a cruise around the world in retirement, but now have grandchildren that you prioritize spending time with. Perhaps the world cruise should be deprioritized, modified to something with shorter duration, or dropped entirely. The ultimate goal is living your best life and the definition of “best life” may have changed as you age. Having a bucket list that is fluid can facilitate a guilt free way to reflect changes in your preferences as your life evolves.

4) Many of the best experiences in life are beyond one’s bucket list: We all relish the next big event in our lives, the trip, family celebration, or luxury splurge. However, some of the best that life has to offer takes place in our everyday mundane activities. This may include being able to sit down with your spouse for breakfast without feeling rushed by work. Perhaps it’s babysitting your grandkids or watching a TV show together with your child on a random Thursday night. It can be a pleasant conversation or a laugh you share with a long-time friend. I think as most people look back on life, they will find more joy in these types of ordinary activities than the more exotic entries typically found on a retiree’s bucket list. Appreciating this perspective may be helpful to some as they contemplate their own bucket list.

READ @FORBES.COM

Unique Colorful Beaches to Enjoy Around the World

Discover sandy spots in different colors of the rainbow for your next vacation.

The world is full of beautiful beaches, there’s no doubt about that. Though we most commonly think of white sand beaches, which can vary from the whitest white to cream and even golden sands, there are in fact beaches in myriad colors. While most of us will gladly settle for a patch of sand on our favorite beach under the warm sun, let’s take a look at colorful beaches around the world, and how they got to be that way.

Argyle Shore Provincial Park, Prince Edward Island, Canada

The natural beach found within Argyle Shore Provincial Park features striking red sand that’s a direct result of high concentrations of iron oxide found in the cliffs that rise from the coastline. The day-use park is open mid-June through mid-September and is perfect for a waterfront outing, complete with picnic facilities and a playground for the littlest beachgoers. It’s pet-friendly, too, so long as your four-legged friend stays on a leash. When the tide goes out, you may even spot hermit crabs and digging clams foraging for their dinners.

The park is in the aptly named Red Sands Shore region of Prince Edward Island, Canada, where you will find plenty of options for lunch and dinner, and some shopping, too.

Horseshoe Bay, Bermuda

A quick flight from Boston, New York or Atlanta will land you in Bermuda, an island in the Atlantic Ocean off the coast of South Carolina, known for its distinct culture, air of mystery and, of course, pink-sand beaches. Those iconic pink sands, like those found in Horseshoe Bay, are attributed to an abundance of red foram, an invertebrate that grows on the coral reefs found just off the island’s coastline. Red foram skeletons can reach up to 3 millimeters, and when the invertebrate molts as it grows, or dies, the skeletons blend with white limestone sediment to create the pink sands. They provide a bonus: The skeletons help protect coral reefs against erosion.

About 3 miles north of Horseshoe Bay is Southlands Park, 37 acres of natural landscapes, including its own beach, steeped in 300 years of island history. Walk through the grove of banyan trees and feel like you’re in another world.

Poʻipū Beach, Kauaʻi

Snorkeling, swimming, surfing, bodysurfing, bodyboarding and fishing are all popular activities at Poʻipū Beach on the south shore of Kauaʻi. Add to that a natural wading pool, on-duty lifeguards and picnic facilities and it’s the perfect destination for a day at the beach. It’s not only people who enjoy Poʻipū’s golden sands that are a result of coral and seashells broken down by ocean waves — Hawaiian monk seals find it a perfect place to rest, too. And during whale season, December through April, you may just spot humpbacks frolicking offshore.

La Jolla Shores, California

It may seem counterintuitive, but it’s after nightfall when beaches in San Diego occasionally become more colorful. In this part of California, it’s not the sand but the water that takes on a different hue. If you’re lucky, you may glimpse streaks of bright blue in the water, almost as if submerged lights have been turned on to illuminate the waves. It’s not underwater lights that shine, though, but rather bioluminescence, a natural phenomenon involving a type of phytoplankton. Bioluminescence has recently been seen at several beaches in the San Diego area, including Ponto Beach and Torrey Pines State Beach, and other beaches up the Southern California coastline.

Before you catch the bioluminescence after nightfall, spend time exploring the undersea world during the day, while staying dry, at Birch Aquarium.

READ MORE AND VIEW IMAGES @AARP.ORG

According to SHRM, a 2021 Employee Benefits Survey conducted by XPertHR showed that roughly 82% of employers studied matched a portion of their employees’ contributions while the remaining 18% didn’t provide any matches at all.

Source: shrm.org, 2021

Did you know?

Looking for the best beach of 2023?

According to Forbes, the best beach of 2023 was St. George Island State Park, the Florida Panhandle. This long barrier island, far from urban areas, is a favorite destination for crystal-clear water and white sand. 

Source: Forbes.com, May 2023

On the Bright Side

Investment Advisory Services offered through Trek Financial LLC., a (SEC) Registered Investment Adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed, and past performance is no guarantee of future results. For specific tax advice on any strategy, consult with a qualified tax professional before implementing any strategy discussed herein. DISCLOSURES

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