We all hope for a long, healthy life, but—from a financial standpoint—the length of our lives may be starting to get out of hand. One projection from the U.K.’s Office of National Statistics estimates that more than 30 percent of the nation’s children born after 2011 will reach age 100. That means that for every couple that reaches age 65, more than half will have least one partner live another 35 years.
If today’s children continue to retire at what we currently consider a “normal” age, many could spend almost as much of their life in retirement as they spend working. Since a majority of U.S. citizens already face insecure retirements with current financial planning norms, extended longevity may become an overwhelming monetary challenge.
One solution to the problem may lie in changing when people begin to plan for retirement. A few extra years of growth can have a massive impact on the value of a retirement account. If we can train today’s children to make good financial decisions earlier in life than most adults do now, they’ll be better able to handle the cost of an extremely long retirement.
But it’s today’s adults who will need to teach them.
In general, adults usually impart their financial habits to children—whether they mean to or not. Kids are observant, and adults’ financial decisions can imprint upon them easily. However, retirement planning, though essential, is an obscure subject. Children get to see how adults spend their money, but they don’t often see how they save it.
Obviously, trying to lecture a young child about 401(k)s and investment strategies won’t be helpful to anyone, so adults will need to take a more basic approach. By teaching children the underlying principles of saving, planning and money growth, you can turn their future financial decisions into a matter of obvious choices.
Getting Kids to Learn
Though teaching financial habits takes more than a piggybank, it’s still a great place to start. Providing a younger child with both an allowance and savings goals is a great way for them to practice budgeting. Help the child set goals that are simple and attainable; if they set an ambitious goal, offer to help them by covering the difference if they reach a significant percentage of the total value.
But saving alone isn’t enough: children need to understand that value can grow over time. This can be taught by providing them with interest: offer a small amount of money for each dollar they saved from their last allowance. They’ll quickly learn that by forgoing some immediate gratification, they can reach their savings goals even faster.
Later on, you can reverse this process to teach a child about debt. Allow them to borrow money from you for a small purchase, but plainly explain that they’ll have to pay the money back with interest. When they hand their money over to you later, it becomes a golden opportunity to explain how debt means paying extra.
If you prefer a more direct route of education, there are numerous online resources to help teach kids about money and smart planning—one of the most interesting examples being Warren Buffett’s own online cartoon series “Secret Millionaires Club” (www.smckids.org).
As a child grows, help them get the ball rolling on retirement planning. Our team at GuideStream Financial would be glad to help them take some first steps. We can help you explain the importance of planning ahead for retirement and avoiding heavy credit debt (especially during college). Financial maturity doesn’t happen overnight, so stay patient and don’t try to cover everything all at once.
Remember that past performance may not indicate future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, strategy, or product referenced directly or indirectly in this newsletter will be profitable, equal any corresponding historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. You should not assume that any information contained in this newsletter serves as the receipt of personalized investment advice. If a reader has questions regarding the applicability of any specific issue discussed to their individual situation, they are encouraged to consult with a professional adviser.
This article was written by Advicent Solutions, an entity unrelated to Guidestream Financial, Inc.. The information contained in this article is not intended to be tax, investment, or legal advice, and it may not be relied on for the purpose of avoiding any tax penalties. Guidestream Financial, Inc. does not provide tax or legal advice. You are encouraged to consult with your tax advisor or attorney regarding specific tax issues. © 2014 Advicent Solutions. All rights reserved.