Passing the Investing Torch

Comments on “Helping Kids and Grandkids Become Investors,” by Craig Israelsen, in the April 2020 AAII Journal:

I am a young investor, and I am very happy that you published an article about investing for kids and young adults. Israelsen wrote in a very simple way, using pie charts and graphs so the information is easy to find and use. My dad [an AAII member] recently helped me set up an account and buy four shares of a Vanguard ETF.

The book I suggest is “Growing Money: A Complete Investing Guide for Kids,” by Gail Karlitz. It helped me to learn about financial reports, stock exchanges, depressions, recessions and types of investments. As a 10-year-old, it feels good to branch off and earn a little bit of money for myself, while still remaining in my comfort zone.
—Samuel Bergin

The article is missing the most important information—minimum age for investing and how to start if your child/grandchild is under the age of 18 or 21 (depending on the state).
—Chris from Texas

Craig Israelsen responds:
Virtually all mutual fund companies allow custodial accounts for children under the age of majority (as you point out, between age 18–21 based on the state you live in). Adults can set up investment accounts for young people using Uniform Gifts to Minors Act (UGMA) accounts or Uniform Transfers to Minors Act (UTMA) accounts.

For my 6-year-old granddaughters, I bought them Disney stock and informed them of the purchase. They did not totally understand, but they understood enough to be excited.
—Tony Hausner from Maryland

When I think about what I wished I had learned at a younger age, there are two more topics not mentioned in this article. One is the “value of money.” As a kid growing up on a farm, I was taught I needed to save money, but I had no idea what for. The other is learning the difference between saving and investing, they are not the same. I wish I had learned to be both a saver and an investor when I was young, I could have really accomplished a lot!
—Paul Thompson

Target-Date Fund Ideas

Comments on “Making the Most of Target-Date Funds Before and During Retirement,” by Chris Pedersen, in the April 2020 AAII Journal:

For years, my employer’s only 401(k) options were target-date funds and a few funds they managed (I work for an insurance company). In 2020, they announced a huge increase of options managed by Vanguard including S&P 500, large-cap, mid-cap, small-cap and international funds. Being 49 years old, I have been struggling to think of a strategy of how to take advantage of our new offerings while not losing the reduced risks that a target-date fund is supposed to provide. Your article provided the advice and formula I was looking for.
—Nathaniel Watson from Pennsylvania

While 401(k) providers and employers continue to steer employees to target-date funds, one approach would be to select a fund with a projected retirement date of five, 10 or 15 years beyond your personal expected retirement date. That would leave a higher percentage in equities for a longer period of time.
—David L. from Utah

This article has the unstated assumption that you have a Roth IRA, rather than a traditional IRA, which will bump into the escalating required minimum distribution (RMD) that at some point will require progressively higher withdrawal rates (e.g., a 4% withdrawal rate is allowed only while your RMD divisor is 25 or higher).
—Dennis L. from Minnesota

Looks like the Roth strategy: Use target-date concept for today’s retirement glide path and use the Roth as a target-date fund for anticipated departure plus five years to cover your kids’ RMD window. A relevant point however is if your Roth/second fund is all in stock and you have a situation like today where there isn’t any room to rebalance the portfolio, i.e., all your money is stuck in the stock market, you’d have no opportunity to buy low!
—Alec Clerihew from New Jersey

Chris Pedersen responds:
Dennis, rebalancing across accounts is a barrier indeed. Fortunately, young investors can often rebalance by just directing new contributions to underrepresented asset classes in the right accounts.

Alec, the article doesn’t assume people have a Roth IRA, but your point about RMDs is still interesting. If someone has an RMD, they have to take that amount out of the account to avoid a tax penalty, but they don’t have to spend it. They could reinvest it. The tax consequence to the distribution is only a fraction of the withdrawal. Only the taxes would count toward the 4% withdrawal rate threshold. Having account-type diversification in retirement savings would avoid being beholden to one set of rules or withdrawal schedules. A taxable account, for example, could be more important to an early retiree, while Roth or traditional IRA accounts are more valuable later.