The Gift of Time: How to Help Your Children Save for Retirement

Here is an unusual holiday gift idea for affluent parents: a retirement nest egg for your kids. If you are in the fortunate position of having more than you need to support your lifestyle for the rest of your life, investing for someone with an investment time horizon of many decades provides an attractive way to help them build wealth slowly. It is certainly easier than battling traffic to discover that the gift you planned to buy is still on a container ship in the Pacific Ocean! Why not contribute to a Roth or traditional IRA for a child who has earned income but isn’t yet able to contribute to retirement savings due to more immediate expenses? For others, the $15,000 annual gift tax exclusion offers a chance for them to build an investment portfolio over time.

Using time to grow wealth

Our kids have many advantages that we don’t have. They can beat us at tennis, navigate social media apps and remember the titles of the books they have read. They also have the gift of time, and time is a great tool to build wealth.

Young adults have the challenge of funding competing goals:

  • An emergency fund to cover expenses between jobs,
  • Their first home purchase,
  • Maybe kids someday, and
  • Savings to support their lifestyle in retirement.

The last one is the furthest away, so it is often the lowest priority. Yet investing in the broad stock market is a very attractive, low-risk strategy that can be successfully employed, especially for this longer horizon goal.

While the past is never a perfect predictor of the future, it provides a reasonable estimate of the probability of returns. Over the last half century, no one who has invested in the broad U.S. stock market has lost money if they did not touch their investment for 20 years ( see Yale University’s Professor Robert J. Shiller’s data). While this does not guarantee that 20-year investors will never lose, it is a powerful indicator that owning all the stocks in a market represents a low risk for a long-term investor.

Why few investors benefit from 20-year time horizons

Investing well is more than just knowing the statistics. It requires acknowledging that emotions get in the way. Here are a few examples:

1. Economic updates and company press releases – We receive new information daily, tempting us to take action and change our investments. While this daily information seldom provides opportunities to enhance return, we feel a need to take action rather than stay the course. In soccer, when facing a penalty kick (one player, with one shot on goal), goalies prefer to dive to the right or left rather than not move and guard the middle. If they dove to the right and the ball was sent left, at least they chose to take some action. Better a wrong action than no action. However, there is very seldom new information for investors that, if acted on, could add return.

2. Fear Of Missing Out, also known as “FOMO” – Our friends enjoy sharing how much their Apple and Google stocks have appreciated. Even worst, our kids tell us of their Bitcoin and Tesla returns. It is hard avoiding the temptation of chasing single stock or momentary fads for twenty years. Great willpower is required. Odysseus instructed his crew to tie him to the mast rather than succumb to following the Sirens’ song and run his ship aground. While our role as Advisors is not to tie up a client, we strive to help avoid temptations and shipwrecks!

3. A lot can happen in 20 years. We may have been tempted with a “once-in-a-lifetime” investment opportunity. There may also have been a sudden medical emergency or an unanticipated need to buy a house during a pandemic. Committing to a 20-year investment plan time requires the ability to leave investments in the market.

Time works against single stocks

The low-risk 20-year time horizon strategy only works when investing in established stock markets, not single stocks. The value of individual companies can rise or fall dramatically over time. Only two of today’s ten most valuable U.S. companies were in the top ten 20 years ago (see our video blog).

Even if the stock we pick appreciates substantially, it can’t outperform the market forever. Some companies will lose value, as new more nimble competitors emerge. Others will end up growing at the same rate as the market. Owning thousands of stocks eliminates the risk of a random event impacting a single stock. Bad things do happen even to good companies. The stock market represents the present value of future public company profits. Unless there is a material impact on all future profits, markets will appreciate over time.

A lifetime approach to risk

Clearly defining when we may need to draw upon a pool of assets will improve performance. We don’t want our emergency fund to fluctuate from day to day or to discover that it is illiquid when we suddenly need it. Month to month volatility of a portfolio invested in the stock market should be of no concern if we are confident that we will not touch it for decades.

Our three-bucket framework (see our blog) has helped clients allocate assets by risk level and time horizon.

• Early in one’s life, assets allocated to multi-decade goals can have significant exposure to stock markets.

• As we start drawing on our savings to support our lifestyle, we shift to a more moderate level of stock market risk, given that we no longer have the luxury of time to recover from financial losses.

• Later in life, we may find that we no longer need all of our assets for our own spending. Some can then shift to the longer time horizons of our kids and grandkids. This asset pool may benefit from a 20 year plus time horizon and safely be invested in the stock markets.

I have always loved the quote attributed to Yogi Berra,

“You gotta be careful if you don’t know where you’re going, otherwise you might not get there.”

Knowing the time horizon for each pool of assets and your ability to hold to the plan over time will greatly improve your probability of success.

Lex Zaharoff, CFA

Lex joined HTG in 2014. With over 40 years of experience advising wealthy families at four major private banks, Lex provides clients with a unique perspective on the art and the science of investing to achieve one’s financial goals.

As Adjunct Professor of Finance at NYU’s Stern School of Business, Lex teaches the MBA course on wealth management. He has a BSE from Princeton University and an MBA from Harvard Business School.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
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