When you are fully focused on career advancement or raising children, valuable retirement planning time quietly slips away. In the backdrop of high inflation and constantly rising living costs, how do you plan to allocate funds for retirement or for your children? And how should you start investing for your children?
A savvy investor can early on formulate a strategic plan to ensure a worry-free retirement life. When you are busy managing various priorities, you may find it increasingly challenging to save for retirement or even for your children after dealing with everyday expenses. In fact, you are not alone. Currently, approximately 55% of American citizens are behind on retirement savings.
You may have heard financial experts emphasize more than once: “Start saving for the future as early as possible.” So, how exactly should you allocate funds between short-term goals, investing for your children, and retirement goals?
We have prepared a comprehensive beginner’s guide to investing for you, helping you simultaneously address these financial priorities.
This is a question involving millions of dollars. How long do you expect your lifespan to be? 70s? 80s? Even 90s? How many years of expenses do you plan to save for?
Since you cannot arrive at an exact answer, you must save for an unknown lifespan, right? This requires you to have basic knowledge of obtaining continuous income from potential avenues. In addition, investment experts would advise you to invest in accounts that generate compound returns, making it more likely for you to accumulate sufficient savings for retirement.
Considering that the inflation rate is slow to drop below 6%, starting to save for a high-consumption lifestyle is logical. Through strategic investments, you can prepare for rising expenses over the next few decades.
Furthermore, as retirement approaches, some ongoing expenses (such as childcare fees and mortgage payments) may diminish. When calculating expenses, be sure to take into account factors such as Social Security benefits, rental income, and other expenditures.
When calculating retirement savings, do not overlook the following expenses:
– A typical couple in retirement needs about $295,000 for healthcare expenses.
– Daily expenditures such as transportation, clothing, and food.
– Entertainment expenses such as movies, theater, or dining out.
– Travel expenses such as hotel accommodations, airfare, and fuel costs for self-driving.
– Premiums for life and health insurance.
In the past, Americans could comfortably retire with $1 million, but with inflation and rising living costs, this figure is approaching $2 million.
Fixed contribution plans such as 401(k) and 403(b) are currently the most popular workplace retirement schemes. If you are an employee, you can inquire about these plans from your employer. Employees typically have individual accounts in company plans, where deductions are directly transferred from wages into the account.
These plans have been in existence since the early 1980s. In 2019, over 85% of the Fortune 500 companies offered fixed contribution plans rather than other pension plans.
Among various fixed contribution plans, local and state governments typically utilize the 457(b) plan. If you are under 50 years old, you can contribute $22,500 annually, while those above 50 can contribute $30,000.
There is also the Roth version (Roth 401(k)), where you can contribute with after-tax funds that can be withdrawn tax-free during retirement. If you expect your tax rate at retirement to be higher than when you made contributions, opting for a Roth account is more cost-effective.
The US government has established valuable retirement plans for citizens. In 2023, workers could contribute up to $6,500 to an IRA account, with a limit of $7,500 for those over 50.
Americans can open IRA accounts through brokerage firms, banks, and other financial institutions, using them for savings in bonds, cash, mutual funds, and stocks.
Generally, you can choose from seven types of IRA plans. Tax regulations vary based on the plan you choose.
Common IRA plan types include:
– Traditional IRA
– Spousal IRA
– Roth IRA
– SEP (Simplified Employee Pension) IRA
– Rollover IRA
– SIMPLE IRA
Solo 401(k) is a popular retirement account suitable for business owners or self-employed professionals without full-time employees. The Solo 401(k) plan offers benefits similar to traditional 401(k) plans in some aspects but also has differences. Moreover, these plans can provide retirement security for business owners and their spouses.
In 2023, the employee contribution limit for a Solo 401(k) plan was $22,500. Those 50 and above had higher contribution limits of $27,000 and $30,000, which can amount to 100% of their total income.
Since self-employed individuals are both employers and employees, the total contribution limit can reach $66,000; for those 50 and above, it can reach $73,500. Funds in the account can grow tax-free.
As your company is unlikely to provide Guaranteed Income Annuities (GIA) that promise a fixed income stream, creating such an account for yourself is a wise move. These annuities can provide a guaranteed income similar to a pension. Therefore, if you don’t have a regular pension plan, GIAs are meaningful.
When nearing retirement, you can purchase Immediate Annuities so you can receive a fixed monthly payment for the rest of your life. This requires a lump-sum payment. However, some people prefer to pay for these annuities in installments over a period.
Therefore, if you plan to retire at 65, you can start contributing towards GIAs from the age of 50. GIAs can be purchased under a post-tax regime, so the contributor only needs to pay taxes on the portion of these plans’ earnings. Another way is to establish GIAs within an IRA to enjoy pre-tax deductions when making contributions. However, when you withdraw funds, you must pay taxes on the entire annuity amount.
If you are a government employee or serve in a uniformed force for community service, then the federal Thrift Savings Plan (TSP) is worth considering.
There are five low-cost investment options:
– International stock funds
– Small-cap funds
– S&P 500 index funds
– Bond funds
– Government securities fund (specifically issued)
Federal employees also have the privilege of choosing from multiple lifecycle funds within the TSP. These funds have different target retirement investment dates in the core funds, aiding in making wise investment decisions.
Employers can contribute up to 5% to the federal Thrift Savings Plan.
Now that you have understood the avenues for retirement savings, let’s delve into the most practical strategies for saving for your children. Whether it is for your children’s college tuition or to ensure they have a decent life as adults, continuous financial planning is a prudent move.
Did you know that 53% of those relying on student loans regret seeking this financial convenience from banks?
Options for investments that can be made for children when they are minors are limited. As a responsible parent, your decisions in this regard will impact your children’s financial stability in the future. Thus, it is imperative to start investing when your children are young to leverage the advantages of compounding. This way, they can avoid costly education loans or other financial burdens.
Based on different criteria, we have selected the most suitable investment accounts for your children.
If you wish to open a savings account for your child that has no age restrictions, a Custodial Roth IRA should be your top choice. Any child of any age with earned income can contribute to this account. The account’s contribution limit is either the child’s earned income or $6,500, whichever is lower. Importantly, your child can withdraw contributions tax-free and penalty-free at any age.
Generally, a Roth IRA is a personal retirement account where you can contribute with after-tax income. While minors can hold a Custodial Roth IRA, the account needs to be managed by parents or guardians.
However, there is a precondition: the income must be earned by the child themselves. Common ways for children to earn money include tutoring, house-sitting, or blogging.
For your child to withdraw earnings and contributions from the account tax-free and penalty-free, they need to hold the custodial account for at least five years and wait until they turn 59.5. Additionally, before retirement, they can make a one-time withdrawal of up to $10,000 for expenses like buying a house.
For parents looking to open a savings account for education expenses for their children, the 529 College Saving Plans are worth considering. There is no limit to contributions in these plans, and anyone can open them.
The savings accumulated in these plans can be used for educational expenses, including repaying up to $10,000 of student loans and funding apprenticeship programs. Depending on your state, you may also enjoy deferred tax, tax benefits, deductions, and tax credits. 529 plans are divided into two types:
– Prepaid tuition plans: Allow you to purchase college credits at current prices for future use by your child.
– Education savings accounts: Accumulate funds in the account and invest them in the market, such as in exchange-traded funds (ETFs) and mutual funds.
You can withdraw amounts from these accounts tax-free if they are used for qualified educational purposes.
Parents who wish to have more flexibility in managing savings accounts for their children may opt for UGMA/UTMA trust accounts. Through these savings plans, parents gain better control over how their children use the funds.
Parents also have the ability to diversely invest funds in various asset classes within these trust accounts, such as mutual funds, stocks, or bonds. These investments help address the continually rising costs of their children’s education. Unlike other investment accounts set up for children, these accounts are simpler to establish and manage.
UGMA/UTMA trust accounts do not have specific annual contribution limits. However, individuals who contribute more than $17,000 annually or married couples who jointly file taxes and contribute more than $34,000 will incur federal gift tax.
While contributors cannot initially benefit from tax breaks, the account earnings can enjoy a federal income tax exemption of up to $1,250. Additionally, $1,250 of earnings is taxed based on the child’s tax rate, which is usually lower.
Though these accounts are opened by guardians or parents, children can take control of the accounts between the ages of 18 and 25. Compared to 529 plans, a unique advantage of these trust accounts is that children can use the funds for expenses beyond education, such as marriage or home buying.
Certificates of Deposit (CDs) remain the safest investment choice for first-time child investors, as each account is insured by the Federal Deposit Insurance Corporation (FDIC) with a maximum coverage of $250,000. CDs provide higher interest returns through compounded growth compared to traditional savings accounts.
If children are under 18, parents or guardians must open accounts for minors in the form of custodial accounts. However, CDs have fixed maturity periods, and early withdrawals may incur extra charges.
No tax is due if children’s income derived from the account’s dividends, interests, or other earnings is below $1,250. Income between $1,250 and $2,500 is taxed based on the child’s tax rate, and any portion exceeding this amount is taxed based on the parents’ tax rate.
As the custodian of a CD, you can contribute up to $15,000 annually for your children without having to pay gift tax.
The secret to meticulous financial planning lies in maintaining strategic positioning while setting short-term, mid-term, and long-term goals. By beginning to invest for your children, you are already a true investor. As an investor, you have the right to choose from numerous options, whether for your retirement or for saving for your children.
Each type of investment account comes with its specific tax implications. Adopting a thoughtful savings strategy to prepare for your and your children’s futures will ensure a worry-free retirement life.
This article was originally published on Due blog website and has been authorized for republication by The Epoch Times, titled “Start Investing for You, Your Kids, and Your Retirement.”
Copyright © 2025 by The Epoch Times. This article represents the author’s views and opinions and is for general information reference only, without any intention of recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or other personal financial advice. The Epoch Times does not guarantee the accuracy or timeliness of the article’s content.