How to make sure your child doesn’t need Social Security

Social Security has played a crucial role in supporting the elderly and disabled since the program’s inception in 1935. However, it is often not enough to provide beneficiaries with a comfortable retirement; many are struggling to make ends meet in an economy that is currently experiencing rising costs of living.

Giving your kids a head start on financial security is one of the best things you can do for them. This is why parents should consider helping their children start saving for retirement, and a great tool for doing so.

Recipients are struggling today

According to the Social Security Administration (SSA), approximately 37% of older men and 42% of older women depend on Social Security benefits for 50% or more of their income. About 12% of men and 15% of women depend on it for 90% or more of their income. In other words, Social Security is a basic system of financial support for many retirees in the United States.

Two people with worried expressions review paperwork at a table.

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However, it is not necessarily a sound system in and of itself. Social Security does a lot of good things for the elderly and disabled, but it’s often not enough. The average monthly SSA benefit for retired workers was $1,669 in June, for a yearly total of $20,028. That’s the equivalent of working full time for $9.62 an hour.

Today, the average renter pays $1,326 per month, which isn’t even included in utilities, food, transportation, unexpected medical care, or other expenses. Not having a secure retirement threatens to put financially vulnerable people at risk of harm or hardship.

things could get worse

It’s hard enough making ends meet for yourself, but the generations behind you might have it even harder. The most recent Summary of Trustees Report indicates that the Old-Age and Survivors Insurance Trust Fund (OASI) reserves, which finance benefit payments, could be depleted by 2034. Social Security would not go bankrupt; benefits would depend solely on incoming payroll taxes. The report estimates that incoming payroll taxes would fund 77% of benefits, and that would drop to 72% by 2096.

This indicates that the program will have difficulty covering projected outflows as it is currently structured. Of course, the government could do something from time to time to increase funding, but that’s just hoping something happens. Meanwhile, Social Security isn’t doing the job on its own to begin with.

The US population is slowing to its lowest growth rates in decades as people have children later in life, and fewer. Fewer people working and paying payroll taxes could also hurt the OASI fund’s finances if that trend continues. Ultimately, it’s a good idea to use the power of compounding returns to set your children up for financial security when they retire.

Set up your children with a Custodial Roth IRA

If you start early enough, setting aside money for your child doesn’t have to be a substantial financial commitment. A Custodial Roth IRA is a great tool for the job. It works like a typical Roth IRA, except it can be set up for a child and is transferred to their control once they reach the appropriate adult age, often 18 or 21, depending on where they live.

Baby drinking a bottle of formula.

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There are some rules to follow; For example, a child must have earned income to use a custodial Roth, so custodians must keep track of the child’s earnings if they don’t file an annual tax form. The Custodial Roth also has the same contribution limits as a regular Roth IRA, which is capped at $6,000 per year.

Any adult knows how life works: A lot happens to kids throughout their school and college years, and most don’t even think about retirement until they’re in their 20s and 30s. However, starting early can have a tremendous impact later in life.

If you open a custodial Roth account when your son is 15 and contribute only $100 per month with a 9% annualized return, that account would have $1.3 million at age 65. that’s almost 15 times the average value of the retirement account of people over 65 years of age. Let’s say the person waited until age 30 to start saving; they would need to contribute $400 a month to get the same $1.3 million at age 65.

You don’t need a massive income to prepare your children for their golden years if you start early enough. Encouraging your children when they are too young to think about retirement is one of the best things a parent or guardian can do for a child.

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