People love to forward me emails to get my blood pressure up. Last week, it was an email from a reputable organization with the headline: "Make the most of your tax refund; apply it toward a car." I imagine someone in 20 years hauling a 2021 Jeep Cherokee to the retirement check-in registrar and asking, "How much retirement can I get for this?"
A lot of young people have gotten or will soon get a $1,400 stimulus payment. I believe they deserve an email in their inbox, a text message or a phone call. Maybe the starter line would be, "Make the most of your stimulus; open up a Roth IRA."
First, let me hedge this blanket Roth IRA advice. If this is truly an unemployed person living on credit card debt and odd jobs, then that money is intended to help get by and should be spent. If this is a fully employed person who has credit card debt or no emergency fund, then this would be well spent for those things as well.
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But imagine the well-timed advice to an employed young person to start a Roth IRA. First, this is enough money to open up an account and to meet the minimum funds to invest that money. Opening a Vanguard Roth IRA is free, but then to invest in a Target Date Retirement Fund requires a minimum investment of $1,000. This $1,400 gets a young person well over that limit to open the account, fund it and then invest it. The whole process might take less than an hour.
First, a little about the Roth IRA. It is a great retirement tool for young people who don't make much money. Imagine a retirement bucket that allows for a person to deposit money they have paid taxes on and then grow that money over time tax-free. Even if that money quintuples over the course of their working career, they will never have to pay taxes on it again. Roth IRAs are especially powerful for someone young, not making much money, and not owing much in income taxes. It gives them some long-term leverage on their savings.
Back to the job at hand. I see your hesitation. Maybe you started saving early, are retired or very much on track to retire. But every time you tried to talk to your child about saving, he rolled his eyes. In fact, you worry a bit about pestering so much that he might go the opposite direction.
I hereby give you full permission to pester away. In fact, double down on your efforts. It turns out they are listening, even as they roll their eyes. You are normalizing behavior, so in the same way that you made your kid fasten a seatbelt even when he protested or rolled his eyes, you know he will never get into a car in adulthood without buckling up. You set the norms. And I promise, they listen.
Assuming that your child had income that exceeded the $1,400 to make a Roth IRA contribution, here's some language for your email to your son or daughter. "The government will be sending you a check for $1,400 in the next few weeks. It might get auto deposited or sent as a physical check. This could be a great chance to open up a Roth IRA. What do you say we call Vanguard together (or Schwab, Fidelity, etc.) and get one started for you?"
If you don't believe me, take it from Master Ken. He is a 7th degree Black Belt in martial arts and owner of Pine Cove T'ai Chi and Healing Arts in Little Rock, but more importantly he is a dad who up until a few months ago was concerned that his 23-year-old daughter didn't have access to a retirement plan. He talked to her about saving and offered to help set up a Roth. He told me proudly that they set the account last weekend, and she is more excited than he thought she would be. It's been a great bonding experience for the two of them. And imagine the timing of this Roth IRA when she is about to get a large deposit to accelerate her savings.
His daughter doesn't have a workplace retirement plan, so they calculated what 10% of her gross pay is each month and are using a Vanguard Roth IRA that can take contributions directly from her bank account and put that amount in a Target Date Retirement fund.
Let's say you are all in. You have that child or grandchild, niece, nephew or mentee in sight, but there's a problem. You might not have made all the best financial decisions in your life. You are not on track for retirement yourself.
Consider an honest conversation. "The government will be sending you a check for $1,400 in the next few weeks. This could be a great chance to save for your future and get a Roth IRA started. No one ever talked to me about doing something like that, and I don't want you to be in the position I am in now, struggling to figure out my finances. What do you say we call Vanguard (or Schwab, Fidelity, etc.) and get one started for you? I don't know that much about it, but we can figure it out together."
Remember, these investment platforms have people trained to walk you through the process and they can also set up an account online. The steps are simple but let me walk you through a few technical things that will be asked or done so that they don't trip you up along the way.
Connecting a bank account. Sure, you can mail in a check, but connecting a bank account is the magic pixie dust that could make this person a saver. She can make the initial deposit; then have the option to set up a monthly draft from her bank account to the investment account. It can even be auto invested as long as she is using a mutual fund.
Do you want to reinvest dividends? This is the moment that people describe as the breaking point. "Reinvest dividends? What? I can't do this. What's a dividend? What am I committing to here? If I choose the wrong thing, am I agreeing to name my first child Vanguard? Or Dividend?"
This would be a good time to quote Taylor Swift. "You need to calm down." And the answer is "Yes. Reinvest dividends." Keep all money moving forward, investing, and working to her benefit.
Then for the investment. Remember that unlike a regular brokerage account, retirement investments can be bought and sold with no tax consequences, so this is not a lifetime commitment here. You don't have to read 3 books, 10 blog articles and listen to 5 podcasts on investing. That kind of analysis is what causes investment paralysis. Many people use the target date fund option with the year closest to when they would turn 65. For many young people in their 20s that would be the target date of 2060 or 2065. But remember, if you change your mind after you get around to all that reading and listening, it's an easy change.
Finally, they will ask you if they can send you a prospectus, maybe via email instead of mailing statements. Prospectus. What a word. Maybe this is the imposter syndrome moment. "Wait, I am just Sarah Catherine Gutierrez. I am not the kind of person that people send a prospectus to." Hit yes; send it by email.
And after you confirm it all and successfully set it up, lean back in your chair and watch this young person in your life instantly become the kind of person who gets a prospectus. That, folks, is the way to make the most of a stimulus payment.
Sarah Catherine Gutierrez is founder, partner and CEO of Aptus Financial in Little Rock. She is also author of the book "But First, Save 10: The One Simple Money Move That Will Change Your Life," published by Et Alia Press. Contact her at sc@aptusfinancial.com.