The following story swathes several crucial financial topics – the importance of an early start to investing; the time value of money; family governance; and the power of compounding. Each of these topics are integrated into the Wealth Management services in which we advise our clients. Here at the Trust Company, we are called upon to explain complex estate planning, investment philosophies and the management of financial goals. From time to time, however, we learn clever and intelligent ideas from our very wise clients, and that is what I am sharing today.
A gentleman with whom I worked offered an idea that is simple, and yet very effective in assisting a young person to begin the journey of saving and investing. This gentleman had a grandson who was working in a summer job – not earning a great deal, but his grandfather was proud of the work ethic that was being established. To encourage the young man, he met his grandson after the boy had received a W-2 for his past summer’s work. The grandson had earned a little more than $3,000 – and the grandfather took him to open a Roth IRA. As a reminder, a Roth IRA is funded with after-tax dollars and grows tax free. Completely tax-free withdrawals can start at age 59 ½, and a worker may contribute 100% of earned income to a Roth, up to $6,000.
The grandfather’s gesture prompted the first of many discussions about investing wisely, with the grandfather often reinforcing the concepts of thrift and being responsible with wealth. The grandson enthusiastically embraced the newfound bond with his grandfather, and the two have enjoyed a great many conversations about saving for the future and investing wisely. Stock ideas and financial markets became a staple of their mutually enjoyable conversations.
Several years passed with the grandfather making additional gifts to the Roth IRA in amounts of $3,000, $3,500 and $4,000 for a total contribution of $13,500. Another important investment topic now entered the discussion – the effects of compounding. This grandchild was 18 years old at the time of the first gift, and he graduated from college and became fully employed at 24 – at which time he could begin funding a 401k and saving from his own earnings. The mathematical effect of even modest gifts like this can be astounding – not because of high rates of return but because of time. Young investors possess the most important ingredient to building a substantial investment portfolio – time. Many of us realize far too late how difficult it is to build investment wealth with little time. Compounding over time has extraordinary impacts – when the grandson reaches age 65, his Roth IRA – earning an average of 8.5% per year – would reach a value of approximately $415,000. Since the grandson is holding a Roth IRA, he will be able to withdraw those assets tax free or choose to pass the account along to his heirs.
The wise grandfather intended to help his young grandchild establish good savings and investment practices. What he would tell me later, is that those small contributions really transformed into much more. First, he built a bond with his grandson that was very meaningful to both of them. They shared ideas and thoughts and discussed results with enthusiasm. They suffered investment declines and celebrated investment victories together.
Making small gifts to a Roth IRA early in a young worker’s life creates the opportunity to share values, opens up topics for discussion and sharing, and is the most tax-effective way of building investment wealth in our planning universe. If you would like to discuss ideas related to planning and family governance, please contact us at sancaptrustco.com.
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About The Tampa Bay Trust Company
The Tampa Bay Trust Company and The Naples Trust Company are divisions of The Sanibel Captiva Trust Company of Sanibel, Florida; an independent firm with more than $3.5 billion in assets under management that provides family office and wealth management services, including investment management, trust administration and financial counsel to high net worth individuals, families, businesses, foundations and endowments. Founded in 2001 as a state-chartered independent trust company, the firm is focused on wealth management services that are absolute-return oriented and performance driven. Each portfolio is separately managed and customized specifically to the client’s yield and cash-flow requirements. Offices in Sanibel-Captiva, Naples, Tampa Bay, Belleair Bluffs-Clearwater and Tarpon Springs. www.tampabaytrustcompany.com
