AARP Financial

Principles for Investing in Your Grandchildren's Future


Grandparents want to support their grandchildren but sometimes struggle to do so in the most effective way possible. While the principles of sound investing are universal, there are some that bear particular attention as it relates to your grandchildren.

Start Early

The first thing to do when you have a new grandchild is celebrate; the second thing you should do is start saving and investing for them. By investing early — and staying invested — your grandchild may reap the full benefits of compounding. Compounding is when any money you earn from your investments is reinvested for the opportunity to earn even more. Obviously, the longer your money is invested, the more time it has to grow.

It's Okay to Start Small

A recent AARP Financial Inc. survey showed that the typical grandparent spent $150 per grandchild over the past year. Think that's not enough to open an investment account? Think again. Investing doesn't necessarily require a large, one-time investment. Mutual funds with a low minimum investment and low subsequent investments make it easy to get started. Start small, think big.

Invest for the Long-Term

Many grandparents reported that when they open an account on behalf of a grandchild, they use a "low return" vehicle like a savings account. By playing it safe, these grandparents risk that their money may not keep pace with inflation — a particular problem when it comes to college costs. To help your grandchild make the most of your financial gift, consider investing in long-term assets, like mutual funds which offer more growth potential.

Be Mindful of Fees

Mutual fund fees and expenses diminish your earnings over time, which in turn reduce the value of your gift to your grandchild. While the average fee for a stock mutual fund is 1.07%, some funds charge 0.50% or lower. That's a difference of 0.57% in earnings per year, which can really add up over time! Over 20 years, a $10,000 investment in a low cost fund would earn an additional $3,691.27* Just as you wouldn't throw money away, you shouldn't pay more than necessary for your investments. To learn more about fees and expenses, click here.

* Assumes 7% annual return and includes the money that would have been made if fees were reinvested. Source: SEC Mutual Funds Calculator.

Consider College Tuition Needs

As college costs have become a serious burden to most American families, grandparents are likely to play an increasingly critical role in funding their grandchildren's college education.

When it comes to paying for college, every little bit helps. $10,000 in investments means $10,000 less in student loans or roughly $13,322 less in student loan payments.** That's money that could be put towards your grandchild's first home or to jump start their own retirement savings. Whether your grandchild was just born or will be heading to campus in a couple of years, it's never too late to start investing for college. Even a little bit may make a difference in your grandchildren's financial future.

** Assumes 8% interest rate on a 10-year subsidized loan, on which interest does not accrue until repayment begins with equal payment amounts compounded monthly.

Keep It Simple

Whether it's learning the ABCs or algebra, students always start with the basics. Why would investing be any different? No need to search out complicated, confusing investments. Consider investments that are diversified and have rebalancing built-in.

Diversification does not eliminate the risk of experiencing investment losses. The sale of an investment for the purpose of rebalancing may be subject to taxes.

Make Use of Tax-Advantaged Accounts

Tax-deferred college savings accounts, like the Coverdell Education Account (Education IRA) or 529 College Savings Plans, give families extra incentive because earnings are usually not subject to federal income tax.

Engage Your Grandchild in Investing — Open an Account for your Grandchild

One of the greatest gifts you can offer a grandchild is early exposure to smart savings and investment habits. Why not give your grandchild the opportunity to "learn from experience" and open an investment account for your grandchild. Straightforward investment options with low investment minimums make it easy to get started and for a grandchild to learn about investment basics.

Remember Your Grandchildren

Naming a grandchild as a beneficiary on a retirement account or insurance policy can be a tax-efficient way to leave a legacy and provide financial support to your family without straining your current financial circumstances.

You Don't Have to Go It Alone

Between the internet and your local library, there are plenty of sources of free basic investment advice available. Not a "do-it-yourselfer"? Call 1-866-218-6142 to speak to a AARP Financial Advisor Monday to Friday, 8:00 a.m. to 6:00 p.m. Eastern Time. They're here to help.

AARP Financial Inc. does not provide tax advice. Please contact a tax adviser for information pertaining to your particular situation.