I vote for the IRA, life insurance is for the ones left, not the living holder of the policy.

IRA investments must come from earned income, so unless your GS has at least as much earned income as your gift, an IRA isn't the answer. As an alternative, you could look at opening a RIC-E Trust account for him. It sounds like what you want the gift to go towards.

I agree that buying an insurance policy is not a good investment strategy.

Insurance is a poor investment, if it's an investment at all.

The RIC-E account mentioned in the preceding post appears to be a variable annuity product sold by financial planners. That's an insurance product different only in small features from whole life. One commonality with life insurance or annuity sales is that the selling agent makes big commissions on the sale, which comes out of the money spent to buy them. Run, don't walk, away from both. A 20-something with no family has no need for life insurance or an annuity and if he gets a decent job, term life insurance is a typical employee fringe benefit either given or made available at very low cost.

A 20-something also doesn't need a retirement fund. If you insist it be put into an IRA (which he has to do, you can't), that's money that can't be touched without penalty of one kind or another for almost 40 years. Hey, thanks grandma.

If the kid is responsible, just give them the money without strings. If not responsible, tell him you're going to give him X per year for the next 5 years. You haven't said how much but a young adult can use money for :

Student loans

A car

Vacations

Furniture for an apartment

Living a little better than their early career earnings allow.

Buying suitable clothes for work

etc, etc.

These are my opinions and some may disagree. Good luck to him and to you.

Retirement fund= regular or SEP IRA or 401(k), 403 (b) or other qualified plan.

This is a specific term.

I wasn't saying that 20-somethings shouldn't have savings. Just the opposite. My message was that 20-somethings need more flexibility with what they can accumulate than to have it locked up until they're old and gray.

I don't know where the kid will be living but imagine saving for the first X years of the career and getting ready to buy a place to live. $50K (or whatever amount) has been saved and is needed for a down payment. But, whoops, the money is in a retirement plan, it can't be accessed. That makes no sense.

Putting money into a retirement plan is a pretty non-reversible decision. It's not for the first dollars of savings, it's for excess savings (if you will) for those so lucky to have that. Money not needed that's expected to not be needed no matter what happens. Funds like that can be put away for retirement, in a plan. For many young adults, even with early career success, it may not be until the mid-30s come that enough money is around to do that other than in a token way. And for some, those are prime child-rearing years and the luxury of extra money isn't something everyone has.

Everyone should save for retirement. Not all of the savings should ever be locked up in qualified plans that can't be accessed until age 59 1/2. And, for many, not even most should be in such plans.

Money in 401k can be withdrawn without penalties for home purchase and repairs. There are limits, and the money has to be redeposited.

I know but I think that's a bad strategy.

We started saving for retirement in our early 20's and I'm so very glad we did. If your grandson doesn't need life insurance, I wouldn't use it as an investment vehicle though. I'm not an investment advisor, but I would think at his young age something to consider would be stocks or mutual funds. He has years to let it grow and turn into a nest egg. Maybe put some funds into an investment and give him some cash - best of both worlds!

It's very nice of you to want to do something to help him with his future financial security. Hope he appreciates and sees the wisdom of such a gesture.

Roth is the way to go. I totally agree with "Insurance is a poor investment, if it's an investment at all".

"Insurance is a poor investment, if it's an investment at all". Agree 100%!

I disagree that money for retirement should be from excess savings. Something should be put away every month, even small amounts. It forms a good habit. If a person is saving for a house, a percentage of that should go into a retirement fund, even just a small percentage. Do you think anyone who saved for retirement ever regretted it?

Some companies have direct investment plans. You could check out an investment in stock which might interest your grandson. You would have to do it in his Social Security number.

Life insurance would be for the purpose of protecting anyone who is dependent on him in the case of his death. Basically would be a gift to his family or whoever was designated as the beneficiary. It’s not money he would ever see unless he cashed in the policy which would involve a loss of whatever money was originally put into it. Not a good investment.

DH had whole life insurance that his parents got when he was a child and we continued paying on it for many, many years, he had the policy for 55 years. It was a $10,000 policy. Every month we paid $21.91 for it. Well, we decided to turn it in. The pay off was under $7,000! We would have been better having put that into savings.

No, do not buy life insurance for him.

I'm with you: I'm against the life insurance policy. Once he begins working, he will likely have a small policy through his employer anyway, and -- assuming he's not married yet, he probably doesn't need it much. Insurance isn't an investment -- unless you're the insurance company building all those big buildings and paying your CEOs so much money.

Two things I'd consider:

- As you said, an IRA. He has years and years ahead of him for the magic of compound interest to work its magic, so this could grow into quite a large gift. More importantly, hopefully it'll spur him on to save more on his own -- while he's still young.

- Or give him a note-of-promise that you'll give him X amount towards the downpayment of his first house. This may seem more immediate to him. It's a different kind of investment, but just as worthwhile as the IRA.

Regardless, I'd ALSO give him a book about personal finances. One aimed at young people who are just starting out.

When DH was an infant, his adoptive father funded a whole life insurance policy for him. Policy dividends paid the premiums, and any overage was paid out to DH. Cashing in the policy enabled us to take a lower mortgage when we bought our first home.

There are probably better strategies now, but in this accomplished what his father intended. It set aside funds -- tax free -- to be accessed when DH was an adult. It was 'estate planning'.

Life insurance was also floated to us as as estate planning -- probably 25 years ago. Our lives would be insured by our DS. He would pay premiums from funds we gave him. When we died, the insurance payout would escape taxation. (We didn't do this, but the strategy seemed logical.)

The idea that a 20-year old shouldn't have a retirement account is ridiculous. If he has earned income, the ROTH IRA is perfect. Contributions to a ROTH can be withdrawn at any time without penalty, which allows for some flexibility in an emergency while still letting the account holder harness the power of long-term compounding. The interest can also be withdrawn, although there will be taxes and penalties involved unless certain conditions are met (i.e., the money is being used to buy the account holder's first home or to pay for educational or medical expenses).

Yes, socks, I think people who needlessly sacrifice their otherwise prudent current lifestyles because of a driving compulsion (at too young an age) to put money away in a retirement fund can regret it. Or if not, they should. There are just too many things people need to accumulate and spend money for in the earlier adult years that are hard enough without an added handicap. There's time enough beginning mid-career to give priority to retirement savings. Token participation at an earlier time in something like a 401 (k) when there's a generous employer match, different story. Don't forget, retirement savings don't need to be in any kind of special vehicle.

I'm not a fan of Roth IRAs. They're not a substitute for putting money into a qualified plan (some of which types I listed above) because the latter gives you a tax deduction for the money put in (income exclusion, same thing) where a Roth doesn't. Also, it's easy enough to achieve essentially the same outcome as a Roth (non-taxability of earnings of the amount invested) without using a Roth and without having the same restrictions.

I think it's the habit of saving for retirement, that is valuable. If one waits until mid-career, this will also be mid-life and there will be SO many things competing for any money left over after expenses are paid. If the habit is not there, it may well be overlooked.

My DD and her husband started a college savings acc't when she found out she was pregnant with her first child. They have contributed to it religiously. Unfortunately, it is not nearly enough to pay for Ivy League tuition and they did not quality for financial aid. If they had had enough money to save enough, they would have had enough to just write the check for his tuition! Families who have been prudent and saved and lived below their means don't fare well when need-based financial aid is passed out by colleges.

I was glad that my late husband had a couple of whole life insurance policies his parents had purchased for him decades ago. It was a nice chance of cash and tax free. But today, probably not a wise investment as it will not benefit the person whose life is insured.

Life Insurance, is, in most circumstances, a horrible investment. A Roth IRA, on the other hand, would be a great gift. I'd suggest you look into setting up and funding one with Fidelity, Vanguard or similar. They offer many, many, many investments that will allow changes as his life circumstances change. Fidelity offers something called the Freedom Funds. Each one has a target retirement date, "Freedom Fund 2025" for example, and the appropriate mix of assets is maintained by the fund manager. The expenses are reasonably low, as well. I'm sure Vanguard would have something similar.

There is never an age that is too young to save for retirement. Ever. I agree wholeheartedly, insurance is not an investment.

I funded Roth IRAs for a few years right after college. Life insurance is not an investment. It is a tool for a specific need. If you cant think of what that need might be, dont buy it.

Thank you for all of your replies...and I think we all can agree buying insurance is not a good investment for retirement! Now I am concerned that since my DD has let him control their investments that she might not have what she would need. The old saying...”if it is not a life and death matter, stay out of it”, comes to mind. SIL is very strong minded and if DD would bring it up, he would know it was me who was interfering in their business.....catch 22! Any good ideas on how this might be handled? I just know that some insurance salesman has him completely convinced...only to be padding his own pockets.

Now back to GS....I visited with my financial advisor and told him my thoughts. And SHOCK, he agreed that a Roth IRA would be a great investment for him but wait for about a year to give the money to him so he can get a job and make enough earned to reach the amount that I have planned. GS will have a degree in Chemical Engineering and his fiancée has her degree in Accounting and one more test to pass for her CPA. She is presently employed as an accountant for an engineering firm. IF they both get jobs in their fields, pay off their student loans, and put off having kids, they should do okay.

Anglo, they must have a pretty high income if they don't qualify for any financial aid. I thought most of the top tier schools offer free tuition for families well into the 6 figures. I know Princeton is free if you make less than $140k a year and Yale is sliding scale to $200k a year. $180k for Penn, $150k for Harvard, $100k for Dartmouth. The others aren't quite so high but still very generous.

It wasn't like that when I attended in the early 2000's. They were very generous with me but it definitely wasn't free and we would have qualified for free tuition and room and board now.

I'm still paying off my student loans at a whopping $80 a month because I have a 1% interest rating and it's been great for my credit score.

WOW, Chi.....does this vary from state to state? It is not nearly that much to not qualify for financial aid in our state. DD and SIL do not make near 6 figures a year, so their kids have student loans. :-(

chi is correct and is describing the rarefied air of the most prestigious PRIVATE schools with large endowments who want to have economic as well as cultural diversity among their undergrads. They're all small (compared to public universities) and they're all very difficult to get into. For some, if not entirely free, it may be a combination of very generous grants, sometimes work-study obligations (I know Penn used to do this), and an affordable level of loans.

It's often much more expensive to go to a public university than to go to a private one (even those of lesser reputation that are outside of the most elite circle) that have the resources to be generous with scholarships. This isn't new.

About 10 years ago, the oldest child of a friend (from solid but lower middle class means, the level where college costs can be a big drag on family finances) was moaning about how their kid wanted to attend one of the public UCs. The cost was going to be something between $20-$25K per year if I remember right. The kid was a great student with many of the right kind of extra things on their record. I asked if the kid was applying to USC (a great private school, better than some UCs and with programs equal to the best at others) and the answer was "No". I asked why not, the response was "We can't afford that". I suggested applying and submitting paperwork for financial aid and all available scholarships too. You know where this is going - the kid was admitted with the offer of a full ride based on "scholastic achievement". Yes, all expenses paid. Nothing is cheaper than free. The kid got a great education and immediate employment in their chosen field.

You appear to be talking long-term money.

Using a mutual fund will be expensive, as that 1 - 1.5% (in Canada it's more like - 2.5%) annual fee rate is a substantial percentage of the annual rate of growth ... and check out the percentage of money managers who outperform the portion of the investment market in which they put your money: about 80 - 90% of them don't; so much for their purported extra smarts.

Over a, e.g. 30 year term, that annual fee accumulation mounts up!

Give him a book aimed at young people offering guidance about management of money.

Buy some of one, two or a few quality stocks in his name. Probably consult him, for if he has a hand in the choice, he'll have deeper loyalty to keeping it intact, long-term.

If he needs money for an emergency when, even having managed his money carefully, he has none available, he can choose to use the stocks to obtain a short-term loan, then pay it off quickly to preserve his emergency money intact, which later he may choose to be a foundation stone upon which to build a retirement fund.

Given any appreciable rate of growth of the value of the stock (which term, "compound rate of growth", I prefer to "compound interest"), he will be pleased with it, over the years ... and as it grows it will retain its reputation as grandma's generous gift to him.

Also, I suggest that the quality stock, with fairly secure long-term prospects, that you and he choose be one that offers a plan to reinvest the dividends that it produces, which we call a "Dividend ReInvestment Plan: DRIP", which will increase the value, seemingly slowly at first, but on a hill that rises more steeply over the years.

Check some calculations that show the comparative value of investing a given amount over 10 years from age 20 - 30, with the same amount invested in the same investment vehicle from age 30 ... till retirement. Even by age 65, after 35 years of investing, at any appreciable rate of return, the original investment will come out ahead.

HOWEVER ... don't forget to calculate for annual taxation of the income (even if reinvested). Plus - allow for the erosion of value of each dollar that inflation inflicts upon its real value, year after year ... and that rate has a compounding effect, as well, don't forget.

Thank you for think of being generous to your loved one, with a long-term horizon.

ole joyful

Phoggie, I'm editing my answer because I think I read your question wrong. No, it doesn't vary state to state. I think cost of living should factor in as $150k in the bay area doesn't go nearly as far as the midwest, for example.

For families making $65k a year, both tuition and room and board are covered.

Like Elmer said, it's only for the top private schools with many millions in endowments. It was cheaper for me to go to an expensive private school than the local state university.

joyfulguy, our market funds here are a bit different. One can invest in mutual funds or ETFs at extremely low fees these days, well under 1%. Also, if using a Roth IRA, the principal and profits compound tax-free, including withdrawals if made after age 59-1/2.

Although I know you feel comfortable owning individual stocks, many people are simply not good at handling risk and researching companies. I think for such people, owning funds is a much better idea for diversification.

Listen to Elmer. Avoid the insurance and the retirement plans. Give him money to get started on life without having to finance a few things he needs. We gave a generous gift to help our kids get their first house which saved them a lot of money from the beginning.

Repeating Elmer's list of best ways to spend money on a young one.

Student loans

A car

Vacations

Furniture for an apartment

Living a little better than their early career earnings allow.

Buying suitable clothes for work

Edited to add: a cell phone and service for a few years.

Or an internet connection (not cable tv), just internet.

Your right, a Roth is pretty good. Life Insurance is not an investment worth having. For a serious, planning for the future investment "gift" how about a large growth mutual fund with a great 10 year track record? Use Vanguard or Schwab.

Is it possible SIL is covering his own basis? Have they cosigned student loans and if something happened would they be responsible for the student loans or any debt? Who would be the beneficiaries?

Mutual funds that are index funds of the same index all have the same track record, they have the same portfolios. Most are very low in cost, a few tenths of a percent. Vanguard is a good choice.

Any account whether under the umbrella of a Roth or outright needs to be opened by the kid himself, one person can't open an account for another unless it's jointly titled. That would be a mistake to do anyway for a grandparent and an adult grandchild.

Mutual funds that are index funds that track the same index all have the same record (more or less). Index funds tracking different indices can have vastly different track records. Popular indices include the S&P 500, Nasdaq, Dow, Russell 2000, etc., but there are many, many more. Vanguard and many other low-cost mutual fund companies take the guesswork out of deciding which index (or indices) is right for you by offering Target Retirement Funds, which are actually "funds of funds," containing several different index funds in what the company considers to be an optimal allocation for someone of a given age/distance from retirement.

Meh, understand that so-called target retirement funds do nothing more than vary the mix between debt and equity (managing foreign vs domestic mix and less in equities, more in debt) as the target date approaches. There's no magic to it. It's vanilla diversification and risk adjustment.

As we understood it, the Retirement Target funds had a higher expense than others. We mixed our own equity and debt/bond funds for less and have more control of it.