On the way to pick up my two kids, I heard a radio ad about a new investment product aimed at parents thinking about their children's retirement. That's right--not their own retirement but the golden years of their toddlers sometime down the road, say in 2070.
I had to turn the radio up for this. The man was saying that for $5,000 each, my kids could be millionaires by then.
He's thinking retirement. I'm thinking, for goodness' sake, my kids aren't even completely potty-trained!
For a minimum of $5,000 and a one-time setup fee of $300, the pitchman on the radio said, a parent or grandparent can open a Retirement Income for Everyone (Ric-E) Trust in their kid's name. The tax-deferred annuity can't be tapped until the recipient is at least 59.
If, as the pitch went, the trust's assets grow at 10 percent per year, that $5,000 investment would be worth more than $2.4 million by the time the infant reached age 65. That would be about $350,000 in today's dollars, said Ric Edelman, the Fairfax-based financial planner who created the trust.
Let me get this right. It's not enough that parents are supposed to feed, clothe and shelter our rug rats; now we have to set them up for retirement too?
I pay tribute to the generosity of parents and grandparents who would consider this. And when I talked to some of the families who have signed up for the Ric-E Trust, I didn't find people who were overindulging their children. Instead, they were working-class, middle-income parents and grandparents who have scrimped and saved all their lives and wanted to pass along some of their wealth before they die.
"This was something we thought we could do for their future rather than give them a car or help with college," said Phyllis Parker, who along with her husband opened four Ric-E Trust accounts for their four youngest grandchildren.
"Really, they will be pretty old before they can use the money," said Wayne Parker, 66. "In fact, my 16-year-old grandson joked that he didn't want to wait till my age to get the money. I told him, 'Too bad.' "
Thorton Saferstein, 68, wanted to help his 41-year-old daughter, a New York City public school teacher.
"The whole idea is, if we live long enough to enjoy our daughter's retirement years, we may not have much money left over to pass on to her when we do die," Saferstein said.
Edelman, of course, thinks the Ric-E Trust is the answer to the worries of parents and grandparents such as Saferstein and the Parkers.
"We know that an overwhelming majority of Americans aren't saving for their future because they either don't have the discipline or the income," Edelman said. "The Ric-E Trust helps reduce the pressure so your children or grandchildren won't be destitute at retirement."
Has it really come to that? Should we be concerned that our children will be destitute when they retire? Not everyone in the financial business thinks this Ric-E Trust is a good idea for parents.
"My visceral reaction to this type of investment is that it shouldn't be a high priority," said Steve Ames, a fee-only financial planner and president of the Northeast region for the National Association of Personal Financial Advisors. "This kind of trust just gives some sizzle to a regular annuity. It's just a gimmick."
Gimmick or not, Edelman said more than 800 people have signed up so far. "Listen, if you think that you will ever really need this $5,000 or you will sorely miss it, then the Ric-E Trust is not for you," Edelman said. "You don't have to self-sacrifice to be a proper parent," he added.
I still wonder, however, if we parents aren't being manipulated to fork over more money to and for our children.
Ames said it's not uncommon to find parents willing to sacrifice their own retirement plans to fund 100 percent of a child's college education. Other financial experts say they've seen clients who become debt-laden sending their kids to private schools. Recent studies show an increasing number of people are borrowing from their 401(k) retirement accounts to cover educational costs.
Other experts warn parents about the dangers of co-signing for car loans, houses or other personal loans for their children--especially credit cards. Many of these parents or grandparents don't realize that co-signing makes that debt as much theirs as their child's.
So, how far should parents go financially for their children?
The answer is so simple it almost seems silly.
"Most people want to do as much as they can for their children. But you should only do what you can afford," said Ames. "If you can't afford to fund 100 percent of college, then don't. Your kids can borrow for a portion of their educational fees."
The parents who bought Ric-E Trust accounts could clearly afford it. "We wouldn't have taken the money out of our retirement fund," said Phyllis Parker. "If we didn't have the money, we wouldn't have done this."
You do right by your children by setting priorities to take care of your basic financial needs first, Ames advises. If you assume a lot of debt trying to raise your children, you potentially become a financial burden to them once they become adults.
Flight attendants tell parents before takeoff that in the event of an emergency, they should place the oxygen masks on themselves before putting it on their children. This runs contrary to our impulse. But the airlines have it right: How much help can you be to your children if you're gasping for breath or passing out?
The same is true financially. Take care of yourself first.
Michelle Singletary's column appears in this section every Sunday. While she welcomes comments and column ideas, she cannot offer specific personal financial advice or answer detailed questions about individual situations. Also join her online on Tuesday at 3 p.m. at www.washingtonpost.com for a live discussion of this column. Her e-mail address is singletarym@ washpost.com. Readers can write to her at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.