Question:
Dear Steve,
My son (30) and his girlfriend (25) don’t have a lot of money. They are expecting our first grandchild in Oct. 2020. We want to make sure this grandchild has a good start in life. My husband and I can afford to save for this grandchild and provide life insurance as well. We are not debt-free, but working on it and we have good jobs. We are both 53 and have everything we need.
We want to save for our grandchild (due in Oct). What would be the best way to do that? Should we just put a certain amount of money into a money market account until we get enough to open a CD? We want to be able to give this money to the grandchild at age 18 (for school, first car, first home, etc). Also, we want to get life insurance for the grandchild. What is the best way to do that? Is the Gerber Grow-Up Plan something worth looking into?
Melinda
Answer:
Dear Melinda,
At one point in my life, I was a registered investment adviser. I hated it.
What I can offer you is some commonsense advice to consider.
I applaud your desire to save to help your grandchild. Grandkids are so precious and can be pure joy in good times and bad.
There are certainly enough pros and cons of buying a life insurance policy for the grandchild. To get the most amount of coverage for the least expense, a whole life policy would not be the way I’d go. This is an excellent article that gives you a load of information on this issue.
But buying a whole life insurance policy that may build some cash value seems like a choice I would not make. I’d go for the term policy and save the difference.
Speaking of saving, unless you have a professional money manager than can balance your investments based on your personal level of risk and the time in your life I have to agree with the world-renowned investor Warren Buffet that said, “In my view, for most people, the best thing to do is owning the S&P 500 index fund.”
This type of mutual fund can be found with all the mainstream mutual fund companies.
Berkshire Hathaway Chairman and CEO Warren Buffett has long said that owning an S&P 500 stock market index fund is the best bet long-term investors can make.
This might be the more controversial part of my opinion. I’m not sure I’d rush to put this account in the name of your grandchild just yet. You could open an account in your name and name the grandchild as a beneficiary. You can arrange a transfer of the fund on your death and avoid probate.
There is a lot of life that will unfold in the next 18 years and I know a lot of 18-year-olds that would blow easy money than make smart choices.
If you put the account in your name there is no reason why you can’t help pay for school, car, or home using the funds you’ve saved. Who knows, you might actually have a life emergency and desperately need the funds to take care of yourself.
If you don’t have a will yet, now might be the time to get that done so you can clearly spell out what your intentions are for the investment account you open up.
While you are thinking of investing. We have to think about the cost of inflation in the future. An $80,000 college education will cost about $160,000 in 18 years at 2.32% inflation.
So you’d need to save $167 a month at an average rate of return of 8% so you’ll have $80,000 in 18 years.
“While it doesn’t go up every year, the S&P 500 has returned an average of 10 percent annually for investors who buy and hold a basic index fund.” – Source
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