How best to invest money for my kids

May 24, 2007 3:50 PM

My daughters regularly get US Savings Bonds from relatives as presents. Can I do better for them?

My young daughters (ages 1 and 3) receive U.S. Saving Bonds (Series EE "Patriot" Bonds) periodically from relatives. They have a 30 year maturation and I feel I can do A LOT better investing this money than in U.S. Bonds. I also am not fond of having to squirrel away these pieces of paper, as I'm convinced I'm going to misplace one or many of them.

My question is: what should I do? This is their money, not mine, but I want it to grow at a reasonable rate. I expect they will be pulling this money out when they hit college age, whether they choose to go that route or not. So, we're talking about a 15-17 year investment window. We're talking about ~$1K in bonds, which (I think) are worth much less when cashed out, maybe half that. There will be more bonds coming though, and I'm thinking I'll start contributing monthly as well to whatever route I decide to go.

FWIW, the relative would never know these are being reinvested. I think it's very kind that they think of my girls on their birthdays, and I mean them no disrespect. I just think US Savings Bonds are ridiculously conservative for this type of investment.

posted by mcstayinskool to work & money (11 answers total)

A 529 account lets you invest in funds and withdraw the funds tax-free when it's time for college (technically, I believe you can withdraw it for any reason, but the earnings are only tax-free if it's for higher education). I've got one for each of my kids.
posted by Doofus Magoo at 4:08 PM on May 24, 2007

This doesn't really answer your question, but...

First thing, if you're worried about losing the bonds, photocopy 'em. If you lose the bonds, there's a form you can fill out to get replacements, and the photocopies will help you fill out that form accurately.

I think you can roll over the bonds into a 529 plan and then invest that in whatever you want (stock market index fund?) without losing the tax advantages conferred. Not that it matters too much if the bonds are only a couple of years old. But you probably want any money you're planning to use for your kids' education be within a 529 regardless--the tax benefits are amazing.

BTW--note that if the bonds are in your kids' names, you're going to need to have them reissued in your name in order to take advantage of the tax benefits. Make sure the relatives know from now on that they should be giving the bonds to you and not to your children!
posted by phoenixy at 4:13 PM on May 24, 2007

15-17 years is plenty of time for it to develop at a much higher rate if they were to put it in an index fund. The Wilshire 5000 is basically the entire US economy, so it would be a safe bet in the time frame you are asking and should get much higher returns.

I've always heard the 80/20 rule as 80% in very safe investments and 20% in very speculative/high reward investments. I had a bunch of T-Bills that were 30 year or some such nonsense. I traded them and invested it in something that returns a rate far above inflation. Best of luck.
posted by geoff. at 4:20 PM on May 24, 2007

Cash them in immediately, put the money in mutual funds. 25% each of growth, growth & income, aggressive growth and international funds. The 529 plan is great, just don't get suckered into pre-paid tuition plans. (Some brokers reccomend it... I don't know why; it limits your childs options to a few schools, and doesn't grow past the tuition).
This guy, while I disagree with him a lot, has a pretty good handle on investing for your kids.
posted by bidrattler at 4:54 PM on May 24, 2007

Whatever route you decide to take with these, one part of the gift you should be sure that they recieve is the idea of time value of money. As they grow up, educate your daughters about investing. This will be more valuble to them over their lifetimes than having the money for college magically appear.
posted by yohko at 4:56 PM on May 24, 2007

BTW
Why not discuss this with your relatives? Explain to them how grateful you are for them investing in your children"s future. Then they can be a part of the investment, watch the fund in the money section of their newspaper, etc. AND your kids aren't put in a precarious position of having to dance around when they blurt out that "Mommy cashed those in."
Just a thought. If they disagree, you can still cash 'em in and not tell 'em.
posted by bidrattler at 5:02 PM on May 24, 2007

Bonds are a good way to protect your money, but not a smart way to invest. You'll basically be protected from inflation. That's it. The bonds aren't making any money, only retaining their value.
posted by HotPatatta at 5:55 PM on May 24, 2007

This page is the US Treasury's page on EE bonds. I was looking at this and other pages on the site a while ago, and if you have paper bonds, you can enter their serial numbers, and turn them into 'electronic bonds' where you no longer need the paper.

From the page:

Buying Paper EE Bonds

• Sold at half their face value; i.e., you pay $25 for a $50 bond but it's not worth its face value until it has matured.
• Purchase in denominations of $50, $75, $100, $200, $500, $1,000, $5,000, and $10,000.
• $30,000 maximum purchase in one calendar year.
• Issued as paper bond certificates.

If you redeem EE/E Bonds in the first 5 years, you'll forfeit the 3 most-recent months' interest. If you redeem them after 5 years, you won't be penalized.
posted by ArgentCorvid at 6:00 PM on May 24, 2007

Cash them in immediately, put the money in mutual funds. 25% each of growth, growth & income, aggressive growth and international funds.

*grrrooooooaaannnn*

This sounds like a great way to pay a shitload of unneccesary management fees, if you're not careful.

I'm not in a position to suggest what, specifically, you should do with these savings bonds or what the 'correct' allocation between equity and bonds is for you, but I will give this advice: pay as little in fees as possible. Look into index funds (listen to what geoff. says above and also think about a foreign equivalent to the Wilshire-style index).

I've heard David Swenson's book (he's the CIO of the Yale endowment) is a good guide to the mutual fund industry and the intelligent navigating thereof.
posted by mullacc at 6:59 PM on May 24, 2007

What should I do?

You have $500 worth of redeemable bond right now. Over the next 15 years, if you get 10% return instead of 5% return, you'll end up with $2088 instead of $1039. Inflation adjusting those numbers with a 3.6% annual inflation rate (which I think is conservative) means that your $500 will grow into a present-discounted-value of $1228 versus $611, a difference of $617 in 2007 dollars.

To be honest with you, in my opinion a present-discounted-value difference of $600 over 15 years doesn't amount to a hill of beans. The 3 month interest penalty (and maybe tax liability) you'll take when you redeem the bond will nearly wipe out the benefit, too, via the magic of compounding. And there aren't many mutual fund or brokerage companies that will open an account for a paltry $500.

I think you should leave the bonds be for now, not redeem them. Speak to the relatives about your preferences about setting up a different kind of investment for the kids. One way to do this is to communicate the following information:

"I'm setting up a 529 plan for young McStayla and Skoolia Jr. If you would like to contribute to their future, checks may be made out to 'mcstayinskool for benefit of 529 plan #123456789.'"

You could then manage the assets in the 529 whatever way you like, including rushing off the cliff along with all the other lemmings folks who are fully into aggressive-growth smallcaps and China stock right now. You could even put the EE bonds into the account on some year that contributions didn't max out, resulting in possibly escaping ever having to pay income tax on their interest.

Please tell me, mcstayinskool, that you are going to help send your daughters to college. If not, your username descends from eponysterical to mere degraded hipster irony, which is very sad.
posted by ikkyu2 at 8:00 PM on May 24, 2007

Of course I'm going to help send my daughters to college. And how did you know their names were MC Stayla and Skoolia Jr?

Thanks for all the advice, all. Much to think about, and you've all helped me in that process.
posted by mcstayinskool at 9:25 PM on May 24, 2007