Today's grandparents are spending about $50 billion a year on their grandchildren — with about $25 billion of that going toward investments, a recent survey has found.
"Grandparents say that grandchildren are essential to their lives and investing for them is one of the one or two most important things they want to do," said Jerry Shereshewsky, chief executive of Grandparents.com, which conducted the online survey of 411 grandparents with Focalyst, a data company specializing in baby boomers and retirees.
Both companies are based in New York.
The survey found that grandparents spend an average of $1,691 per grandchild in the months before the child is born and during its first year. But first-time grandparents are more generous, spending $3,150 over the same time period, while "seasoned" grandparents spend $1,343 per child.
About 59% of grandparents said they believe making financial decisions for their grandchildren is important, and 71% said they want to contribute to their grandchildren's education, the survey found. About 40% said they want to invest for their grandkids because their own adult children aren't in a position to do so.
According to the survey, which was conducted between Oct. 30 and Nov. 10, popular financial investments explored by grandparents are Section 529 educational savings accounts, mutual funds, life insurance policies, trust funds, savings accounts and stocks and bonds.
Many grandparents have witnessed how compounding has benefited their 401(k) plans and want to employ it to fund their grandkids' education, said Bambi Holzer, who operates Bambi Holzer Financial Group, a financial and life-planning advisory firm in Beverly Hills, Calif., and serves as financial editor for Grandparents.com.
Grandparents typically select mutual funds, not individual stocks, for their grandchildren, and fund companies have done an excellent job of setting up age-based investing options that automatically switch holdings as key birthdays approach, Ms. Holzer said.
Her clients who are grandparents have embraced these investments and find them easy to understand, she said. In fact, many grandparents are "champing at the bit" to start investing for their grandchildren, with some completing all the paperwork needed to set up a 529 plan before a grandchild is born, she said.
"They're just waiting for the grandchild's Social Security number to be issued," she said.
Many grandparents like 529 plans because if the intended recipient decides not to attend college, another child may use the money for education, or the account can be dissolved, said John Kuhns, a financial adviser with Boys, Arnold & Co. Inc. in Asheville, N.C. The firm manages $875 million in assets.
Mr. Kuhns said that 529 plans have created a tax-efficient way to ensure that money is available for college without the worries that can accompany a trust fund — namely, that receiving a no-strings inheritance may encourage a child to quit school and spend the money frivolously.