The saying, “it’s never too early to begin saving for retirement,” holds true at any age, even for kids in high school. In fact, if your teen has a summer or part-time job, now is a great time to talk to them about starting an IRA; preferably a Roth IRA. Teens are poised to take full advantage of the power of compounding over time. Starting early can have a significant impact on the level of savings they can accumulate over their working years.
In addition, investing in general can be a valuable tool for educating young people on the value of money and how it grows, including the concepts behind interest, earnings, compounding and even taxes. The contributions made to a Roth IRA grow tax free (no income tax ever).
It’s simply amazing––here is an example to show your teenager that shows the power of compounding. By using the Rule of 72 (a simplified way to estimate how long an investment will take to double in value at a fixed annual rate of return) we can create a few examples. If we assume an investment will grow at 7.2%, the value should double in 10 years (72 divided by 7.2% = 10 years). If we assume a one-time investment* today of $2,500 the graphic represents how much that $2,500 can grow over 10, 20 up to 40 years. But if you really want to wow your teenager show them how much saving $2,500 annually will grow to using the same 7.2% return.
Now that’s a compelling reason to begin saving early in life!
Here’s another––let’s assume a 40-year-old has not started saving for retirement. For them to achieve the same $525,550 account value at age 60, they will need to save over $12,500 annually for 20 years (earning the same 7.2% return). This is 5 times the amount of someone in their 20’s.
Professional Tip––if you can afford to, gift your child the amount they earned this summer and contribute it into a Roth IRA for their benefit (and each year hereafter ideally). In 40 years they will be extremely grateful, and you will have built an incredible legacy.
At Odyssey, we emphasize the value of starting early. We have a NexGen program that provides financial education, planning advice, and investment solutions for our clients’ adult children. Good money decisions, including starting early, can make a world of difference for your child’s personal finances. Life’s a journey––navigate it wisely!
* This is a hypothetical example and is not representative of any specific situation or investment product. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.