As a parent, you constantly want to set your children up for success. Whether it is in school, athletics, relationships, or their spiritual walk, you desire for them to do well. But you probably have not considered how huge their teenage years can be for their retirement. Your teenager can make some serious headway on their retirement before they leave for college.
Some of you may be familiar with the term “compounding.” It is a pretty simple concept. The percentage you earn each year is placed on your principal (the amount you contributed). So the next year, your gain is not just based on the principal, but the total amount of principal and whatever gains you had. Over time, you can see significant growth occur.
Let’s suppose your 16-year old son, Johnny, got his first job working at Chick-fil-A. Instead of wasting all his money trying to customize the beat up car you let him drive, he opens a Roth IRA and places $2,000 in a mutual fund that mimicked the annual return of the S&P 500 from 1966 to 2015. He adds $2,000 at age 17 and 18. Before Johnny leaves for college, what has he accomplished?
Check out the chart below.
Well done, Johnny. You just gave yourself almost $600,000 for retirement. Not bad for a summer job. And what if Johnny developed a habit of putting $2,000 each year into the account? Well, your Johnny could be a millionaire by age 65.
Now for the disclaimer. Of course, I am not the first to put together a chart like this. And these types of charts are just illustrations to demonstrate the power of starting early. Mutual funds fluctuate in price. Like the S&P 500, some years have positive growth while others have negative growth. These fluctuations would influence the overall value of the fund at age 65. However, the point remains—get your kids to start early, start early, and start early.
Parents, don’t let your teenagers miss out on these pivotal financial years. Teach them the importance of long-term thinking when it comes to money. When they start working, have them set up a Roth IRA and encourage them to contribute to it. Show them charts like this. Their 65-year old self will be grateful you did.