An IRA for a working teenager is a great gift from a parent or grandparent. Rewarding a teenager for working by funding an IRA or better yet, a Roth IRA, gives a young person the opportunity to become familiar with the concept of retirement savings. With a 7 percent rate of return, a single $2,000 Roth IRA contribution for a 16-year-old would be worth $58,914 at age 65. More importantly, an annual investment like this helps a teenager understand how to reach important life milestones and achieve financial security – especially when one can show how regular investment can swell into millions over the course of a lifetime.
Another lesson to teach your children is to pay attention to retirement benefit options when choosing a job. It may not seem like a priority for a newly minted 22-year-old college graduate, but with the power of compounding, those early years of accumulation blossom.
As workers get older, their financial awareness improves. But there’s some bad news too: even among 26- to 40-year-olds, only about 40 percent are contributing to a tax-advantaged IRA, according to Charles Schwab.
We should all share numbers in conversations and presentations with young people that illustrate the power of compounding in creating financial security.
For example, if you save:
- $5,000 a year beginning at 45 you will have $247,114 by age 65.
- $5,000 a year beginning at 35 you will have $611,729 by age 65.
- $5,000 a year beginning at 25 you will have $1,398,905 by age 65.* * Assumes an 8 percent annual rate of return
As the 76 million baby boomers age and prepare for retirement, it is paramount that they share the knowledge they have acquired about building a solid financial foundation through planning and saving. Teaching your college recruits, administrators and young advisors allows them to develop a habit of saving, become aware of the information and resources available and develop confidence in their ability to save for a comfortable retirement.