livetoread Posted November 18, 2015 Share Posted November 18, 2015 I thought I'd pass this along because I am amazed. My son and I have been going over retirement planning for his Personal Finance class. We discussed the value of investing early and started plugging numbers into a RothIRA calculator. If he opens a Roth IRA with 1k of the money he has earned at his job this year (age 17) and adds only 1k a year until he retires at 65 (assuming 7% average growth), he'll have almost 404k. If he waits until age 20 and does the same thing, he'll have almost 327k. If he waits until 25, he'll have about 228k. (BTW, you can buy into the Target Retirement Funds at Vanguard for 1k.) Obviously he will add more than 1k a year once he has more money, but even if he never does, that's over 175k in extra money for doing nothing but starting to save 1k a year at 17 instead of 25. If his initial investment at 17 is 1k and then he adds 1.5k every year after, he has 503k versus 404k, a difference of 100k just for another $500 a year. FWIW, teens don't have to use their earned money. Parents can use their money to fund it, or any combination of kid/parent money up to the total amount earned or the contribution limit, whichever is less. I see the question of doing this relating to the other thread on helping kids post-college. It sounds weird, helping your kid pay for retirement or at least encouraging them to start and walking them through the process, but other than paying for education, what other financial gift is going to pay off like that? Regardless of the option chosen by the parent, that's huge. If your kid has earned income and can afford to save at least 1k for long term, run the numbers with them. Bankrate.com has some helpful calculators. I always knew starting early was good, but the numbers are eye-popping. 3 Quote Link to comment Share on other sites More sharing options...
freesia Posted November 18, 2015 Share Posted November 18, 2015 Yeah, it's the assuming growth part. My retirement spun it's wheels for years and took several big dips. I don't mean to discourage early saving, but boy I feel like I was sold a bill of goods in the 80s when I graduated. Humph! 9 Quote Link to comment Share on other sites More sharing options...
FriedClams Posted November 18, 2015 Share Posted November 18, 2015 Compound interest is an awesome thing. We plan to have our kids do this at the earliest age possible. The amazing part to me is if they contribute for 10 years, and then stop, they end up with more money than if they start late and add a ton. Math is awesome. 3 Quote Link to comment Share on other sites More sharing options...
livetoread Posted November 18, 2015 Author Share Posted November 18, 2015 Of course another consideration for parents if they are contributing is that it is all the kid's money. The kid can decide to pull it out at 22, pay the penalties for any interest earned, and set up a meth lab. 1 Quote Link to comment Share on other sites More sharing options...
Guest Posted November 18, 2015 Share Posted November 18, 2015 We started putting away for retirement early and it was a big help. Something to think about - any money saved is useful. Quote Link to comment Share on other sites More sharing options...
FaithManor Posted November 18, 2015 Share Posted November 18, 2015 Our oldest boy received a settlement from the car accident. He has invested it very wisely so at the least it is safe from being frittered away, but since he invested conservatively he isn't losing, and he is making small gains. Over the course of his life, statistically he has a good chance of having what he needs to retire before 65. Due to the injuries and the level of arthritis he will incur in middle age, he needs to be prepared to not be working full time by age 50-55. Dd and hubby made a choice that no matter how tight they were, they would save $100.00 a month and put in their employer 401K's so even though they have only been married 2.5 years, they are pleased to see that they have the principle plus some more already. Again, conservatively invested so the gains are not rapid, but again, not so likely to be lost either. I am glad these two are saving young. 2 Quote Link to comment Share on other sites More sharing options...
Guest Posted November 18, 2015 Share Posted November 18, 2015 I have seen these calculators before and I agree, they are amazing. The book The Automatic Millionaire has a comparison chart like this. I think the part that is difficult for most everyone is that retirement clearly seems like the least of your financial worries when you are a teen, or even so much in your twenties. Early twenties often have MAJOR financial concerns to fund and they are much more immediate than retirement. My nephew's wife just recently graduated Law School and passed the bar. Her school loan debt is unspeakable. They might have opened an IRA, but I highly doubt it. 4 Quote Link to comment Share on other sites More sharing options...
vonfirmath Posted November 18, 2015 Share Posted November 18, 2015 I started investing for retirement at age 22. Even after being married, my husband and I invested regularly until our son was born and we needed the money elsewhere. But... some of that money has been sitting there nearly 20 years and I have not seen these kinds of gains. So yeah, it is great it is there and will be when we retire. But don't spend it until the time passes and it is actually there. 4 Quote Link to comment Share on other sites More sharing options...
livetoread Posted November 18, 2015 Author Share Posted November 18, 2015 How does this play into paying for college? It's my understanding that the FAFSA/govt makes you exhaust all personal money before qualifying for financial aid. Are teen retirement accounts counted? I know parents' aren't, so I assume these wouldn't be either? Anyone know for certain? Hmm, a quick google says that FAFSA does not consider it, but some colleges do separately. Quote Link to comment Share on other sites More sharing options...
livetoread Posted November 18, 2015 Author Share Posted November 18, 2015 I started investing for retirement at age 22. Even after being married, my husband and I invested regularly until our son was born and we needed the money elsewhere. But... some of that money has been sitting there nearly 20 years and I have not seen these kinds of gains. So yeah, it is great it is there and will be when we retire. But don't spend it until the time passes and it is actually there. Hang in there! The biggest jumps happen in the last few years because of compounding. But yes, if we have another 2008 debacle it sets the growth back years so it is hardly a sure thing. Even 1% difference in the average growth changes those numbers a lot too. 7% seems reasonable as an average over 40 years, but who knows? 1 Quote Link to comment Share on other sites More sharing options...
Tsuga Posted November 18, 2015 Share Posted November 18, 2015 Of course another consideration for parents if they are contributing is that it is all the kid's money. The kid can decide to pull it out at 22, pay the penalties for any interest earned, and set up a meth lab. Or like in my case, and my partner's, pull it out during a major recession and divorce to ensure The kids lives remain stable and that they are still eating decently. A meth lab remains a possibility... I mean in theory, not for us, hah! 1 Quote Link to comment Share on other sites More sharing options...
Evergreen State Sue Posted November 18, 2015 Share Posted November 18, 2015 Our 20 yr. old ds is looking into starting a Roth IRA. He doesn't have a regular job now while in school, but did earn some money over the summer. We were told there is a $40 annual fee starting when he is 21. We were wondering what would be the minimum he would have to put in annually to offset the fee and make it worth it. I would expect he would only earn money during the summer until he's 23. Whatever he puts in, it has to stay in and not be pulled out because he needs a new car or to pay the rent. Retirement money needs to stay for that purpose. Anyone have experience with that? Quote Link to comment Share on other sites More sharing options...
livetoread Posted November 18, 2015 Author Share Posted November 18, 2015 Our 20 yr. old ds is looking into starting a Roth IRA. He doesn't have a regular job now while in school, but did earn some money over the summer. We were told there is a $40 annual fee starting when he is 21. We were wondering what would be the minimum he would have to put in annually to offset the fee and make it worth it. I would expect he would only earn money during the summer until he's 23. Whatever he puts in, it has to stay in and not be pulled out because he needs a new car or to pay the rent. Retirement money needs to stay for that purpose. Anyone have experience with that? Fees are going to depend on the fund he decides to put it in. He should look carefully at fees because they do eat into a rate of return and they vary quite a bit. We generally stick with Vanguard due in part to their low fees. For most of their funds, they have an annual fee of $20 for accounts under 10k, but they wave it if you go paperless. Expense ratios are more fees that vary and Vanguard has low ones, especially in their index funds. It is my non-professional understanding that with RothIRAs, he can pull out principle with no penalty for any reason after five years. He can pull out earnings for certain reasons with no penalty. He can pull it all out for no reason at anytime and get hit with a big tax penalty. So it does take discipline to put it in and leave it. 1 Quote Link to comment Share on other sites More sharing options...
madteaparty Posted November 18, 2015 Share Posted November 18, 2015 Can a minor child open a Roth when her parents don't qualify for one? Quote Link to comment Share on other sites More sharing options...
umsami Posted November 18, 2015 Share Posted November 18, 2015 It's wonderful to do....but know that usually growth is not that consistent. There are some models out there that basically use the S&P500 fund as a guide, though. Either way...better to start early! Some other advice for kids or young people regarding retirement.... Should they get bonuses at work, they're much better off adding that to their retirement savings. If their work has automatic stock purchase or 401k deductions, take advantage of them Back before I got married, I worked with a guy who was approaching one million dollars in retirement savings. He was about five years older than me, so mid-30s. He made a good salary, but not that good. He just prioritized saving. I'm 47 now. From what i understand, he has retired. 3 Quote Link to comment Share on other sites More sharing options...
livetoread Posted November 18, 2015 Author Share Posted November 18, 2015 Can a minor child open a Roth when her parents don't qualify for one? I don't know, but I would think yes because it is based on the kid's earnings, not yours. Quote Link to comment Share on other sites More sharing options...
amsunshine Posted November 18, 2015 Share Posted November 18, 2015 How does this play into paying for college? It's my understanding that the FAFSA/govt makes you exhaust all personal money before qualifying for financial aid. Are teen retirement accounts counted? I know parents' aren't, so I assume these wouldn't be either? Anyone know for certain? I've done some of the college npc calculators, and many ask about what assets the child has, including retirement accounts. It makes it iffy enough for me to think it might be best to wait on something like this until after college is done. Quote Link to comment Share on other sites More sharing options...
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