Fund a Teenager’s Retirement as a Multi-millionaire for Only $18,000!

As I've said before, there are only three simple steps you need to take to be rich. This article talks about them all -- suggesting that if you get your kids to save early enough they can retire wealthy. The article has been provided to Free Money Finance courtesy of Marotta Asset Management. Here goes:

We teach teenagers ten times more about sexuality than money. Many get the wrong message about what we expect them to be engaged in. Give this article to a teenager and encourage them to start a Roth IRA.

For an $18,000 gift over the next six years plus a little work on the teenager’s part you can completely fund a teenage child or grandchild's retirement in the multi-millions. Here’s how it’s done:

They can contribute to a Roth IRA to the extent they have earned income. Getting earned income requires some work on their part. They need to keep track of everything they earn. The work has to be real work and the income needs to be reported on their tax form. Contributions to a Roth IRA are after taxes, so a good time to start a Roth is after age 14 when they are no longer taxed at their parents’ rate.

The maximum contribution for a Roth IRA is $3,000 for 2003. Teenagers who have earned that much money often have other ideas for its use than funding their retirement. That’s where a parent or grandparent can offer the right incentives. You can offer to give to them any amount that they earn and use to fund a Roth IRA between 14 and 19 years old. They will work hard to fund their IRA and still have the money to spend. If they work very hard and earn $3,000 each year it will cost you $18,000 over the next six years. It will be worth the effort on both your parts.

Contributing $18,000 in the first six years and earning 11% will result in investments worth over a million dollars at the end of 39 years. If the process is started at age 14, the value of the Roth IRA will pass a million dollars at age 56, and be worth nearly 9 million at age 72!

Starting early makes a big difference. At the end of the first six years of $3,000 investments, the portfolio should be earning and reinvesting over $3,000 per year. That means that funding a Roth IRA for 6 years and then stopping results in more money than waiting until the seventh year, and funding it for the rest of your life! And if you start at age 14 and continue to contribute $3,000 each year, you will own results in a 18 million dollar portfolio at age 72 earning nearly two million dollars a year.

Teenagers don’t need to earn and contribute the maximum each year to benefit. Even funding a Roth IRA with $700 over six years starting at age 14 will result in a portfolio of over two million dollars at age 72. This incentive would only cost $4,200. Offering to match their funding with a gift is generous and provides an incentive for them to plan and save for their future, but families with less income can mentor their children through the process without matching their contribution. A financial planner can help set up the accounts, manage the investments, and explain the principles to the teens involved.

Everything that is true for a teenager is true for adults as well, so don’t forget to fund your own! Roth IRAs can be funded until April 15 using income earned in the previous year. The highest wage earners are not eligible to fund Roth IRAs, but their children, who file separately, are eligible. Because of their benefits, funding your Roth IRA should be one of your highest priorities.

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1. Spend less than you earn.
2. Invest the savings.
3. Do it for a long time.

Those are the simple keys to becoming wealthy. Helping you kids do the first two early in life will set them up for a financially secure future.

Comments

[Duane Gran]

This is excellent advice. If you run a family business it is common to employ children over the age of 14. They learn some responsibility and the money is taxed at a much lower rate. A parent who already provides well for their children may make the executive decision to direct a portion of the child's earnings into a Roth IRA. It's a pretty good strategy.

[lol]

The numbers seemed WAY off, then I saw "and earning 11%"

11% is so far from realistic this article should be deleted

[Mike]

I get a bit irritated with this type of article, that talks about the power of compounding as far as savings balances, but uses an unrealistic rate of return and doesn't talk about the power of compounding when it comes to inflation. At a modest 3%/year inflation rate, to buy what $1 does today will require $4.38 in 50 years when your teen is thinking of retiring.

That said, a Roth IRA is not a bad idea, provided they won't decide to raid the account before actually retiring.