Recently my husband was kidding with our daughter and said, “You’ll just take care of us financially when we’re old.”
I immediately said, “Amy, don’t worry about that. Dad’s just kidding you.”
She replied, “Mom, if you’ve been helping us save for our retirement as teenagers, I figure you and dad are just fine.”
So, how I did I get our kids to start saving for retirement when they were in high school? It’s all about the magic of compounding.
Driving into downtown Chicago one night with our kids, I said to our son, “Now that you have your first paying job this summer you can start a Roth IRA.”
I explained a Roth is where you can contribute up to a certain amount of money (in 2018 the IRS limit is $5,500 or earned income, whichever is lower). This money is invested in an account. You decide how it’s invested, and it grows tax-free forever. He could take out his contributions if he needs the money, but if he takes the earnings out of the account before he’s 59 ½ he’d have to pay taxes and a penalty.
Just about this point I was losing him. “Why would I want to do that mom?”
This is where the magic of compounding comes in.
- I said that if he saved $2,000 per year in a Roth IRA for the next 5 years and then stopped contributing, and if he earned 7% on his investments (which of course is just assumed and there’s no promises on that), by the time he was 65 he’d have more than $571,000.
- If he were able to contribute $5,000, with these same assumptions, he’d end up with more than $1,400,000!
- I also explained that if he waited until he was 35 to start saving, to end up with the same amount of money at age 65 he’d have to save almost $13,000 per year for 30 years.
Now, it wasn’t easy for him to save into this account as he needed and wanted to use some of the money he earned. So to increase his contributions he used some of the money from his savings account (money that he’s received from gifts and that he’d saved from his allowance over the years) to help fund his Roth IRA contribution. Our daughter did the same when she started earning money.
That was it. That simple. Benjy got it and so did his sister Amy.
When you start saving and investing when you’re young, time is a powerful investing partner.
Great article Ellen! I have a 13 year old and this gives me a framework I can share with her when she is making money. So appreciate you!
I’m so glad it’s helpful Shannon!
Wow! I salute you, and you are a great parent! We all know that saving for something in the distant future is super hard. And you making your kids save for retirement makes you a super awesome parent. I have three little kids now, and they are saving their money, but not for retirement yet. Now, I have thoughts of teaching them about saving for retirement. It pays to know how much to save for retirement so that you’ll be able to take full advantage of time and opportunities if one starts early, just like your teenagers. Good job and keep up. Also, good job on securing your own retirement also! Few people are able to do that. I’m happy for you.