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Why your children should start saving for retirement in high school, and how you can help

Why your children should start saving for retirement in high school, and how you can help

| March 19, 2018

For many people, saving for retirement starts with a person’s first full-time job, meaning most don’t begin the process until their early-to-mid-twenties.

But what if you could help your children get a head start on their retirement savings, starting as early as high school?

As the old adage goes, the best time to plant a tree was 20 years ago. The same philosophy applies to saving for retirement. So why not give your children the advantage of saving for retirement at a younger age?

How to help your teenage children begin to save for retirement

A custodial IRA is a great way for parents to help their teenagers save for their retirement.

These special accounts are held by a parent for a minor with an earned income. All funds in the account belong to the child, allowing them to get a head start on their retirement saving and procuring the benefits of compounded growth. Though your children can’t control the market, the one thing they do have complete control over is when they start saving for retirement. Obviously, the earlier they can begin to save for their future, the better.

To begin the custodial IRA process, your child simply needs income that is declared on a tax return. While your child’s under-the-table babysitting gig won’t cut it, many teenagers begin their first part-time job in high school, making them eligible for a custodial IRA.

Like a traditional Roth IRA, a custodial IRA requires that contributions are limited to the lesser of total earned income for the year and the current maximum set by law, which is $5,500 in 2017 and 2018 for those under 50 years of age. However, there are several requirements specific to a custodial IRA account that must be followed and are listed in further detail here. One of the biggest guidelines for parents to be aware of that is that the custodial IRA must be managed for the benefit of the child, meaning parents cannot commingle money from their personal retirement accounts.

However, to further your child’s savings, I encourage parents to “match” their child’s contributions. Though they won’t be able to place the funds directly in a custodial IRA, parents could open a special savings or checking account for their matched contributions. This is a great way for parents to support their child’s early retirement savings efforts.

Why early retirement savings add up for teenagers

Early contributions in a retirement fund can give your children one of the biggest heads starts they could ask for in life. Saving early makes a tremendous impact on their retirement.

For instance, if your child began saving at 16 and invested $2,000, they could end up with around $4,000 by the time they graduate, assuming they do so around 24 and average a 10 percent growth rate. When that child graduates, they’ll be much more inclined to come out of college and continue to save. If their parents matched their contributions and continued throughout college, their savings could potentially be even higher.

With this, your child can get a 6-10-year head start of working towards their retirement goal.

Here’s another way to illustrate the advantages this provides to your child. If your child put $2,500 a year into an IRA from ages 15-22, assuming 10 percent average growth, they’d have $800,000 in that account by the time they reached 60 (I used the rule of 72 to come to this conclusion). This is assuming they never contributed to their savings ever again, meaning there would be potential for even greater growth, as most people would continue to save.

The power of time is a pretty incredible thing. After all, it’s never too early to start thinking about saving.

To learn more about how you can help further your children’s future financially, please click here to contact me to learn more about my complimentary workshop, Raising Financially Fit Families, which I present to groups and organizations of all sizes.


Registered Representative/Securities and Investment Advisory Services offered through Signator Investors, Inc. Member FINRA, SIPC, and Registered Investment Advisor. 8515 Cedar Place Drive Suite 108 Indianapolis, IN 46240 134-20180301-437121