Teens looking for work this summer have been met by a bumper crop of opportunities. If you’re a teen or the parent of a teen reading this, we have some very compelling numbers to show you that we hope will convince you to consider saving at least some of that summer pay.
Very simply, it could make you a millionaire!
Saving early and often is the key to reaching the $1M milestone
When you’re starting out at your first job, the idea of retirement seems a million miles away. Life can take you in so many different directions over the decades, but this much is certain: Getting off on the right foot by saving early is a smart idea. If you can manage to save just a little bit while you’re still under mom and dad’s roof, you’ll be much richer for it down the road.
In order to save any money, you need to have a job. The good news on that front is that employers were out there looking to hire summer employees in big numbers. According to job site Snag, 58% of employers said they were going to be hiring more summer employees this year than last.
Of course, you won’t make a fortune from your summer job. But the good news, according to CareerBuilder, is that some 87% of employers hiring this summer plan to pay $10 or more an hour.
The thing about financial planning for the future is that it’s not about the money you earn; it’s about the money you save.
Need proof? Just look at the examples of the janitor who stashed away $8 million or the librarian who was worth $4 million. They did not work in high-paying fields. They got rich by scrimping, saving and having time on their side. They started saving early in life.
Using a Roth IRA to your benefit
If you manage to save money from a summer job, you’ve got to earmark it for long-term investment. In fact, that’s the very definition of what it means to be an investor: It means to take money that you won’t need for many years and make it grow. Typically, the means putting it to work for you in the stock market.
Don’t worry, you don’t need to know much about Wall Street to get started investing. You just need to pick the right vehicle for your money.
If you have earned income this summer, money expert Clark Howard’s preferred savings vehicle for you is a Roth IRA.
With a Roth, you get an individual retirement account where you can squirrel away after-tax income up to $5,500 per year. Your earnings on the account grow tax-free, and when it’s time to make withdrawals way down the road, the money you take out won’t be taxed either.
But remember, the Roth is just the vehicle. Clark compares the Roth to being like a house. It’s an empty shell that you’ve got to put some furniture in. The “furnishings” you pick are the stock investments you put in your Roth.
The consumer champ has a strong bias against stock picking and toward investing your money in low-cost index funds that track the performance of broad market sectors. We’ve got a list of some great index funds here that won’t eat your money up with fees. In some cases, you can get started investing with just $1!
Do this before life gets in the way with student loans, family obligations and other things that can take you away from financial goals. The way to ensure a stable financial future is to start planning for it when you’re still young. In fact, the younger you are, the better.
CHART: Who wants to be a teenage millionaire?
OK, we’ve reached the part where we show you the money. Below you’ll see how your money can grow over time.
Before we get to the good stuff, the basic idea here is that if you contribute $2,000 year to your Roth IRA for 10 years early in life, it has the potential to grow to around $1 million by your 70th birthday. With the Social Security Administration pushing full retirement age out further and further, 70 is becoming the new 65!
Now, a couple of caveats here: First, you have to do this from age 15 to age 25 to make it work.
Second, the numbers below assume you never make any withdrawals from your Roth IRA until age 70: Not when you want to buy your first house. Not when you run into medical debt. Not when you lose a job and need to support yourself until you find other employment. Never!
That’s because if you do make any withdrawals, the numbers won’t work.
Finally, the chart below assumes an annual growth rate of 8% by investing your money in a low-cost index fund. While that may sound like a lot, it’s helpful to keep in mind that the S&P 500 has seen an average annualized total return of 9.8% over the past 90 years.
(Editor’s note: The S&P 500 is an index that tracks the financial performance of the 500 largest companies in the United States.)
So, without further ado, the chart…
|Time frame/Age||Contribution amount||Growth total|
|Year 1 (15 years old)||2,000||2,160|
|Year 2 (16)||2,000||4,492.80|
|Year 3 (17)||2,000||7,012.22|
|Year 4 (18)||2,000||9,733.20|
|Year 5 (19)||2,000||12,671.86|
|Year 6 (20)||2,000||15,845.61|
|Year 7 (21)||2,000||19,273.26|
|Year 8 (22)||2,000||22,975.12|
|Year 9 (23)||2,000||26,973.13|
|Year 10 (24)||2,000||31,290.98|
|Years 25-69||ZERO ADDITIONAL CONTRIBUTIONS!||N/A|
|At your 70th birthday||998,822.14|
The power of compound interest is what makes this all possible. Don’t believe the numbers? Play around with them yourself using the compound interest calculator at MoneyChimp.com.
You may have heard the oft-quoted maxim from Albert Einstein that “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” Until you see the numbers staring you in the face, it can be hard to get your head around.
The beauty of this plan is that you never have to contribute another penny toward your Roth IRA again after doing it for 10 years. And because you’ll be making contributions during your early days while you may still be living at home with mom and dad anyway, this plan will hopefully be that much easier!
Of course, we here at Clark.com encourage you to keep saving past your 25th birthday, but you get the idea!