Teenager Takes Parent’s Advice!
My youngest son, Tim, is a high school junior and is employed at a local grocery store. One of his classes is entitled “Personal Finance” and as such he has been keeping tabs on the stock market and the economy in general. Earlier this year, I suggested that he open a Roth IRA. The conversation went like this:
DAD: “With some of the money you have earned from working, why don’t you open up a Roth IRA? Think of the money you will have when you retire in 50 years! Use a financial calculator and look up what your investments could be worth if you start now.”
Here are Tim’s findings. The numbers are amazing:
(The amounts below are based on annual payments - where applicable - for 50 years at an 8% tax-deferred growth rate compounded annually.)
| A one-time investment of $1,000 = $46,902 A yearly investment of $1,000 = $573,770 A yearly investment of $5,000 (max. annual Roth IRA contribution) = $2,868,851 |
TIM: “But what if I need this money before I retire? 50 years is a long way off.”
DAD: “That’s true, but did you know that you can withdraw the entire amount of your contributions tax and penalty- free at any time. If you need the money for a house, after having the account open for five years you can withdraw up to $10,000 of contributions and earnings for a first-time home purchase. But remember, primarily, this account is earmarked for your retirement. And by the way, because this account is a Roth IRA, once you turn age 59- 1/2, all the money, including the millions of interest earned, is INCOME TAX-FREE!”
TIM: “OK, I’m in, how do I open an account?”
Tim opened his Roth IRA earlier this year and contributes to the account periodically by using a strategy known as “dollar cost averaging”. I am trying to develop the habit of saving in him. It also gives me and my wife peace of mind knowing that he will be financially secure in his retirement years.
The other day, in Tim’s personal finance class, the teacher asked the students how they were saving money. Tim raised his hand immediately and responded “I contribute to a Roth IRA.” He tells me that the teacher was quite surprised and asked if any of the other students had a Roth IRA. Tim was the only one. I am one proud dad!