Dear MarketWatch, 

My son is turning 15 next month and just got his first job working at a fast-food restaurant. I want my son to know the value of money. I have talked about saving and investing to him a lot over the years in the hopes some of it will sink in and start him off on the right foot financially. 

He will be making $9 an hour and I want him to be able to enjoy the fruits of his labor while also making wise financial decisions to get him in the habit of saving young. If it was up to me he would save most of his paychecks for retirement but I’m not foolish enough to think he has the same dreams at this point in his life. 

He is going to want a car soon and will be spending money. I want him to open a Roth individual retirement account and start funding it with his first paycheck. Can you suggest some saving plans for him? How much should be his to spend, and how much should go towards retirement, a car and college? 

I have nothing saved for college, but he gets free tuition for any in-state college due to my disabled veteran status. We don’t have any money saved for a first car yet so I think he should save up some money for that as well and I’d be willing to also fund a portion of his first car as a gift as well as help with insurance and gas. 

Can you suggest a savings plan? I want him to save for retirement and was wondering what funds should we be looking at? Target-date funds? Index funds? It’s such a long time until he retires, I am not sure what the best investment strategy is. 


Proud Midwest Dad

See: I’m 62, unemployed, living off of my savings and waiting on Social Security — ‘Can I go fishing for the next 25 years and forget about work?’

Dear Proud Midwest Dad, 

Thank you so much for writing in with this question — I really love it. Your son is lucky to have you, and any lesson you teach him about saving money for his future will benefit him in the long run. 

You’re right to think he will probably not want to put a majority of his earnings in a retirement account, but any amount that he saves for the future will grow significantly with compound interest by the time he gets to retirement. Think about it — if he’s 15 years old now and he retires at age 65, that’s 50 years’ worth of compound interest! 

Read: Young people should be investing in stocks — here’s why

The actual breakdown of his paycheck will vary on a few factors, such as the cost of his goals (like a car or college), how much money he can reasonably expect to spend on a day-to-day basis and if he has any other wishes for his money, such as paying it forward. 

Some advisers suggest “thinking in threes.” For example, a small percentage (such as 10%) could go to charity, the second portion would be a larger chunk that goes toward long-term goals and the remainder would go to the “fun stuff,” said Karl Frank, a certified financial planner and the president of A&I Financial Services. Joel Cundick, a certified financial planner at Savant Capital, also echoed a small percentage to charity. “Starting earning with a mindset of giving back can be valuable,” he said. “For the rest, the son should spend as he wishes to spend. Lots of learning takes place with that level of freedom.” 

Cundick suggests encouraging him to try and save half of his income. If the car is a nearer-term goal, he could allocate 25% toward his car and 25% could go to a longer-term goal, like retirement. 

Check out MarketWatch’s column “Retirement Hacks” for actionable pieces of advice for your own retirement savings journey 

Perhaps have him map out his current and anticipated spending, and also write down how much he expects his other goals to be, such as the price of the car he wants or how much college will cost him (even if he does get free tuition at any in-state college). If he were to look over his expenses, such as lunch out with friends or trendy clothes (at least that’s what I was spending on when I was in high school), he might see that he’s spending more than he’s comfortable with, especially if that money could go toward a car instead. Writing it out lets him visibly see how each dollar he spends is a dollar less he can put away for his future or the big-ticket items he wants. 

Consider sitting him down and talking this out with him. “As an industry, we cannot emphasize enough how impactful developing good personal finance and savings habits early on is for his son’s future,” said Jamie Rugg, a certified financial planner and vice president of wealth management at Highline Wealth Partners.

Retirement saving is a hard sell for a lot of people, especially when they’re younger and know they have decades to go until they’re retired. But if you show him the beauty of compound interest, and how a dollar today could multiply substantially in that timeframe, he may be more inclined to save for the far-off future. 

Take for example a full $6,000 annual contribution to a Roth account every year for 50 years. In a low-cost index fund with an average 6% return, that money would grow to be $79,000 in 10 years, $220,700 in 20 years, $474,350 in 30 years and $1.74 million in 50 years, said Kara Downing, a certified financial planner and co-founder of Endeavor Wealth Advisors. “Make sure the child receives copies of his or her monthly account statements so they can see their money grow,” she said. 

As for where to save, you’re right. A Roth individual retirement account is an excellent investment vehicle for a teenager, especially considering he’s most likely in a very low tax bracket. As you’re probably aware, Roth accounts are funded with after-tax dollars, as opposed to traditional IRAs, which use pre-tax dollars. The money comes out tax-free at 59 ½ years old, but investors can take out any of their contributions prior to that age. 

Also see: We have $7 million for retirement but ‘I feel bad about not working’ — should I retire anyway? 

There are also penalty-free withdrawals allowed for a variety of life’s milestones, such as qualified education expenses (including tuition, fees, books and computers) or up to $10,000 for a first home purchase. “It’s possible that one day the teenager will earn too much to contribute to a Roth IRA, so there’s no better way to jumpstart a teenager’s retirement savings in their teens than allowing compound growth to do it’s magic for 50+ years,” said Peter Lazaroff, a certified financial planner and chief investment officer at Plancorp.  

The annual contribution limit for a Roth IRA in 2021 is $6,000, but keep in mind your son wouldn’t be able to contribute more than he’s earned. For example, if he earns $3,000 in 2021, the maximum amount he can contribute to that Roth IRA is $3,000 for the year. The Roth IRA would also technically be a custodial account, which means a parent, such as yourself, would act as owner or custodian until the child reaches age of majority. 

To make it seamless, you could have him set up automatic transfers aligned with the frequency of his paychecks, such as from his checking to a savings account for his car or an investment account for his retirement goal. “Even though the amount he sets aside may seem small, the regular contributions will build over time and most importantly develop strong saving habits,” Rugg said. “When the paycheck comes in, pay yourself first by saving for your future before spending on other items.” 

If you’d really like to incentivize your son to save for retirement, and you have the means to do so, you could offer to match his contributions (so long as you don’t exceed the limits). You could do a dollar-for-dollar match, or a percentage of his savings. Any amount would be appreciated — especially in the future. “Teaching the power of saving and matching will change the son’s financial life,” Cundick said. “And if some of that savings can take place in a Roth IRA thanks to the son’s earned income… all the better!” 

Readers: Do you have suggestions for Proud Midwest Dad? Add them in the comments below.

Have a question about your own retirement savings? Email us at [email protected]

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