Don’t Let These 5 Excuses Keep Your Kids From Becoming Millionaires
By: US News - January 09, 2017
Here’s an interesting experience, and one that may be common: trying to set up a small custodial IRA for a niece or nephew at a bank, only to be told that “a minor can’t have an IRA.” While an IRA may not make for an exciting birthday present for a teenager, it’s a good way to start investing at an early age.
According to Vanguard projections*, a 20-year-old investor who begins saving $200 per month in a Roth IRA, and who invested in a portfolio of 80 percent stocks and 20 percent bonds, would have about a 55 percent chance to accumulate over $1 million by age 65. On the other hand, if a 30-year-old investor follows the same program, the likelihood of being a millionaire drops to 14 percent.
The reason for this dramatic difference is that young investors have the opportunity to take advantage of compounding — the process where investments make returns, and those returns make returns, and so on. The graph shows how the wealth curve really begins to bend up as time goes on, just as in the scenario outlined above. This is especially true as you get to 40 years and beyond. In our example, it takes 35 years for the median investor to get to half a million dollars. Then just 10 more years for the next half-million. Then just eight years to tack on another million.
Don’t let these excuses keep your young investor from getting started:
1. “There’s plenty of time.” The here and now is the most valuable time you have. The fact that there is “plenty of time” is exactly the reason you should be investing now. Every dollar you invest now is a down payment on life options down the line.
2. “I’m too young.” Anyone with earned income can open a Roth IRA. That includes minors with a summer job. At the extreme, some people even open IRAs for infants who have modeling income. The youngest IRA owner at Vanguard is less than a year old.
3. “I don’t have the money." Windfalls like a tax refund, or cash gifts from aunts, uncles and grandparents are great sources of money for contributions. And some parents will even choose to match contributions that their children invest for the future rather than spend.
4. “I don’t want to tie that money up." I might need it for an emergency.” One good thing about choosing a Roth IRA is that the contributions you make (although not the earnings) can be withdrawn at any time, for any reason. While we wouldn’t recommend using a Roth IRA as a place to store short-term savings, the money can be used in a pinch, and in the meantime, you’ll be generating earnings that can continue to compound.
5. “I already have a 401(k).” If you just got your first job with a company that offers a 401(k), congratulations! However, once you get past contributions that are matched by your employer, you might still want to consider a Roth IRA for saving additional money. This is especially true if your employer’s plan is filled with high-cost investment options or if they don’t offer a Roth option for your 401(k) contributions. Later in life, you may be grateful for having “tax-diversified” with money in different kinds of accounts.
$1 million sounds like a lot — and it is. But if you get started early, you may be surprised at how attainable it is.
Article source: US News
** Disclaimer Required by IRS Circular 230** Unless otherwise expressly approved in advance by the undersigned, any discussion of federal tax matters herein is not intended and cannot be used 1) to avoid penalties under the Federal tax laws, or 2) to promote, market or recommend to another party any transaction or tax-related matter addressed.