How $50 a Month Can Make Your Teen a Millionaire

This summer thousands of teens are learning to say, “Would you like fries with that?”

In our current economy just about any teen seeking work can find a summer job. If they work 20-40 hours a week making $8 an hour, they can earn $2,000-$4,000 over the summer.

Could they give up $50 a month or $600 a year to lay the groundwork to become a millionaire?

Here are the steps to follow:

1. Mom or dad set up a custodial Roth IRA. Until your child is age 18, she or he is a minor so a parent is needed to set up this custodial account. A Roth IRA means that when the money is accessed at retirement age, it will be 100 percent tax free.

2. Invest $50 a month in a low fee indexed mutual fund within the Roth IRA. This can be an S&P 500 index fund or one that tracks a larger segment of the market like a Russell 3000 or a Wilshire 5000 fund. We’ll assume an 8 percent rate of return, although historically it has gained over 10 percent on average, despite seeing decreases about once every four years. (You can’t predict future returns, but one thing is sure – if you save $0 you can guarantee earning 0 percent.)

3. Each year increase the amount invested by 2 percent to reflect inflation.

4. Wait until age 75. Enjoy your $1,000,000.

Granted, 60 years is long time to wait for a payback, so many teens may rather have the $50 now. However, the payback starts much sooner than this. Here is why:

What if you waited ten years to age 26 to start saving up to get to that $1,000,000? How much would you have to save each year?

You would have to invest an extra $600 beginning that first year and by the time you get to $1,000,000 you would have paid an extra $44,000. These big differences are caused by the power of compound interest. The impact of those extra 10 years, from age 16 to age 25, after 50 years of compounding, grow like a rocket to the moon (which could be a regular destination in 60 years).

To recap, if you start investing $600 a year for retirement starting at age 16, you only have to save 61% of what that 26-year-old has to save for retirement. That’s how you keep an extra $44,000. In other words, starts-at-16 gal is investing $600 less each year by the time starts-at-26-gal begins and still gets to the same $1,000,000.

Want to hear something depressing? The average 26-year-old isn’t thinking much more about retirement than the average 16-year-old. Just for fun, let’s consider what would happen if you wait until age 36 and age 46 to begin saving for retirement.

To get to $1,000,000 by age 75 a 36-year-old needs to begin by saving $3,000 a year. Meanwhile, the 36-year-old who started at age 16 only invests 38% as much and still gets to $1,000,000, contributing $113,000 less. In other words, starts-at-16 guy is investing $2,000 less each year by the time starts-at-36-guy begins and they get the same results. Do you think a lot of 36-year-olds could use an extra $2,000 a year? Those who started investing at age 16 have it.

To get to $1,000,000 by age 75 a 46-year-old needs to begin by saving $7,100 a year.

Meanwhile, the 46-year-old who started at age 16 only invests 24% as much and still gets to $1,000,000, contributing $220,000 less. In other words, starts-at-16 gal is investing $6,000 less each year by the time starts-at-46-gal begins and they get the same results.

So you see, you don’t have to wait until retirement to benefit from starting to save at age 16. How many 46-year-olds would love to have an extra $6,000 each year and still know they would retire as a millionaire?

We’ve tossed around a lot of big numbers, but there is really just one takeaway from this article:

Start saving for retirement as young as you can.

If you don’t you will pay for it, big time. Those who delay too long to begin saving for retirement may find themselves at age 70 working a job saying, “Would you like fries with that?”

Don Milne is Financial Literacy manager for Zions Bank.