Most young people have a lot of goals to save for: a car, a house, marriage, etc. Unfortunately, it never seems like there is enough money to go around. It can be very challenging just to make ends meet and keep up with the cost of everyday life. There is a lot to juggle! The most important thing to do though when you are saving for any purpose is to start as soon as possible, even if you can only put away a few dollars at first.
The benefit of a having a long time horizon
Of all the goals to save for in life, retirement can have the longest possible time horizon. When you start saving early, that long time horizon is a huge advantage. When you keep money invested for many years, it has a lot of time and potential to grow. This is often referred to as the power of compounding (year after year of investment returns). Sure, investors sometimes lose money, but with sound investments made for the long term, the chances of accumulating a lot of money are good.
It can be hard to focus on saving for retirement because that period of life can seem so far out in the distant future. But when you start saving early, you may only need to invest a relatively small amount of money to meet your retirement needs. Instead, when you put off saving for retirement, your savings have less time to grow, and therefore you need to put more money aside to meet your retirement needs.
Starting early is the key!
For most teenagers (yes, teenagers!), the last thing they have on their mind is saving for retirement, but that is a great time to start. This is where a wise parent or grandparent can step in to help and open a custodial Roth IRA for a child so that they can start investing as soon as they get their first part-time job. Any money invested during a person’s teenage years has many, many years to grow. The following example shows how important a factor time is when saving for retirement.
It is absolutely possible! Parents or grandparents can help set children up for retirement by getting them started at an early age and even putting aside some money for them. A custodial Roth IRA is a great choice. Investments made in such accounts are limited to amounts earned by the child working at a job in a given year, but the actual contributions can come from an adult (parent, grandparent, guardian, etc.).
Example: A teen earns $5,000 working part-time in their first year. Up to that amount of $5,000 can be invested in in a custodial Roth IRA. The teen could invest the full $5,000 that they earned in their job or a parent or grandparent could invest that amount of $5,000 or some amount less than that on the teen’s behalf to the account. To help the teen learn the habit of investing, the teen and the parent or grandparent could both contribute to the teen’s account (up to the max of $5,000 in total).
Under current tax law, amounts withdrawn from a Roth IRA are never taxable. Additionally, amounts invested in a Roth IRA can always be withdrawn at any time should a hardship arise.
Conclusion
It can be impossible to have enough money for all the things you need to focus on: housing, food, education, entertainment, healthcare, saving, etc. It is not easy to juggle a budget and have enough money to do everything. A balanced approach to personal finances is the key. It is easy to put off saving for future needs such as retirement when you are young because it seems like these things are so far out there in the future and there are many other goals to focus on. But it only gets more difficult to put enough away for retirement when you put off saving.
Starting a Roth IRA can be a truly great way to set a young person up for retirement. The best thing to do is just start now, or help your child or grandchild start. Every little bit helps – even if you only invest a few dollars at a time. Make the first step and start saving for retirement. You will be happy that you did!