When we think of saving for retirement, it’s one of the big goals and you know you should be saving for many years. For this reason, more and more people start saving earlier. So, what would happen if your little child started saving for retirement?
Even though many people start saving for retirement in their 20s, saving earlier can be a better thing. Let’s say your child can make a little bit of money by doing odd jobs, babysitting or mowing lawns. You teach him the idea of saving and he decides to save for retirement.
A Simple Example
Let’s say your child makes $100 every month and puts $40 per month into an investment account. It happens every month from age 10 to 18. Assuming a 7% rate of return, your child will have $5,146 saved by his 18th birthday. And if he leaves the money without adding any cent until he retires 40 years later, he will have $84,601.
This sum will be much higher if your child saves a small amount throughout his life. For example, he adds $100 per month and he will have $349,291 in savings 40 years later. Even though it isn’t enough to retire on, it’s a result of small savings.
How To Start Saving Early
Most children won’t save on their own and they need your help. These numbers mean nothing to them, but you still have good ways to show your kid the importance of saving for retirement.
First, tell your child he doesn’t have to save all his money. Let it be a certain percentage that applies to all earned money. And you can allow your child to decide how to deal with gift money. Then you need to open the right savings account. 1% interest rate won’t do much, so find the option with a decent one.
One of the best options is a Roth IRA that can be opened for a child under age 18 with an employment income, which can be a form of self-employment. This is perfect for children since they won’t incur any tax liability. You will be the custodian until your child turns 18. The contribution limit is $5,500 per year.
You can also give your child a cash-back match to motivate him to save more. For example, if your child makes $100, you can say if he invests $50 in the Roth IRA, you will give an extra $5 to reward his saving behavior.