A teenager could have more than $1 million at retirement, with very little effort, if he or she starts saving from that first summer job.
IN THIS PACKAGE
- Disciplined saver faces a big expense
- Seasonal slogans may not always peg investment truths
- A little money, lots of time can make teen a millionaire
- Tax strategy can save on stock distributions
- The savings game
- The Leckey file
- Getting started
- Spending smart
- Can they do that?
- Taking stock
- Approach to retirement can become filled with turbulence
- The week ahead
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When she was growing up in Hollywood, Fla., Deborah Koch was like most teens. She liked to buy things. Anything.
So she went out and landed a job. She worked for her dad in his office, filing papers, running errands, putting things away.
Her dad is Jeffrey Koch, a certified public accountant, money manager and personal finance specialist. He started filing tax returns for Deborah; son, Matt; and daughter, Terri, as soon as the money from lawn mowing or baby sitting began to come in.
Deborah is now a senior vice president at Gibraltar Private Bank & Trust in Coral Gables, Fla.
"All three of my children funded individual retirement accounts very early in their lives, courtesy of their compulsive father," Jeffrey Koch said.
By the time Deborah landed her first job that was not at Dad's office, she was 16 and well along in saving for retirement.
The Koch children put half their earned income as teens into their retirement accounts. It's important to note that money going into a retirement account must be earned rather than be a gift from parents or family. That's why Jeffrey Koch filed the kids' returns as soon as they started making money.
In other families, I've heard that parents match that contribution by giving the kids the amount they saved in the IRA.
At a later date, Dad converted the traditional IRAs to Roth IRAs for the children, so that their future retirement withdrawals will be tax free. Then the money grew.
"He would show us the statements," Deborah Koch said. "At the time, it didn't mean very much. But it got bigger and bigger."
A few years ago, when her balance neared $40,000, Koch decided to take a $10,000 withdrawal that is allowed for first-time home buyers from a Roth IRA.
That's how her summer jobs helped her to buy her condo.
And she still has a substantial sum set aside for retirement. Koch is 37. She has three decades in which to watch her savings grow.
The lesson she got from her dad: "He showed us the value of time."
There are two things you can control about your retirement. One is when you start to save. The other is how much you save.
"Almost everyone focuses on areas where you have very limited control. You don't control interest rates, the dollar goes up and down, stocks go up and down," said Fran Kinniry, a principal in Vanguard's Investment Counseling and Research Group. "You can't choose what the investment environment is going to be, but you can choose how early you start saving."