Making Retirement a Part of Your Teens Financial Education

By on January 1, 2017

I was working by the time I was 15, coaching other kids for my private sport club to pay for uniforms, prom and save for college. My eldest, at fifteen, expects to bring in about $3500 this year as a science camp counselor during spring and summer vacations. I gave her a simple choice: she could have her money deposited in the bank for some fun money and college savings OR she could save $3000 this year (and $500 over the next two years) to pay her future self a million dollars.

Who Doesn’t Want to be a Millionaire?!

It’s rare that families consider the possibility of giving a child a running start on retirement savings, however, an early start while they are without their own financial responsibilities could mean millions by age 70. And while 70 may seem far off to them, you understand the struggle of trying to fund a secure future while paying off student loans, supporting a family and buying a home, so why not give them a leg up?

If you are the parent (or grandparent) of a teen who has just landed their first job — or if you pay your kids who work at a family business* — you have a great opportunity to boost their financial literacy with a little lesson in saving for retirement. When your child receives their first paycheck, review the financial literacy basics like taxes and banking, then help them maximize job earnings by discussing ways to manage their money far into the future.

Here are some strategies for opening the conversation from the anatomy of a paycheck to funding a million-dollar retirement:

Turn a First Paycheck into a Teachable Moment

Your teenager may be surprised by the amount they receive on their first pay check in comparison to what they thought they were earning. This is will be an excellent time to help them read their pay stub, then explain a little about where the money went – to taxes and deductions – and why.

Net “Take Home” Pay = Gross Pay – Required Taxes – Voluntary Deductions

Required Taxes

Many young people will notice that they have had some money taken out for federal state (and sometimes local) income taxes, then there will be a series of deductions labeled by various acronyms and abbreviations. All workers are required to pay income taxes, however how much and when it is paid can be customized (to a degree).

Income Taxes: Generally, their employer is simply withholding the amount your teen can expect to pay (if they overpaid they will get it back on their tax return). You and your account may also choose to have no income tax withheld, but ensure they understand that they may have a tax bill to pay come April.

FICA: The other required taxes are listed as Federal Insurance Contributions Act (FICA), which combines the taxes and benefits of Old Age Survivor and Disability Insurance (OASDI), a social security and disability program with Medicare. Unlike income taxes, all workers must pay into these programs and here is your opening to discussing retirement.

It is important your teen understand that they can get their FICA money back if they become disabled or reach retirement age. Every year they work, your teen is earning social security credits; the government promises to oneday support retired (or disabled) individuals based on the number of credits earned over their lifetime. The money they pay in FICA today is going to support the current elderly (or disabled) who earned credits years ago, however, one day your teen will have sweet vengeance when some future teen is paying FICA taxes to support them.

Voluntary Deductions

Other paycheck deductions are voluntary. If your teen works at Starbucks more than 20 hours a week, they may be automatically enrolled in company retirement benefits. Employees can also pay health insurance or make charity donations through their employer. Most teens have health covered through their parents, so these deductions from their pay is unlikely.

And there it is, the basic paycheck. Now the question is, what will your teen do with the money?

Talking to Teens About Retirement

In some families, teenagers with income contribute to basic family expenses. In others, parents expect summer earnings to replace the allowance they received as children. Many teenagers save for their first car, but most put money away for college.

If your teen doesn’t need the money for basic necessities or can spare some of their college savings, you might mention that even a small amount set aside now can grow significantly as the interest compounds over the years. It’s never too early to start saving for the future, no matter how far away it seems.

Since you’ve just discussed their paycheck and taxes, it might also be an excellent time to tell your teen that their Social Security benefits won’t cover all of their needs in the future (perhaps use a grandparent as an example who has savings, pensions, etc. to supplement their income). There are typically two ways teens might easily save a little for retirement now, either a: pensions, 401 k or similar employer-based retirement account, or b: individual Roth IRAs.

Pensions and 401 K Accounts

If your teen is working for a startup, large company, non-profit or government entity, they may be eligible for an employer retirement fund, 401 K account. Why not take advantage of putting a few dollars into these accounts and simply letting them accrue interest or rolling them over later in life. The funds can be withdrawn directly from your teen’s salary, and placed into a tax deferred account that will draw interest. Over 30 years of accumulation, small contributions can turn into quite a sizeable nest egg. Note that your teen cannot withdraw these funds without paying tax and interest penalties.

You and your teen will need to keep track of these funds. If you have lost track of an account, however, the National Registry of Unclaimed Benefits can help you relocate the account.

Individual Retirement Account (IRA)

Many teens will not work enough hours to qualify for employer-sponsored retirement benefits, however they can set up an IRA with a bank or other IRS-approved organization. An IRA is a great way to save for the future, offering big tax advantages to let the money grow over time. A teen who invests a small amount of their earnings in an IRA can reap significant investment returns in the future.

The Benefits of a Roth IRA for Working Teens

There are many accounts and investment products you can use for retirement savings, but some experts think the Roth IRA — as opposed to the traditional IRA — is a good choice for working teens because of its tax-free benefits, flexibility, and the fact that it allows parents to make contributions. I will be offering my teen a matching contribution up to $4000 (matching her estimated contribution).

If you are trying to persuade your teen to save, here are some simple numbers to offer your teen: If you take $8,000 in savings from a few summer jobs and put it in a Roth at age 17, it will grow to $235,656 by the time you’re 67 (assuming a 7 percent annual rate). Wait until 25 to open an account with that first contribution of $8,000 and the balance is about half-as much at $119,796.

At age 25, if your teen begins making annual contributions of $3,500 (well below the maximum limit), they will have $1,099,366 by age 67. If they can afford to make maximum contributions of $5,500 they stand to accrue $1.5 million or more. This is their chance to get a head start!

Advantages of a Roth IRA

The Roth IRA is a particularly good investment choice since most teens will fall in the lowest income tax bracket for a few more years. They can count on being in a higher bracket at retirement and will benefit from tax-free withdrawals in the far future. In addition, because most working teens do not make enough money to pay income tax, the tax deduction for contributions to a traditional IRA provides little benefit.

In order to open a Roth IRA, the IRS requires your teen to have earned income through employment but the contributions don’t all have to come from their paycheck. Parents, grandparents, uncles, aunts and others looking for a way to make a meaningful contribution to a child’s future financial stability, can make contributions on top of the teens savings. This is a good way to encouraging your teen to save and directly reward them for their hard work.

The Roth IRA offers unusual flexibility, the original contribution can be withdrawn after five years tax-free and without paying a penalty. This makes the Roth IRA a particular good choice if you and your teen need to use the money for college as a last resort. Thankfully, when filling out the FAFSA to determine eligibility for various forms of federal financial aid, your teens Roth IRA (or other retirement account) is not part of the Expected Family Contribution calculation.

Get Some Guidance From a Financial Advisor or Tax Professional

The rules relating to retirement accounts and taxes can be complicated. Be sure to do your research and speak to your trusted financial advisors before committing to any one particular product. An experienced financial professional can help you and your teen examine the options and plug in the numbers to greatly shorten the learning curve into a success curve.

Paying for college is an enormous challenge, but that problem may end up paling in comparison to the shortfall most people experience when they don’t have enough to cover their basic expenses after retirement. The earlier we start helping the youngest among us avoid that fate, the better; plus the lesson in financial literacy could turn a young earner into a regular saver who retires in style.

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About Scott Ho

FSN insurance and retirement journalist - Planning for your retirement or understanding your insurance needs can be confusing and difficulty. Scott knows these tasks can seem daunting. He offers his experience to make choosing insurance coverage and planning for your golden years a successful endeavor. Connect with Scott at !

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