How Much Do You Have to Save and Invest Each Year to Have a Million Dollars at Retirement? (by age)

The best thing you can do for someone, especially if you have children or grandchildren is help them fully fund their retirement when they are still children. It’s actually not very difficult or costly… Just consider this:

1. A dependent minor can earn (this year) roughly $6,800 before they have to file a tax return.

2. Anyone with earned income can contribute to an IRA up to the (this year) $5,500 maximum contribution or as much as they earned, whichever is lower.

3. A child can be paid the “customary and traditional” rate for the work that they do. Even if it could be considered a “chore” instead of a “job” – for example, cutting the lawn might have a customary and traditional prevailing rate of $20 – you could pay this hypothetical child that $20.

4. Accounting for money earned would be simple, just keep a ledger with three data fields: When earned, How much earned, and what it was earned for. Keep that for each tax year and you’ll be fine…

5. Contribute the money to a ROTH IRA and invest in a market index tracker. (i.e. a Vanguard fund, or similar) A ROTH is the best choice because the tax rate of a child earning only a few thousand dollars is going to be 0% and because the ROTH is a post tax account, the money would be taxed at that 0% and then distributed tax free.

6. Note that the money contributed to the IRA doesn’t have to be the money that was earned by the child, it could be a gift, the key is the contribution to the IRA is limited to how much “earned” income the child made. (And the child doesn’t need a W2, this is provable by showing the accounting ledger.)

7. Marvel at the power of compounding interest: If the account earns “only” 6.8% – and the NYSE has a historical market year-to-year return average of 7.9% – the child in question will have quite a bit of money waiting for them when it’s time to retire.

The math shows:
Deposit $20,000 total by age 15
Earn an average 6.8% rate of return per year
Retire at 65
50 years at 6.8% will equal almost $900,000 of tax free money waiting for retirement.

If that kid took over their account when they became an adult and then kept putting $100 or $200 in the account every month, increasing that amount by inflation and by the percentage of their pay increases? Well, the answer is: What would you have done with your life if you didn’t need to even consider how to pay for your retirement?

This is a much better deal than paying for someone’s school, you can borrow money for school but not for retirement. Also, the compounded rate of return for the retirement account is MUCH better because of the extra 30+ years it’s earning a return. (And, I shouldn’t need to say this, but: NEVER borrow against this account for any reason or withdraw any of it prior to retirement…)

Do this for a child you love and you can change their world!