Starting a Teenager’s IRA


My son has started to earn a bit of money through odd jobs, and I’ve convinced him that it would be a smart thing to start an IRA account rather than just blow all of his money on cars and stuff.  The reason is the effect of compounding.  Basically, for every six years that you have to invest in a wide basket of growth stocks (such as in a diversified mutual fund), you double your money.  This means that you’ll make twice as much starting at 16 than you will at 22.  How significant is this?  Well, a 16-year old who starts and IRA and puts in $2,000, then never touches it, will have about  $1.2 M at age 70.  To get the same result, he would need to put in $4,000 at age 22, $8,000 at age 28, and $16,000 at age  34.

In order to put money into an IRA, you need to have earned income, meaning money that was earned through a job or through starting a business, rather than money that is given to you or money that you earn through investing.  All of the money needs to be earned in the year it is put into the IRA, although you actually have until April 15th of the following year to send in the money.  So if you earned $2,000 in 2017, you could start an IRA with $2,000 and send in the money until April 15th of 2018.


One issue with a child starting an IRA is that many places have minimum amounts to start the account and minimum amounts that can be invested in a fund.  Many of these fund companies require minimum investments of $3,000 or more, which can be difficult for a minor to earn, let alone part with at the end of the year.  I found that he could start one with Vanguard with a $1,000 minimum investment, and that he would have two funds to choose from.  These would be the Vanguard Star fund and the Vanguard Target Date Retirement funds.

An issue he is having, however, is that even earning $1,000 will be difficult.  You see, his summer break is only 2 months long because we have a “modified year-round” schedule where   they only get two months off in the summer, then they get a two-week fall and spring break.  Add a family vacation and maybe a camp in there, plus he starts with the marching band a couple of weeks before school starts, and he doesn’t have very long to work a job.  He could work during the school year, but he has quite a bit of homework each night, so his grades would probably suffer.

Luckily, my son is something of an entrepreneur.  Seeing a need for regular chips and other good-tasting snacks due to the restrictions placed on the school lunch program by Michelle Obama’s initiatives, my son started a covert chip business where he sells chips to his classmates (and sometimes a teacher) between classes.  He claims that there is nothing in the school rules against selling snacks out of his jacket, and we’ve checked as well.  He has even started using an ice pack to keep chocolate bars from melting so he has added Hershey bars to the product mix.  (He says that girls almost exclusively buy the chocolate, where guys tend to buy chips.)  He is learning about running a business since he needs to keep a careful inventory of his expenses and sales so that he can file taxes and start an IRA.

Unfortunately, with his business he was only able to earn about $300 last year and is unsure if he’ll be able to continue this year or not.  I checked to see if there was a way he could start an IRA with less money.  I found that he could actually start a custodial IRA with as little as $100 at Schwab.  We will probably open his account this week with the $300 he has earned so far and then add to it as the year progresses.  I’ll provide reports later on what we invest in and on how his IRA is doing in future posts.  Stay tuned!

Anyone out there start a custodial IRA?  What has been your experience?

Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

How Much Do You Need to Be Saving for Retirement?


The goal of retirement savings is to ensure you have enough saved to replace your income in retirement without needing to spend the principal, or at least without spending all of the principal during one’s lifetime.  In retirement in general, I would advise being invested mostly in a diversified portfolio of stocks and bonds with 5-10 year’s worth of expenses kept in a money market account.  This would provide growth to account for inflation while also providing security against the ups and downs of the market.

A good rule-of-thumb is that one can expect to be able to spend about 8% of the value of one’s retirement accounts each year without decreasing the principal.  The reason is that stocks can be expected to return 10-15% over the long-haul.  If 8% is extracted each year, that leaves between 2 and 7% to make up for inflation.

What SmallIvy’s listening to now:

 Great new country group, with hit song, “Shut-up and Fish”

Note that one could get a little more sophisticated in the timing of withdrawals from the investment portion.  This would be done by  not selling stocks and allowing the cash reserves to decrease (down to about the five-years’ worth of expenses level) when the market returns less than 10% in a year, and selling additional stock, raising the cash level up towards the ten years’ worth of expenses level, in years when the stock market returns more than 15%.  On years when market returns are in the 10-15% range, only enough shares would be sold to maintain the current amount of cash.  This is a good way to deal with the non-uniform returns of the market, allowing one to sell when the prices are high and hold when the prices are low.

So, how much should be saved to get to this level?  If one starts out early (in one’s twenties), a savings rate of about 10% of gross income will be sufficient.  Starting later in life, in one’s thirties, that amount should be increased to the 15% range.  The increase is needed because one has lost a lot of the effects of compounding. ($1 over 45 years will double about seven times, resulting in an increase of $128 per dollar invested, while $1 over 25 years will only double about five times, resulting in an increase of only $32 per dollar invested).   If one does not start saving until one is in one’s late forties or fifties, as much as possible should be saved because one would need to basically save most of the money directly (on the order of $1 million dollars).


Magazines from Amazon

Note that these percentages do not take into account employer matches on 401k’s and so on.  To be conservative, it is best to ignore these and just save the extra anyway.  In that way if the employer decides to stop matching it will not be necessary to come up with the difference.  Because one tends to spend up to the limit of disposable income, increasing retirement savings is not an easy task.  One needs to put retirement savings into the plan before Netflix and cell phone companies start calling.

Note also that retirement savings should come before saving for children’s college.  They can get scholarships and financial aid, attend a less expensive college, and/or work their way through college.  If this sounds harsh, you can ask them if they would prefer to go to Harvard and then support mom and dad in retirement or go to the state school and let mom and dad take care of themselves.

So what about Social Security?  Well, unfortunately I would not count on any Social Security income in twenty to thirty years.  The program is already spending more than is taken in and all of the money sent in before has already been spent (remember the $200 hammer?).  It is likely that benefits from that program will continue to decrease, both in the raising of the retirement age and decrease in monthly payments

The best people can do is to resist the drive to push contributions for that program higher.  Americans are already putting about 15% of their incomes into the program, meaning that one needs to save about 25-30% of one’s income for retirement when only 10-15% would be needed if the money stayed with the individual (or the money were truly segregated and invested to get market returns).  If contributions were raised to 25% of income or more, it is unlikely anyone would be able to save on their own.  Living on Social Security, at $1500 per month, would then be the new, unattractive norm.

Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

How to Grow Rich Slowly


Everyone has seen the late night advertisements.   There is a guy standing in a large backyard by a sky-blue pool with tropical flowers and a large stucco-roofed house in the background.  Perhaps he has a woman 10-20 years younger than him lounging next to him in a bikini, enjoying the sunny day.  They are both probably wearing sun glasses – wealthy people are always wearing sunglasses.  He says that he is ready to share the secrets to building great wealth and obtaining economic freedom.

He then proceeds to tell you that you can make a fortune while you keep your day job using his system.  It may be a real estate trading scheme.  You may be buying and selling penny stocks.  Perhaps you are doing multi-level marketing — a technique only a hair different from a pyramid scheme.  Maybe you are selling products over the internet for them.  All you need to do is set up an account and then check each day to see how much cash you made.  Just sign up for their seminar, which conveniently is coming to the Holiday Inn near you.  The price is never mentioned.

Unfortunately, wealth will not come to you from some scheme.  If there really were a scheme that could create untold wealth, why would they share it with you?  Why not just sell the real estate themselves?  Why wouldn’t they set up their own websites to sell their products?  If the individuals in the commercials actually are wealthy (and they didn’t just rent out a house for the commercial), you can bet that they got that way off of the fees for their seminars and classes, not from the scheme they are presenting.

 

The Compound Effect

Getting wealthy through starting a business, which is the fastest way, requires time, risk taking,  hard work and long hours.  Getting rich through investing luckily doesn’t require as much hard work, but it requires sacrifice,  prudent risk taking,  time, and discipline.

Sacrifice is required.  You don’t buy a new car every few years; you buy a 3-4 year-old car every 5-8 years.  You don’t buy a boat; you rent one during the few occasions you actually go boating during the year.  You don’t eat out every night; you learn to cook and eat out perhaps once a week.  You set a budget and stick to it, and that budget has less money going out each month than is coming in from your job.  You understand that by waiting and buying the toys later for cash and from the gains from your assets, you can have both the money and the toys.  Buy them now, on credit, and you’ll end up spending twice as much for them as the sticker price.  Plus in five years, they’ll be old and broken and you’ll still be making the payments!

You take prudent risks.  This does not mean going to Vegas and betting on red.  It means investing your money in places where the odds are in your favor, but that grow faster than the rate of inflation.  Things like stocks, real estate, ETFs, mutual funds, and bonds.  These investments allow your money to earn money and compound, growing as you work so that eventually your portfolio is providing more income than your job.  This is when things really start to happen.

 

For more information on why you can have too much diversification, try one of these great books:

        

Growing wealthy requires time.  Do some calculations on compound interest and you will find that very little interest is made in the first few periods, but huge amounts are made during the last few.  Try this experiment: start by placing a penny in a jar.  The next day place two pennies, the next day four pennies, and so on, doubling the amount each day.  See how much you will be putting in the jar by the end of thirty days.  (If anyone does this, please write a comment telling everyone what happened).  Be patient and let your money compound.

Finally, discipline is required.  Money needs to be put away every month into investments.  It doesn’t matter if the market is up or down, put some money away.  If the market falls through the floor, buy all you can.  If the market seems really pricey, perhaps hold back a bit on the side in a money market account, but put some in anyway in case you are wrong.  In any case save some money each month from you earnings.  Consistency is the key.

Learn how to use mutual funds from the founder of Vanguard:

 

 

 

 

 

 

 

Join the conversation and help make this blog more exciting!  Please leave a comment.  Also, if you have an investing question, email  vtsioriginal@yahoo.com or leave the question in a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Blog at WordPress.com.

Up ↑

%d bloggers like this: