How Every 16 Year-Old with a Job Can Retire a Millionaire

I’ve been encouraging a couple of twins who I’ve known since they were five to start an IRA since they are now 17 and working a job at a grocery store.  An IRA, or individual retirement account, is a little gift from the government that allows individuals to save money either tax-deferred or tax-free.  They come in two flavors: Traditional and Roth.    A traditional IRA is tax-deferred, meaning you pay no taxes on the money you invest or any of the money you make in the account until you withdraw it at retirement age.  With a Roth IRA, you pay taxes on the money you invest, but then pay no taxes on the money you withdraw or the interest it earns.

So how would these little wonders turn a 16 year-old into a millionaire at retirement?  Well, if one of the twins were to open an IRA and put $4,000 in it, and then invest entirely in a diversified stock mutual fund like the Vanguard Total Stock Market Fund, it would double in value about every six years. Because it would double eight times between the time they were 16 and 65, every dollar they put into it would be worth $256 when they reached 65.  This means that $4,000 would be worth about  $1 M at retirement age, even if he invested nothing else after putting the original $4,000 away.

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If he invested in a traditional IRA, he would also save on the taxes on the year he put the money into the IRA.  If he were in the 10% tax bracket, he would get to keep $400 more of his money right now, so it is like he gets extra money for making the investment.  Went he withdrew the money from the IRA at age 65, however, he would be taxed on the money he was withdrawing.  If he were in the 25% tax bracket during retirement, this would mean that he would actually only get $750,000 after taxes.

If he invested in a Roth IRA, he would not get a tax break now, so he would pay $400 more in taxes now.  But when he withdrew money at age 65, he would get to keep all of the money he earned, tax-free.  This means he would get to keep the whole $1 M.  The only catch is that he would need to find the extra $400 to invest.  (In fact, if he invested that extra $400 he got to keep from taxes when he invested in the traditional IRA, putting in $4,400 instead of $4,000, he would end up with the same amount of money after taxes as he would have had with a Roth IRA if his tax rate at retirement were the same as it was when he was working.)

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For the twins, I’m advising they go to Charles Schwab since they offer an IRA account with a $1 minimum investment.  This means they could put whatever they can this year, even if it is only $100, an then add to it as they can.  If they could get used to putting in $20 per paycheck, that would get them to a little over $1,000 per year.  They could also go to Vanguard, but they require a $1,000 minimum to start.  Both are great companies with a wide selection of funds to choose from for investments.

Filling out the paperwork and opening the account only takes 15 minutes or so online.  Because they are minors, the twins would need to have a parent be a custodian on the account until they turn 18.  After opening the account, they would just need to send in a check or send money from a bank account electronically, then choose investments.  At Schwab, I would start with the Schwab Total Stock Market Index Fund (SWTSX).  At Vanguard, I would buy the Vanguard Total Stock Market Index Fund if I had the minimum $3000 to invest, otherwise I would choose the 2065 Target Date Retirement Fund which only has a $1000 minimum.


So what else do you need to know about IRAs?  Well, there are some important rules:

  1.  You must have earned income equal to or exceeding the money you put into the IRA during the year you put the money in.  This means you need to make at least $4,000 from a job or from running a business in 2018 if you want to put $4,000 in an IRA this year.
  2. Right now you can put in up to $5,500 per year.  If you were to put $5,500 away each year between age 16 and age 35, you would be absolutely set for retirement, no matter what else you did financially.  (Lone exception, you must not touch the money in the IRA and it must stay invested in a diversified stock portfolio your whole working life.
  3. If you take the money out early (before retirement age), you’ll pay a penalty plus you’ll need to pay taxes on the money.  (Actually, there are a couple of exceptions with the Roth IRA, but why would you want to raid your retirement funds? Just stay invested.)
  4. With a traditional IRA, you’ll be forced to start taking the money out when you’re about 70 1/2 years old, so you may need to pay some hefty taxes then, especially if you invested a lot more than the original $4,000 and have several million dollars in the account.  With a Roth IRA, there is no need requirement to take the money out ever, so you could let it grow for another 30 years and leave it all to your heirs, if you wished.

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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.

Is It Worth It to Put Money Away for College?

Most of the time it feels good to live a financially stable life, which is where we are after spending the last 20 years doing things like buying used cars, a smaller home than we could get a loan for, and eating in.  It is nice to have money in the checking account to pay for the various $600 emergencies that come up like car repairs.  It is great to be able to pay for unexpected medical bills that come with having kids without worrying about finding the money.  A few months ago, we even bought a few acres of land to use for camping or just hanging out and were able to do so by just selling a few stocks.  Really, the land is almost an investment in that it will keep up with inflation at least.  The only cost is property taxes and a minimal amount of upkeep.

There are sometimes, however, when you wonder about being financially responsible.  The first is when real estate is really doing well and your friends with the 80/20 loans and HELOCs up to their eyeballs are seeing their net worths increase a hundred thousand per year because home prices are climbing quickly.  At times like that you wonder if you really should have accepted the lure of leverage like everyone else and bought a bigger house with a lot less down.  Luckily, times like the 2008 housing bust are there to remind you of why you made that 20% down-payment and then paid off your 15-year loan in twelve years.


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The second time where i wonder if saving up is worth it, which is what we’re staring straight in the face, is when you start to look at college tuition and financial aid.  We have a son who is just two short years away from college, which means that we’ll be sending out applications late next year and seeing what offers we get on tuition.  Looking at tuition offers is something I’m not looking forward to.

Our income really isn’t that high.  We’re upper-middle class, but are on one-income and certainly not making the salary of doctors and those high up in the business world.  Based on income alone, I’m sure we’d receive some tuition relief from many colleges.    With our net worth, however, I’m sure we won’t get any offers of financial aid from the government, nor should we.  I am hoping that there are some true scholarships – where they bribe your child to go to their school because of his/her grades and accomplishments – that my son can win since he really deserves them.  He’s had straight A’s since 6th grade and already scored in the 30’s on his ACT during his first try as a Sophomore, sans any prep classes.  Because I’m thinking that our net worth will knock us out of the possibility of any sort of financial aid – I probably wouldn’t even bother filling out the forms, except I’m sure some of the scholarships, such as the state lottery scholarship, will probably require it.


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It’s not that I mind just paying for college.  I think everyone who is able should do so.  It is irritating to see Money Magazine  giving out all sorts of advice on how upper-middle class people, who could pay for college if they wanted to and made it a priority, can manipulate their accounts and financial situation to “maximize their student aid.”  What is bothersome, however, is how I perceive college tuitions are set by the colleges.

You see, just as with healthcare, the prices on the books for most colleges are not the real price.  They are like the MSRP sticker on the car window.  It may say that tuition is $40,000 per year, but almost no one actually pays that.  After you get an offer, the college looks at your financial situation and decides how much you really need to pay.  Some people pay nothing.  Some people pay $10,000 per year.  Some people pay $25,000.  And it isn’t like the people paying nothing have any different classes, access to professors, or dorms than those paying full price.

And I’m not taking anything away from someone who came from a home with one parent who worked extra jobs to put food on the table and obviously didn’t have any money to put away for college.  In that case I think the student should get a break because there are great students who come from everywhere and we don’t want just the kids of upper-middle class parents and the wealthy going to colleges.  Plus, making an investment in a child that made good grades and prepared for college without a parent looking over his/her shoulder constantly and driving them also makes great sense as a society.  Such a child has shown that they are self-driven.  These are the kind of people you want to provide with tools to create things and to lead people.

What irks me is seeing people who have the means having no penalty for not putting money away for college, as would be the responsible thing to do.  In fact, there appears to be a penalty for being responsible.  From what I’ve heard, when schools decide how much you need to pay for tuition, they may look for any money in the child’s name, like custodial accounts that were set up when they were minors, and assume that money would be spent on tuition.  They might also look at college savings accounts like 529 Plans and Coverdell Savings Account (educational IRAs) and count that as the family’s expected contribution.

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So let’s say that Sammy Student walks up to the bursar’s office at WhatsamattaU, which has a list price of $25,000 per year, and has $20,000 in mutual funds that he gained by putting away birthday gifts from relatives and summer jobs.  Let’s also say that his family has put away $36,000 in an educational IRA, which has grown to $80,000 with investing.  The family makes $80,000 per year in income.  The school might then decide that Sammy must pay the $80,000 in tuition over the four years since they assume he’ll use all of the money in the educational IRA and the money in his mutual fund account for tuition and some of the $80,000 in room and board over the four years.  They assume the family will kick in another $15,000 per year for room and board from their income, so Sammy and his family end up paying $160,000 of the full $180,000 price.

Next comes Franklin Freshman, whose family also makes $80,000 per year.  Franklin spent all of the money he got from birthday gifts.  His parents just figured that things would work out for college somehow and went on an extra vacation each year instead of putting any money away for Franklin’s college.  When Franklin gets to the bursar’s office, because he and his parents have no money saved, the school decides that his tuition would be $5,000 per year, expecting Franklin’s parents to pitch in $20,000 per year, including $15,000 per year for room and board.  Franklin and his family get the same education, but only pay $80,000 – half of the price Sammy’s parents paid.  Both families have the same income and the same advantages.  One just chose to save for college and the other did not.  Part of the money Sammy is paying therefore goes to cover some of Franklin’s expenses.

So, we’re basically encouraging people to not save for college, because if they do save they’ll pay more than if they don’t.  That makes me wonder, am I being a sucker for saving up?  Should I encourage my kids to spend their birthday money on games, fun, and maybe a car while they’re in high school, rather than saving and investing?  My goal is to have them start an emergency fund to help them get a good start in life, rather than hitting the streets with nothing after college, but maybe the college will just scoop up any savings they have anyway.  I’m a bit late on the college savings accounts, having saved for 16 years already.  Maybe I should have just invested it elsewhere or just bought a new car or two along the way.

Has anyone out there already made it through the college tuition game?  What was your experience?  Is it worth it to save up?  Are there advantages?

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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.

Year-End Financial Forget-Me-Nots

BikeThe new year is of course a time of resolutions and soul-searching.  People see the coming of a new year as a time to change and make themselves better.  People resolve to lose weight, pay off debt, or maybe spend more time with friends.  If you haven’t been doing so already, hopefully one of your resolutions will be to start and keep a budget.  In our house we didn’t do so well in that department this year – only getting a yearly budget together and then a couple of monthly budgets along the way.  After years of saving and investing our finances can take a little abuse, but still I don’t like the feeling of not having control over how we’re spending our money.  I want to know if we buy this doodad, or go on this trip or that, that we’ll still have the money to put away for college and retirement during the year.  I also don’t want to see our account balances declining because we’re spending more than we’re making, so getting back on course with a good budget will be one of my resolutions this year.

 There are a lot of things to do before the new year, however, that you don’t want to forget during all of the holiday madness.  Probably the thing to do is to get these things out-of-the-way in October before the holiday madness really begins, but if you haven’t done these things already, maybe take a little time between Christmas and New Years to get them done and start the next year out right.

1.  Take some losses.  If you have sold some stocks at a profit and had a lot of capital gains in the stock market this year, now is the time to sell some of the losers remaining in your portfolio to offset those gains and reduce your taxes.  You can also deduct up to $3,000 in losses against regular income. (Always check on things like this.  I’m not a tax guy, plus tax rules change all of the time.)   Note that you can’t buy back a stock you sold at a loss for thirty days after the sale, and you can’t buy the same stock less than 30 days before you sell at a loss or the transaction will be called a wash sale and will not be deductible.  The IRS doesn’t want you to take a loss when you really stay in the same position.

Also, note that your investment strategy is a lot more important than saving on taxes, so only sell stocks you were planning to unload anyway.  Don’t sell some stocks you really like but that have just dropped a bit since you bought them just to take the loss, because chances are you’ll never buy them back even though you think you will.  A small move in the price of a stock will make up for a lot of taxes that you pay.  If you would buy the stock again today, don’t sell.  Again, back earlier in the year you could also have bought more shares, waited 30 days, and then sold the shares on which you had the loss, but you might then have a large position than you want.  You could also sell now and hold onto  the cash for thirty days so that you could buy the shares back later, but you run the risk of missing a big move up in the mean time.  Really, it’s best to sell because you no longer want the shares, but think about the timing to take advantage of tax rules rather  than to let tax rules drive your investing.

2.  Pull together a yearly budget for 2017.  Get together with your spouse and talk about the new year.   Talk about how much you want to spend on vacations and luxuries during the year.  If your car is ready for a trade, talk about where the money will come from for that.  Also, talk about the things you want to start putting money away for like home repairs and the next car, then put it in the budget so it actually happens.

3. Start an IRA.     OK, you really don’t need to do this before January 1st because you can make contributions for 2016 through April 15th, but if you go ahead and get the account open, maybe you can contribute some year-end bonus money and get the account funded rather than waiting until April when you may be low on cash.  You can also then save up quickly and make a 2017 contribution early rather than waiting until April 15th of 2018.  The longer you have the money invested,  the more time it has to grow, so it is better to invest early in the year than to wait until the last-minute to make next year’s contribution.  Also, use this time when you are home from work for a few days to actually get an IRA open and choose your investments so that you don’t miss another year.

4. Start an educational IRA.  If you have kids at home, you should start up an educational IRA and start putting money away for college yesterday.  They will be heading out the door to campus before you know it.  As with an IRA, you actually have until April 15th to make a contribution for 2016 (see rules here), but with college such a short time away, any extra time you can give your investments to grow is really golden.  If you start putting away money early and often, you can let the markets help pay some of the costs.

Got an investing question? Please send it to or leave in a comment.

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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.