Quick Tip Tuesday: Teaching Your Teenager to Save for Retirement From Their First Job

Download your copy of the Teenager Job Savings Worksheet HERE

Hey, it's Lee from Luminary Wealth.

It's Quick Tip Tuesday, where I share a quick, easy way that you can build wealth in your family and teach your kids early that saving is important.

Today, I'm talking to parents with teenagers who are old enough to get a job.  This is geared at kids ages 14-20; high school through early college age. 

When your teenager gets their first job, sit down with them and figure out how much they'll be earning each paycheck.  If it's fairly regular, that makes these calculations really easy. 

Take their paycheck amount and subtract any necessary payments they owe. 

Examples of this would be:

If they are paying for their own gas to get to and from work

If they're going to help pay for the car insurance

If they are saving for their college fund

• If they are paying for their own gas to get to and from work

• If they're going to help pay for the car insurance

• If they are saving for their college fund

Figure out what's left, and multiply that by .75.  That's the amount they should set aside for their Roth IRA.  The remaining 25% they can spend however they like.  Teaching this small behavior early will lead to much greater wealth over time, and fewer tax burdens when your child reaches retirement, since Roth IRAs grow tax free forever.

Let's look at an example.  Consider a teenager making $15/hour, working 15 hours a week.  That's a gross income of $225 weekly.  While they'll likely get all their taxes back in their refund in April, the employer is required to withhold for Social Security and State and Federal Taxes.  So let's consider, just for ease of math, that what is being withheld won't be coming back to them.  If they get a refund in April, great!  They can put some of that away next year.

So we'll take the gross income of $225 a week and multiply that by .73, because on average, withholdings run about 27%. 

That means a weekly net check of $164.25, for a monthly income of $657. 

Next, we'll calculate the costs your teenager will help cover from his or her salary.

Gas:

Now let's consider that your teenager has to pay for gas for the family car they drive to and from work.  Assuming an 8 mile drive each way, 3 times a week, on a car getting roughly 20 miles to the gallon, and an assumed cost of $3/gallon at the pump, and we have a monthly gas fee of $28.80, so let's call it $30 for gas.

Insurance:

Insurance is next.  According to Car and Driver, when you add a teenager to your premiums, your costs are going to up 152% on average.  It's actually 129% for female teenagers and 176% for male teenagers, because statistically, male teenagers get in more accidents than female teenagers.  But just for this example, we'll use the average of 152%. 

Just as a reference, my car insurance on 2 vehicles is $716/year.  Multiply that by 152%, and divide by 12 to find a monthly cost, and I get an insurance burden of $91 to add my teenager to my policy.  So let's say your teenager pays that extra fee out of their salary.

The third expense I mentioned earlier is to save a little back to help pay for college.  Right now, after gas and insurance, they have $537/month.  Let's suggest they put away $175/month into a 529 College savings account.   That's roughly 33%.  It's not really a lot compared to the cost of college, but it's more about building a behavior now than it is about putting away thousands for college later. 

That leaves about $360 as a net after expenses.  Multiply that by 75%, and we'll ask your teenager to put away $270 into their Roth IRA every month, and they can have $90 each month as "play money" for trips to Starbucks, going to a movie, spending time with friends, Food Truck Friday, or whatever floats their boat!

When you sit down with your teenager, it's important to share with them WHY we're saving all this money for retirement when they're super young.  If you throw your teenager's available deposits into a compounding interest calculator, like the one at Investor.gov, then you can show them that a single contribution of $270, compounded for 50 years, or until an 18 year old is 68, at an average interest rate of 6.8%, is a lovely total of over $7,200! 

If you can coerce your teenager into putting away just that much from a summer job each summer for 4 years, they will have contributed approximately $3,200 over those 4 years, but that will become $90,000 or more by the time they need it.  And all the growth is 100% tax-free forever.  It seems like a small thing, but the compounding interest combined with the tax-sheltered nature of a Roth IRA makes it a no-brainer.  Who wouldn't want a gift of $86,000 and no tax consequences!  I know I would!  The more you can encourage them to put away when they're really young, the smaller the burden to save will be as they age, and the more it will grow, because time is your biggest asset when saving for retirement. 

I've created an easy spreadsheet so you can sit down with your teenager and figure out the numbers that work for their job and you can grab it below: 

Download your copy of the Teenager Job Savings Worksheet HERE

If you have any questions about how to set up a Roth IRA, explaining any of my calculations, or anything else, don't hesitate to reach out to me at Lee@LuminaryWealth.com.  I'd love to hear how your children are saving for the future!

Watch our Youtube channel for more quick tips on teaching your kids about money. 

Keep saving, and have a great day!