Teenager new to the job market

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KDillon
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Teenager new to the job market

Post by KDillon »

Hi, my 16-year-old just got a job and has been listening to me extol the virtues of investing early and often. My question is, what is the best way for a 16 year old to start allocating some of his paycheck towards a retirement account? And if a simple IRA is the route to go, what happens to this once he gets a salaried job? Would he still want to contribute to this account, which may only have several thousand dollars in it, when he Sets up a 401(k) with an employer? Thanks!!
Silverado
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Re: Teenager new to the job market

Post by Silverado »

Open a Roth IRA and buy a low cost total stock index fund once a month. Done.

If you have the means, you might consider setting up a deal to match his funds. He’ll thank you in 50 years.
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retired@50
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Re: Teenager new to the job market

Post by retired@50 »

What's the nature of his earned income?

Is he getting a normal paycheck from McDonald's or is he mowing lawns for neighbors?

This could make a difference with regard to which type of account is best suited to his situation.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
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arcticpineapplecorp.
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Re: Teenager new to the job market

Post by arcticpineapplecorp. »

KDillon wrote: Tue Jun 15, 2021 7:50 pm Hi, my 16-year-old just got a job and has been listening to me extol the virtues of investing early and often. My question is, what is the best way for a 16 year old to start allocating some of his paycheck towards a retirement account? And if a simple IRA is the route to go, what happens to this once he gets a salaried job? Would he still want to contribute to this account, which may only have several thousand dollars in it, when he Sets up a 401(k) with an employer? Thanks!!
welcome to the group.

as was said, have him open a Roth IRA.

The limit for him is equal to his earnings up to $6000 total for the year, whichever is less.

So if he earns $3000 this year, he can only contribute $3000.

If he earns $6000 or more this year, he can contribute $6000.

He can maintain the Roth IRA even if he later gets a 401k.

Better yet, he can still keep contributing to a Roth IRA (depending upon how high his income is later) even if he has a 401k. As an example, I continue to contribute to my Roth IRA along with my 457(b) plan at work.

If he does not want to stash all of his earnings in the Roth IRA, and you can do a match that would work also. For instance, say he makes $6000 this year, but only wants to put $3000 of that in the Roth IRA, if you are in a position to do so, you could contribute the other $3000 to the Roth IRA for him because he had the earnings that allowed it, regardless of where the contributions come from.

Some parents use this "match" as an incentive to even get their kids to save (doesn't sound like a problem here). So parents will say, "If you save $3000 of your own money, I'll match that with $3000 as well". That's getting him familiar with a 401k with a match for later on (with you taking the place of the employer match).

Also, it's critical he understands that he's locking the money up until retirement. If he later raids the account, he's defeating the purpose of the Roth IRA and of investing at all (which is most powerful because of compounding interest which gets greater with time).

Finally, he'll have to learn to deal with the ups and downs of his portfolio as the market gyrates. Make sure he understands his portfolio's balance will go down from time to time. But that doesn't mean he can't still make money over time. Use 2020 as an example:

Someone who invested $10,000 on Jan 1, 2020 in the total stock market (US) would have lost 33% between 2/21/2020 and 3/24/2020, but if s/he had held on, would have MADE 20% on their money by the end of the year, and would have wound up with $12,098.79 (with dividends reinvested):

Image

source:
http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
protagonist
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Re: Teenager new to the job market

Post by protagonist »

I disagree with a lot of people here about the issue of kids investing.

Kids make very little money, and what they invest will have a negligible effect on their retirement.
But they are working hard, between school and their job. They should have fun with their money while they still can.

On the one hand, yes, investing teaches them about saving and investing. On the other hand, if they get to have fun with their meager earnings they learn the value of labor. All that work can pay for the guitar they want so badly, or they could take their gf or bf out for a good dinner, or maybe even a beater car, or whatever. It will be worth it to them. Putting money away that they won't see for 50 years means nothing to them...how many 16 year olds care about their retirement?

If you want them to learn about investing, fine...match their job earnings yourself and give them money that you earned earmarked for investment purposes only. Teach them and then let them choose how to invest it. But let them party with their meager job earnings. Let him/her be a kid.
rockstar
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Re: Teenager new to the job market

Post by rockstar »

protagonist wrote: Tue Jun 15, 2021 8:26 pm I disagree with a lot of people here about the issue of kids investing.

Kids make very little money, and what they invest will have a negligible effect on their retirement.
But they are working hard, between school and their job. They should have fun with their money while they still can.
This.

It's really time for them to learn to work, make money, and spend without using debt. Figuring out how to budget limited earnings now makes far more sense.
mikejuss
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Re: Teenager new to the job market

Post by mikejuss »

protagonist wrote: Tue Jun 15, 2021 8:26 pmI disagree with a lot of people here about the issue of kids investing.

Kids make very little money, and what they invest will have a negligible effect on their retirement.
But they are working hard, between school and their job. They should have fun with their money while they still can.
This isn't really a problem. At the end of the year, look at your son's final pretax earnings, and whatever the number is (up to $6,000) put into a Roth IRA for him. He can keep his own money--and maybe learn a little about investing via your contribution to his Roth IRA.
50% VTSAX | 25% VTIAX | 25% VBTLX (retirement), 25% VTEAX (taxable)
Normchad
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Re: Teenager new to the job market

Post by Normchad »

mikejuss wrote: Tue Jun 15, 2021 9:48 pm
protagonist wrote: Tue Jun 15, 2021 8:26 pmI disagree with a lot of people here about the issue of kids investing.

Kids make very little money, and what they invest will have a negligible effect on their retirement.
But they are working hard, between school and their job. They should have fun with their money while they still can.
This isn't really a problem. At the end of the year, look at your son's final pretax earnings, and whatever the number is (up to $6,000) put into a Roth IRA for him. He can keep his own money--and maybe learn a little about investing via your contribution to his Roth IRA.
I love this approach. Work should come with a reward, and I agree kids should enjoy their money.
protagonist
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Re: Teenager new to the job market

Post by protagonist »

Normchad wrote: Tue Jun 15, 2021 10:01 pm
mikejuss wrote: Tue Jun 15, 2021 9:48 pm
protagonist wrote: Tue Jun 15, 2021 8:26 pmI disagree with a lot of people here about the issue of kids investing.

Kids make very little money, and what they invest will have a negligible effect on their retirement.
But they are working hard, between school and their job. They should have fun with their money while they still can.
This isn't really a problem. At the end of the year, look at your son's final pretax earnings, and whatever the number is (up to $6,000) put into a Roth IRA for him. He can keep his own money--and maybe learn a little about investing via your contribution to his Roth IRA.
I love this approach. Work should come with a reward, and I agree kids should enjoy their money.
Me too.
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CyclingDuo
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Re: Teenager new to the job market

Post by CyclingDuo »

KDillon wrote: Tue Jun 15, 2021 7:50 pm Hi, my 16-year-old just got a job and has been listening to me extol the virtues of investing early and often. My question is, what is the best way for a 16 year old to start allocating some of his paycheck towards a retirement account? And if a simple IRA is the route to go, what happens to this once he gets a salaried job? Would he still want to contribute to this account, which may only have several thousand dollars in it, when he Sets up a 401(k) with an employer? Thanks!!
We would be more on the side (and we were with our kids) of using the opportunity to have some good discussions - including saving some of it. A few good articles out there such as...

7 Conversations to Have Once Your Teen Starts Earning a Paycheck

https://www.moneyprodigy.com/first-paycheck-teenager/

How should teens handle their summer-job money?

https://www.reuters.com/article/us-kids ... JY20130726

CyclingDuo
"Save like a pessimist, invest like an optimist." - Morgan Housel | "Pick a bushel, save a peck!" - Grandpa
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bottlecap
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Re: Teenager new to the job market

Post by bottlecap »

Normchad wrote: Tue Jun 15, 2021 10:01 pm
mikejuss wrote: Tue Jun 15, 2021 9:48 pm
protagonist wrote: Tue Jun 15, 2021 8:26 pmI disagree with a lot of people here about the issue of kids investing.

Kids make very little money, and what they invest will have a negligible effect on their retirement.
But they are working hard, between school and their job. They should have fun with their money while they still can.
This isn't really a problem. At the end of the year, look at your son's final pretax earnings, and whatever the number is (up to $6,000) put into a Roth IRA for him. He can keep his own money--and maybe learn a little about investing via your contribution to his Roth IRA.
I love this approach. Work should come with a reward, and I agree kids should enjoy their money.
How about getting your son to agree to save 10 or 15% and, if he agrees, secretly resolve to pay him an amount equal to what he's saved at the end of the summer?

That way he gets in the mindset of saving, understands how difficult it is after all of the other deductions from his paycheck, and gets a nice surprise for being responsible. If he learns to save early and automatically, one day, 20 or 30 years from now, he'll log on to his investment account and similarly see a nice surprise as a reward.

My parents didn’t make me open an ira when I worked as a teenager, but when I started my first full time job, they told me to max out my 401k and adjust my lifestyle accordingly so I wouldn’t expect to have that money to live on in the first place.

I never missed a year of 401k contributions with the exception of a couple of years that I was ineligible.

JT
ddurrett896
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Re: Teenager new to the job market

Post by ddurrett896 »

protagonist wrote: Tue Jun 15, 2021 8:26 pm Kids make very little money, and what they invest will have a negligible effect on their retirement.
But they are working hard, between school and their job. They should have fun with their money while they still can.
I think it's less about the actual money going into the account and more about instilling the need to invest and live below your means.
cjcerny
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Re: Teenager new to the job market

Post by cjcerny »

KDillon wrote: Tue Jun 15, 2021 7:50 pm Hi, my 16-year-old just got a job and has been listening to me extol the virtues of investing early and often. My question is, what is the best way for a 16 year old to start allocating some of his paycheck towards a retirement account? And if a simple IRA is the route to go, what happens to this once he gets a salaried job? Would he still want to contribute to this account, which may only have several thousand dollars in it, when he Sets up a 401(k) with an employer? Thanks!!
Open a Roth IRA for your child. Tell him you'll match what he contributes to that IRA up to $1000. Invest the money VTI or VTSAX. Contribute more to it along the way to 59.5 if both of you can. Begin withdrawals anytime you want to after 59.5. Having fun with your money is important, but saving some of it for a rainy day 40+ years in the future is also important to model.
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