There is no better -- and yet seemingly ridiculous -- time to save for retirement than in your late teens and early 20s.
Saving that early maximizes the power of compound growth. But suggesting to a teen with a summer job or after-school gig to focus on a goal 50 years away is a bit much. And even once your kids have launched into adulthood, saving for retirement in their 20s can also be a nonstarter when they are trying to make rent, save for a down payment, stay on track paying down their student loan and, justifiably, spend a little on having fun.
That's where the Bank of Mom and Dad (and grandparents too) can step in with financial help that will go a very long way toward making sure the kids will be all right.
You're likely already helping an adult child. A recent report from Merrill Lynch Wealth Management and Age Wave estimates that parents shell out $500 billion a year in support of adult children (between the ages of 18 and 34). Helping with groceries, car expenses, school expenses and vacations are common ways parents lend a financial hand.
Retirement savings should be a priority. Especially over bankrolling vacations or helping an adult child buy a too-nice car. (I've explained the downside of fancy car buying here: https://www.rate.com/research/news/truck-purchase-retirement-savings.)
And a Roth IRA is the perfect way for parents to jumpstart their child's retirement security.
Solving your kid's retirement problem before they even know they have one
A quick eye-opener: Let's say someone saves $3,000 a year from age 18 through 22 in a Roth IRA, and then $6,000 a year from 23 to 30. ($6,000 is the current annual limit for anyone younger than 50.) By age 30, they've got more than $70,000, assuming a 6% annualized growth rate. Let's also assume that after 12 years of contributions ($57,000 in all), they decide to stop saving more, but keep the savings growing for another 40 years. That $57,000 will have grown to more than $720,000. Make that $720,000-plus, tax free. That's the retirement glory of a Roth: All withdrawals are tax-free.
If, however, the young adult doesn't focus on retirement saving until age 40, they will need to stuff retirement accounts with $8,700 a year for 30 years to land at age 70 with the same $720,000 or so. That's a total of $261,000 in contributions to end up with the same account value that would require less than $60,000 of contributions if they got that early start.
And to be clear, this scenario of stopping saving at age 30 illustrates the power of compounding when you start early. But the big win will come if your kid continues to add to the pot. Let's say at age 31 your child takes over and keeps investing $6,000 a year for the next 40 years. At age 70 your child is looking at a retirement stash worth $1.7 million.