An MSN Money article about how you can start on your first million at age 16 is a popular topic here in the blog-o-sphere. I myself remember reading it months ago, in a computer lab at school, and even going as far as creating an Excel document to double check and tweak the numbers. Low and behold, the math works.
The idea is, if you get a summer job at age 16 and wrack up $2,000 (I did this easily at my first summer job), but instead of spending the money on movies and shoes like I did, you put the money in a Roth IRA. You do this the next summer, the one after that, and the one after that, and then stop. After four summers, you’ve put in $8,000 and you just stop. Leave it there. When you come back to it at age 67, assuming an average 10.7% annual return, you’ll have just over $1,000,000 – and you never had to contribute to it past age 20.
Ok, it’s not the perfect plan. People say getting an average return of 10.7% isn’t as easy as this article makes it sound. Then again, some other people say it is. The article cites this rate as the “average compound annual rate on large-capitalization U.S. stocks.” So buy and hold some large-cap funds. Others point out that $1,000,000 won’t “really” be $1,000,000 in 40 years. Ok, ok, inflation, we get it. So the idea there would be, don’t stop contributing to the account at age 20!
I like this plan. You know what I like about it? It’s more than meets the eye.
Most high-schoolers are not going to be easily convinced to take all of their hard-earned burger-flipping money and well, not spend it. In fact, you’d have trouble getting most people to put aside $2,000 a year for something that’s 40 years away. But, the plan has some awesome benefits that you don’t have to wait 40 years for, and I think that’s the key to why it’s so awesome.
First and foremost, the plan gets to a person before they’re corrupted by debt. Debt is the reason most people don’t save. By age 18 or 19 a person can be staring down the barrel of student loans, credit card debt, and a car loan. 10 years later, and your credit card debt is worse, and you’re looking to take on a mortgage. Yikes. But with the “Start at 16” plan, you start in before any of this debt can take a hold of you. Which is awesome.
Not only that, but the money can help someone in the difficult years when they strike out on their own immediately after college. Now, I don’t recommend raiding a Roth for any old thing. But if you want to take a job that’s a great spring-board job to launching your career, but the job doesn’t pay accordingly, knowing that money is set aside can severely aid you.
For one thing, you don’t have to feel bad if you can’t contribute as much to your retirement as you’d like to in your 20s. You have a nice nest egg already building, so you can pick up again when you get a job that pays more. Suze Orman recommends (in her YF&B book) using credit cards to bridge the gap in this sort of situation – where you’re trying to work on your career, but the pay simply isn’t enough to cover necessary expenses. This isn’t bad advice, so long as you very carefully monitor that key word of “necessary.” Similarly, you could take from your Roth to pay for necessary expenses – so long as “necessary” means “ramen and rent money,” not “steak dinners and decorating expenses.”
If I can convince just one 16-year-old to take this course of action, my life will be fulfilled. Well, no, not really – but I’ll feel awesome for a good, long time.
