It’s always interesting to me that most financial independence blogs talk about getting ourselves into a state of financial independence. We are always thinking about how we can walk away from the world and get more time for ourselves to pursue our passions, invest in our future, and become the best future version of ourselves. What I haven’t seen a lot is setting our children up for their future, successfully talking to them about managing their money, and how they can get out of the woe is me mentality that so many share about never being able to retire.
It appears to be a little known fact that as a teenager, if you have earned income, you can start your own Roth IRA. We’ve already seen the impact of how compounding interest has essentially doubled my initial investment in VWELX and that was over the course of less than ten years. That’s an amazingly powerful tool that I am so happy that I was able to take advantage of. In less than ten years I have doubled my initial investment, just think if instead of at 27 I invested into this fund at 16 or 17… The implications for growth are staggering. Could this fund have doubled and then doubled again? This is not a far stretch to imagine as the fund was a $28/share purchase back at it’s historical max back to early 2000. Think of 16 years now of dividends, short term capital gain, and long term capital gains reinvested back into the fund. Even with two large bear markets in that time period this fund would likely be worth closer to $40,000 than the current $20,000 for me.
The above scenario really highlights what you could be doing for your children by talking to them about their retirement before they even start their career. Imagine that your child has above the national average 401k by the time they leave college. This is an individual you have not only completely changed their long term financial habits, but essentially guaranteed that they have a extremely high chance of being a millionaire. Below is a chart showing what would happen if your child was able to save $10,000 by the time they turned 20 and what would likely happen to that growing for the next 45 years to the current retirement age.
So what happens is this individual has only $196,285 predicted in their retirement account by the time they turn 65. Almost $200,000 is not a lot of money considering retirement expenses, but you have to keep in mind that this person contributed $0 for the next 45 years. That’s right your child has more than the current average American has in their retirement account by literally over $100,000! Don’t believe me, check out the link here. Literally mind blowing stuff when you start to think about how you can change your child’s life and their future. At this point as a 20 year old you kind of have to try to fail to be a millionaire or retire early.
I wish I had known this growing up, heck I think most people serious about saving for retirement wish they knew this, but unfortunately this is not something that we teach, it’s not something that is actively pursued, and I would argue few children have this sort of account established for them by a parent when they start earning money. This is literally one of the best gifts a parent can give a child that is outside of teaching them to be a fantastic individual, because it literally can change a family tree, lift one out of middle class status, and set their financial success up where it is extremely hard to fail.
Has anyone pursuing financial freedom started their children on the same path?