By the time I learned that $5K invested per year from age 18 to 25 is the same as $5K invested from age 26 to the rest of your life, it was already too late, but the next day I opened a Roth IRA. A few extra years of compounding is unbelievable, but don’t be discouraged if you’ve passed the mark. It’s never too late. And now that you know about this, here is what you can do for your younger friends, children or nieces/nephews as they approach adulthood.
At age 18, they can legally open an IRA. Help them open a Roth IRA account and teach them about compounding by using the “rule of 72.” You take 72 and divide by the rate of return and the answer is how long it takes to double your investment. This is why the 7 years from age 18-25 is so powerful.
Contributions cannot exceed earned income, so he/she will need to learn how to work for fair pay. You can gift matching contributions tax free so that they can still spend their money while contributing the same amount to their Roth IRA at essentially 0% income tax.
Some banks even allow parents to open custodial accounts for children under age 18 and contribute based on the same earned income strategy, though you need to make sure their work is paid at fair market rates.
The youngest of the millennial generation are starting to approach adulthood and can imagine the benefits of being able to fully take care of their retirement savings by age 25. The rest of us should continue to focus on maxing our accounts annually.