Help Your Teenager Earn Their First Million

Photo: summer jobs

As adults, how many times have you wished you had invested money as a teenager or young(er) adult? We're all aware of the power of compounding interest, and the idea that starting your savings earlier means having more money when you are ready to retire, but by the time we discover this financial truth – we've already missed a whole lot of years of saving! Why not help your kids earn their first million?

Teenagers aren't thinking about retirement. They're thinking about getting their first cars, road trips with their friends and falling in love. If you can help your child realize the formula for retirement fund success relies on starting it early and not withdrawing the money until retirement, your child won't be among the adults who look back and wish they had started their retirement savings earlier. Investing money for retirement as a teenager doesn't have to be overly complicated. You don't have to spend hours studying the performance of various stocks and bonds or anything – just open a Roth IRA with a low-cost equity portfolio and leave the money until your 16 year old turns 67 and can remove the money tax-free.

Here's how today's teenager can (start) earning their first million by the time they retire:

Get a summer job at the age of 15 or 16: Can a 16 year old earn $2,000 over the summer months? Of course they can (and I did too, 13 years ago when minimum wage was even less than it is now). If your teenager gets a job at about $9 an hour, they would have to work around 223 hours to make a little over $2,000. This is before taxes are taken out though, so to be on the safe side, you could assume they need to work around 350 hours in order to clear the $2,000 after Uncle Sam gets his cut. A typical summer vacation is around 3 months in length, so your child would be looking at working at least 117 hours per month, or about 29 hours a week. This leaves plenty of time for socializing and “hanging out”, too.

Earn $2000 per summer all through high school: (and maybe your first summer as a college student or new high school graduate, too) If your 16 year old earns $2,000 during each of the four summer vacations of their high school career, they're looking at $8,000 that can be placed in a Roth IRA to earn tax-free for as long as the money remains in the account. (If you withdraw the money after you are 59 and a half years old, it can be withdrawn tax-free as well!) With $2000 invested into a Roth IRA over the teenagers four summer vacations, your sixteen year old could start the ball rolling to earn their first million for retirement. If you invested the $8,000 earned over the four summers into a Roth IRA; investing in common stocks with the average compound rate of 10.7%, your account would grow to be over $9,300 at the end of the fourth year. By the time your sweet sixteen year old has graduated from high school and started the next phase of his or her life, even without any additional contributions those summers of working will have earned:

  • Over $25,000 at the age of 30
  • Over $71,000 at the age of 40
  • Just shy of $198,000 at the age of 50
  • Over $540,000 at the age of 60
  • Over $1,100,000 at the age of 67

Helping your teenager understand the value of compounding interest and saving early will turn them into retired millionaires with just a few summers of working. (Not to mention whatever they do to contribute to their retirement accounts through their adult working years). As we get older and have more financial responsibilities, most of us find it impossible to save $2,000 in 3 months time. The opportunity is perfect for a teenager to establish their retirement accounts, as long as they keep their hands out of this piggy bank until they retire.

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Guest's picture

I like this in principal, but the math here seems flawed to me because of the child's age you're talking about.

Kids don't enter high school at age 16, they enter around 13/14, which is too young to get the kind of job that will pay what you're talking about. Where I live, if the kid is between 14 and 16, the parents has to sign a work release, and then they're only allowed to work a certain amount of hours (I'm fairly certain it's a max of 20/week). So essentially, they get two summers of work, not four. That in turn affects the rest of the money compounding.

Guest's picture

Yes, it would be wonderful for a child to put away $2k a year into an IRA, but good luck convincing him/her to work for 'free.' The way this article is worded leads me to believe the child is getting no take home income, rather it's all being put into a retirement account. I'm guessing that strategy, to a teen's ears, sounds like "Work now and you can have the money you earned in 50 years." While it's good to teach teenagers to save for retirement, they also need to learn to appreciate the fruits of their labor. Some kind of split (e.g. 40/60) is needed in practice.

Guest's picture

I agree. It's a great idea, but the math isn't the best. Also, this assumes an average return of 10.7%. Not undoable...probably. But with the economy, it's hard to know for certain.

Additionally, working about 30 hours/week is a great goal, but doesn't always leave times for summer trips, courses and other similar activities which are not only fun but help students learn and grow and develop skills and talants and discover interests that will serve them well over the course of their lives. These things often (although not always) do cost money rather than allowing the student to earn money (and eat into the amount of time in which they can earn money) but they can be invaluable in terms of life experience. Your daughter may not play professional soccer as a result of attending soccer camp for a week and your son may never make it to Broadway after being involved in the summer musical at the community theater, but they may discover a passion for something they will pursue the rest of their lives...or they may discover something they definitely don't want to do for the rest of their lives. Working's great and earning money is definitely valuable, but students should also have the time to learn and grow and explore new things while they're, well, students. There's gotta be a balance.

Guest's picture

I like the idea of starting retirement early, but I think it would be more beneficial to use this money for spending during college to avoid loans and stress that as soon as they graduate they should start investing in a Roth.

Either way, I definitely agree that it is important for parents to stress savings and explain these options to teenagers. Just give them the flexible to choose how they want to spend the money.. and heck, if I hadn't wasted a bunch of money on dates and clothes in high school who knows if I would have ever learned my lesson before becoming an adult.

Debbie Dragon's picture

I think I'm assuming that most people are about 15 when they start high school (I was) and yes, we did need working permits to work. When school is not in session, a child as young as 14 can work up to 40 hours in non-hazardous employment. See the US Dept of Labor page for child labor laws:

As for working for "free" in the teenagers eyes, I suppose that would be true if they only worked in the summer or ONLY worked 29 hours a week.  I worked full time every summer in high school, and worked as many hours as I was allowed by law during the school year so I made far more than $2000 during the course of each year of high school (gosh, I bet I made more than that in babysitting jobs alone, which I didn't consider a job but it was a great source of income at the time! Perfect for the 13 and 14 year olds who maybe aren't ready to work in a different job setting?)

As for being balanced, personally II took a summer camping trip with parents just about every summer, but our family was never well off enough to send me to sports camps or to pay for additional courses or enrichment activities during the summer months (I participated in school activities during the school year instead), but I can see where a family with children who are used to enjoying several weeks of enrichment activities over the summer would find it harder to earn the money themselves just due to the lack of time.  In this case, I bet gifts from grandparents and parents could help "fill in" or to make up the difference between what they are able to earn and what they haven't earned.

I like the idea of earning money in high school to pay for college expenses, too, Courtney, but figured it made more sense to me to get the retirement savings going first because of the value of that compounding interest. The longer the money is in there, the better opportunity it has to grow over the years.  I also figure that most college students work when going to school, and could use that money to pay for their current living expenses.  As a high school student, most do not have to worry about providing for themselves or paying living expenses, and it just makes it a great chance to get the money together and saved- where as when you start college many students begin taking care of their own living expenses and won't have any extra money to set aside for savings.


Guest's picture

I love the concept of the post. So many times parents only concentrate on "spending wisely" principles and not about saving long-term. I have a daughter who started teaching piano to neighborhood children when she was 11. She is now a teenager and is making a little more. She'll be able to cash in when she can drive, and also babysits. She socks away more money than I do! We have a separate account for her to use when she is older and starts a business. Not sure she'll need it. She can really rake in the bucks.

Guest's picture

My comments:
1. $2000/summer is possible as a total pre-tax income. As has been mentioned by other commenters, kids will not want to save the entire amount - they will spend it. I would suggest encouraging your teen to save 50% for retirement and live off the other half. That leaves $1000 - split that up over the year, and they get $83/month. That's good for at least a couple of movie nights a month for the whole year plus snacks - teens love snacks.
2. 10.7% is an unrealistic expectation. As anyone invested in the markets this past year knows, your return this year was probably in the neighbourhood of -25% - mine was. It would suggest estimating using a more reasonable 5-7% return instead.
3. As another commenter mentioned, there are not 4 summers available for working. Most places have restrictions on when kids can start working (with or without parental permission). I would suggest that they would be able to work two summers reliably. BUT, if the teens work a couple of evenings and/or weekend shifts during the school year as well, they would be able to save a significantly greater amount before leaving High School.
4. The income earned by a teen is taxed at the same rate as ordinary workers. I would suggest that most teens will earn less than the taxable thresholds. This means that *MOST* of their taxes will be returned to them as a tax refund. Teens should save half this tax refund in their retirement account. They can add the other half to their disposable income.

Just my 2 bits.

Guest's picture

The only problems I have:

1. Kids, even earning $2000, don't want to save the whole $2000. I sure as heck didn't as a kid.

2. I'd do something like "If you save $1000 for savings/retirement, I'll give you 50% of that", just to encourage them to save

3. The interest at 10.7% is too high. 7-8% is more realistic.

4. Whatever they get back as a tax refund can be saved again into their retirement fund with their own discretion.

Guest's picture

This assumes large investments by the parents for clothes and vehicles and college. Might as well let the teen spend the fruit of his/her labor on these things and set up the retirement account yourself.

It's also important to figure out how the child's assets are counted in the financial aid process. Any savings account, for example, will be gutted by the college. I don't know about IRAs in the child's name though.

Guest's picture

I tried this and it failed for one simple reason. She didn't want to help least not now.

I am a financial planner. I explained the whole thing. I laid it out. But she didn't follow through.

The take away? I should have spent more time "selling" her and getting her into the process.

Luckily I have a 9 year old....I can try it again on her in 3 years!

Guest's picture

I actually did this when I was younger and it went so horribly that I actually shut down the account this year.

I invested money before the fall of 2001 into the safest Roth IRA I could find, and it immediately tanked. The next seven years were spent just building my investment back to where it started and this year, it finally went over my original investment... right before the market started plummeting again.

By that point, I was so irritated with the whole business that I canceled the account. Over 7 years of "investment", I lost $200.

In theory, this idea is good. If I had had better timing and invested when the market was down, it would have been worth it. If I had had the money to continue investing over all the last seven years, it might have worked better. But after I immediately lost money with my first investment, I wasn't about to throw more money down the toilet when I had so little.

Opening a Roth IRA was an incredibly discouraging experience and I doubt I will repeat it soon. It's definitely turned me off the stock market.

With the market so volatile right now, I wouldn't recommend that a young person start a Roth IRA. The market hasn't bottomed out yet, and there is NOTHING more depressing than trying to do the right thing financially and losing a ton of it right away.

Better to put the money in a savings account where it is actually guaranteed to go up, and then to invest that money when the world economy is on its feet again. At least then young people won't have to go through the years of pathetic bank statements I did.

With the stock market destroying so many dreams and retirement accounts right now, recommending someone dives in with a whole summer's worth of hard-earned earnings is irresponsible and impractical.

Guest's picture

A 16 year old could theoretically make that $2000 in the summer, but what about the expenses involved with having a car to get to work? Should the child take over the cost of gas and maintenance costs?

I'm certainly not an advocate of frivolous spending, but I also feel that kids need time to be just kids. I would encourage them not to spend every penny they earn, but they also don't need to start working towards retirement at that age.

Debbie Dragon's picture

My first year working, between the ages of 15 and 16 my tax return shows I made $13,000.  Is that not normal?  Every year after that my income would increase slightly (and again, that isn't including babysitting money).  So when I was thinking about teenagers saving $2,000 per summer, I was just assuming that wouldn't be their entire earnings for the year so they would still have money for their car and gas and such.

Based on the comments, it sounds as if teenagers are not making much of anything at all.

At 29... I didn't think I was that far removed from the life of a teenager, but apparently times have changed :)

Guest's picture

Earning $13,000 per year working at age 15/16 is NOT normal for today OR 13 years ago.
Most teenagers are restricted to the hours and type of work they are allowed to do and most jobs pay only minimum wage, which here in the Midwest in 2011 is only $7.25per hour. When did you sleep? How did you ever manage to get through your High School coursework with grades good enough to get into college or perhaps that wasn't an issue for you? I almost feel sorry for you and think you may someday have regrets that you missed out on the magical time of just being a teenager! We have our whole lives ahead of us to work and can never get that time back. Trust me.

Guest's picture

I love this post.
I have a 17yr old and I wish I had been given all the advise she is getting. She is looking for a job to save for college and her car insurance instead of retirement, though. She is just having a hard time finding a place that is hiring. She had a babysitting job but the woman lost her job. The sad thing is I feel that it is so important for teenagers to learn the responsibility of a job but many of them can't find work. She is cleaning houses when she can but it's just not enough. But I think that is what everyone is saying now.

Guest's picture

One of the major flaws with this thinking is that the "10% annual return" on the stock market is not realistic. That figure gets touted a lot as the supposed annual long-term rate of return on the market, but it's highly misleading. Instead, you should be looking at the compounded annual growth rate, which for the period from 1950 to today, just to pick a nice long time period, is a bit over 6.5%.

Now, throw into this mix the effect of inflation: for the same timeframe of 1950 to today, inflation has averaged a shade 4%. So stock market returns have only beat inflation by about 2.5%, on average, over the period from 1950 to today.

It's better than a stick in the eye, but not by much. After tucking away your hard-earned 8 grand for 50 years, getting 2.5 inflation-adjusted growth, how much can you expect to have waiting for you at retirement?


Probably enough to live on for 6 months.

Another way to look at it and come to the same conclusion:

Let's say some hypothetical person retiring in 2008 had invested the equivalent of $8000, back when they graduated from high school in 1960. Adjusting backwards for inflation, $8000 in 2008 dollars is equivalent to $1160 back in 1960. That may have been a reasonable amount of money for a kid to earn working FT during the summer for 4 years straight--the minimum wage was $1.00 at the time.

If IRAs had existed in 1960 and our hypothetical retiree had invested that $1,160 in an S&P 500 index fund, how much would she have today? $1,160 would have bought about 20 shares of of the S&P, which stood at $58 in 1960. Even at the peak of the S&P back in 2007, those 20 shares would have only grown to about $28,000, and of course a year later, they're worth only about $17,000.

Now, here's yet another way to look at it: that initial $1,160 investment back in 1960 probably reflected 800-1000 hours worth labor (probably unpleasant), in order to wind up with $17,000 50 years later. But that same retiree could also have earned $17,000 for retirement in the year before she retired with an investment of a MERE 400-600 HOURS OF LABOR, assuming a career-ending salary of $60-80,000.

This last way of looking at it demonstrates that the real key to a secure retirement is steady income growth over the course of your career, as much as investment growth.

Guest's picture

if you made $13,000 in 1994, as a 15-yo, I'd have to say that's extremely a-typical.

If you worked 20 hours a week 9 months a year, and 40 hours a week 3 months a year (which seems to me to be a *really* heavy work schedule for a 15YO!), that's still only about 1250 hours a year. To gross $13,000, you must have been making better than $10/hour, which is more than most jobs for kids in HS pay, even in 2009. In 1994, the minimum wage was $4.25/hour, and someone working FT at minimum wage would have grossed only $8500.

Guest's picture

I was a teenager in 1994 & couldn't make that kinda money - I babysat and worked 2 retail jobs in the summer. Working enough to earn 13k would leave no time for activities & those HS activities equal scholarships in many cases... better to start out with no college debt then to have a big IRA.
And as someone who works in a high school I can tell ya - schools are more demanding now. They don't make the kids work as hard but they do seem to take up a lot more time with everything. I wonder if it's intended to keep kids out of trouble...

I'll have to check my old bank stmts & see how much I made in high school- my Dad keeps everything. Which has no financial value but it is neat to go back in time by going through the old files...

As someone who works with teenagers, and a parent striving to raise a financially responsible 9 year old... even the most responsible kids would spent some amount of this - at least in this day & age of materialism.
Even my kid comes home demanding stuff - like an MP3 player - as if I'd ever buy him such a thing! It snowed yesterday & I handed him a shovel & told him to go earn the $ for his MP3 player. He told me it wasn't worth it - LOL.

I think they'd be better served using it to buy their first car, use the money for an emergency fund (for when the car breaks or gets totaled) and then when they go to college Financial aide will expect it to be used for tuition. The last time I was enrolled in college classes (2 years ago) my IRA was considered in my financial aid since some IRAs allow you to withdraw (penalty free) for college expenses.

One other thing - if the kid ever has any kind of hard luck in their life(and need disability, food assistance, even just help getting the car repaired) they will be expected to clean out that IRA regardless of any penalties. When my son's Dad left me & I was struggling I was forced to do so if I wanted to keep us off the streets. Although I hope no kid ever goes through such hardship - hopefully they make good decisions & never end up in such a situation.

Sorry I was so long winded.

Guest's picture

Yeah, I agree Deb, I think this is possible with the computation you have so far laid. And if we only learn how to save at a very young age, we'd be a millionaire in time as we grow old. ;)

Guest's picture

I think we are over thinking the actual point here.

The point is, start to talk to your kids about the idea of financial responsibility.

Some parents teaches their kids about money at age 2 or 3! How? Give them chores, reward them, and they can use the $ to buy what they want. As they grow up, you teach them more ideas that relate to the real world.

Again, the point is, teach the next generation a little about financial responsibility - and other things about life.

Guest's picture

I think that this is very sound advice. Of course, most teenagers would hate to spend their summers doing work without being able to reap the benefits of spending their money in the end, but there will eventually be a payoff.

Another idea that might solve the issue of the teenager not seeing a reward for their work, would be to invest half of all holiday money and subtract that from the amount needed over the summer. This way, your teen will see some of the money in the form of gifts and some in the form of their paycheck, and won't feel too deprived.

There is an important lesson behind all of this about instant gratification. If more people believed that it is smarter to plan ahead than indulge, then we would all be better off today.

Guest's picture

This would be great advice if they weren't considering their education after high school. Considering the average amount of student loan debt (at least for my college) is around $25,000, and the interest rate on loans is higher than the interest you would gain from a Roth IRA, it would be more beneficial to put extra earnings toward paying off debts before saving for retirement.

Guest's picture

I was disappointed to read all the posts that give every reason in the book that this doesn't work. I am a financial planner, and I started saving when money first touched my hands. I retired at 38. Yes, 38. It does work. You have to do it and you have to persevere. Yes, investments can go down... you have to diversify and don't stop putting away. Whenever the Dow is down 400 points, I am buying. When you get a raise, save it before it ever touches your hands. Save save save.

My 16 year old made about 1300 this summer. I am incentivizing him to save it in a Roth by offering to put half in. He puts in 650 and I'll put in 650. That's pretty easy... free money to him.

Yes, 10.7% is high. The 100 year equity rate of return averages 9-10%. From 16 years old to 65 you're looking at 50 years, so yes, you will hit the long term averages. Don't be discouraged. Buy more when the market is down. Buy wisely. Diversify. Anyone can do it. And yes, putting 2K a year away starting at 16 through 21... and then putting nothing else away, you will have a million by retirement at that 9-10%.