Even if adults haven’t saved anything for retirement, they at least know they should have begun sooner. When it comes to our kids, though, many parents wonder when they should begin having them save for retirement. Exactly how early is too early?

There is a Chinese proverb that says the best time to plant a tree was 20 years ago. The second best time is today. Same goes with getting your minor children started on this journey. The best time was when they were born. The second best time is today.

But just as important as the when to begin is the why to begin the process as early as possible.

24/7 Wall St. Insights:

• It is never too early to begin your child on the journey of saving for retirement. You can put away money for them right after birth and let them start contributing as they age.
• The combination of time and the power of compound interest are a powerful, one-two punch that can turn even as small amount of money into a fabulously large some of money.
• There are a number of investment options available for kids from simple savings jars to traditional savings accounts. Older minors have other choices available.

The power of time and compound interest

Albert Einstein reportedly called compound interest the “the Eighth Wonder of the World.” Benjamin Franklin also understood its power, saying “Money makes money. And the money that money makes, makes money.”

It doesn’t take long to realize the benefits of compound interest. Given enough time, even a small amount can rapidly increase in value so that by the time retirement age rolls around, you are sitting on a small fortune.

According to this compound interest calculator at the Securities & Exchange Commission, an initial $1,000 investment that you didn’t touch for the next 50 years while earning the stock market’s historical 10.5% annual average return will give you over $147,000. 

However, contribute just $100 monthly after that initial deposit and you would amass a $1.8 million retirement nest egg, all thanks to the power of time and compounding interest.

Now imagine that as your child grows and enters the workforce, he contributes more each month to the account as his salary increases over the years. By the time he retires, he will be sitting on a massive goldmine.

The multiplier effect

Getting your kids started on this journey can begin simply. I started mine at a very young age with three jars. Their allowance was divided up so that some money went into a short-term savings jar for something they wanted to buy in the next week (the smallest amount). A slightly larger percentage was put into a jar for more expensive things that took multiple weeks to save for. The final, largest amount was put into a never-touch, long-term jar that could be used for college or retirement.

The exercise was intended to teach savings, of course, but also deferred gratification. They quickly learned the value of saving money without going into debt.

And as kids get older, more options for traditional investment vehicles open up. While they can start with a basic savings account, when they become teens better options become available.

Investment options for teens

Custodial Roth Individual Retirement Account (IRA). This is a Roth IRA that you open in your child’s name, but they need earned income to contribute. That could be money from a newspaper route or a lemonade stand, but not the allowance you pay them.

Uniform Gift to Minors Act and Uniform Transfer to Minors Act (UGMA and UTMA) accounts. These are also custodial accounts that your child takes possession of when he turns 18 (or up to 25, depending on the state). The custodian and others may contribute to the account.

Brokerage Accounts. Brokerages are starting to allow teens to open accounts that parents then monitor. Fidelity, for example, offers Youth Accounts that can be opened for teens 13- to 17-years old.

Key takeaways

Obviously, saving for retirement from their birth will initially be on you. It’s only as they get older and begin to gain knowledge and understanding that we can introduce them to the concept of saving. Giving them an allowance for chores and having them set aside a portion of that money for future needs is a critical part of teaching them responsibility.

As the grow older, they will have more investment choices available, ones where the power of time and compound interest will turn their small grubstake into a golden nest egg. But only if you get them started saving for retirement today.

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