Better Than a Bike

LIKE MOST PARENTS, my wife and I spent time and money building a happy and balanced childhood for our four children. That encompassed things like vacations, cub scouts, church, music, and youth soccer and baseball. But it also included trying to pass along values like hard work, thrift, generosity and education. We never hesitated to speak about our finances around the dinner table, although we only shared specific numbers when the kids got older.

About ten years ago, I was lamenting that I couldn’t contribute to a Roth IRA because my income was too high. (Yes, it’s a nice problem to have.) But it occurred to me that my children could contribute if they had earned income, plus the benefits of starting young would be enormous.

So when my oldest son turned 16, we talked about investing for his retirement. I thought this would be an awkward conversation, because retirement was so far off. He surprised me. I didn’t think he was listening much to our dinner table conversations, but he had understood enough to internalize the value of planning and saving. He asked how much he would make by retirement. We created a spreadsheet showing how a $1,000 investment would grow to perhaps $30,000 or $40,000. We went down to the garage and I pointed out that if he invested, instead of buying a bike, he would in time end up with a car. Since he was learning to drive at the time, he really liked that idea.

We tallied up his earnings. He had done some lifeguarding, as well as snow shoveling, mulching, lawn mowing and other tasks for his uncles, aunts and grandparents. They had been generous. He had just over $1,000.

He liked the idea of taking what was a large sum to him and making it into an enormous amount, but he also wanted to spend his money. I told him about how many companies are helping employees save for retirement via a matching contribution. I offered to do the same and match his savings up to $500. He took the bait: He opted to invest $500 of his money, take my $500 and keep $500 to spend.

At the time, there weren’t many investment companies that allowed you to start a Roth IRA for $1,000. We chose Vanguard STAR, a low-cost, low-minimum mutual fund that invests in other Vanguard funds. Today, Vanguard and other fund companies offer target-date funds with $1,000 minimums. If I were helping my son today, I would guide him toward one of those funds.

By the time he started college, my son had about $4,000 in his account, thanks to both additional savings and investment growth. We rolled his account balance into the Vanguard Total Stock Market Index Fund. He plans to keep his money there until retirement. It was the length of time that convinced both of us that this was a reasonable strategy. He said that he wouldn’t need the money for another 45 years. I added that he would only take out a small portion upon retirement, and withdrawals would continue for another 30 to 35 years.

During college, he had engineering internships that paid well and provided more money for his Roth. We starting calculating his “numbers.” These numbers weren’t how much he would need to retire, but rather how much the current year’s $5,000 Roth investment would be worth in retirement. Using a 7% average growth rate, we calculated that his $5,000 would grow to $120,000 by retirement, and then might provide $200,000 to $250,000 in total income through age 95.

I waited until he had a job to discuss the Roth’s tax-free growth. He called to complain about how much the government took out of his paycheck. That led to a conversation about why the Roth IRA is such a great investment vehicle. Discussions with the other kids have been much easier. They saw what their older brother was doing and they wanted to be like him—only better.

Dave Rowlands is a former Xerox executive and McKinsey consultant. With his wife, he now owns and runs two small companies. He is helping his oldest son, now an engineer, to start a personal finance blog for Millennials.

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