There’s no need for teens to plan out exactly when and how they’re going to retire before they even finish school, but young people should begin considering early on how they want their financial lives to look years down the road.
With many teens entering the world of employment for the first time, it may seem strange to advise them to think about retirement. After all, at a time when most young people are just getting their first job, the concept of retiring feels impossibly far off.
However, when it comes to working, planning ahead and thinking about the future is essential. People are living longer than ever, and the ability to make wise financial decisions now in preparation for the future is an integral part of financial literacy. There’s no need for teens to plan out exactly when and how they’re going to retire before they even finish school, but young people should begin considering early on how they want their financial lives to look years down the road.
Younger generations can’t rely on Social Security
While Social Security has helped many retirees supplement their incomes, anyone who watches the news knows that relying on government programs for retirement is becoming a riskier proposition. As the number of retirees skyrockets, teens paying into Social Security now may not be able to count on the same financial safety net as their parents and grandparents.
This means that looking at and setting up retirement plans is even more essential for today’s teens than in past generations. It’s with this in mind that parents can help their kids learn about the following options:
IRAs
The most common form of retirement planning is the individual retirement account, or IRA. While there are many different types of IRAs, the most common are Traditional IRAs, Roth IRAs and SIMPLE IRAs.
Traditional IRAs are the most basic type. These accounts allow workers to contribute funds up to the amount of their taxable income. Because fund contributions to this type of account are tax deductible, the amount of taxes a person has to pay is reduced.
Roth IRAs are not tax deductible, meaning individuals must pay taxes on contributions upfront. However, when this money is used in the future after an individual has retired, they will not have to pay any taxes on the funds they’ve put in over the years.
A Savings Incentive Match Plan for Employees, or SIMPLE, can either come in the form of a 401(k) or an IRA. With these plans, when an employee makes contributions to their account, employers must contribute a set amount as well in order to match it.
Pensions
Pensions are becoming increasingly rare as the responsibility for retirement planning is being placed on the individual, but some jobs still offer these plans. Pensions are great retirement tools, as they act as contracts between employers and employees that a certain amount will paid to an employee on a regular basis after they retire.
Think about flexibility
While it’s important to think about the future, it’s also wise for young people to invest in retirement plans that can be accessed at different times. For example, funds can be withdrawn from Roth IRAs at any time without individuals having to pay taxes or incur a penalty. For teens, a Roth IRAs flexibility can come in very handy if they need money for things such as college or a car purchase.
Additionally, Roth IRAs allow parents to make contributions as well, making it easier for mom and dad to help their children get a leg up in saving for the future.
For more information regarding IRAs and other retirement tools, parents and teens can visit the official website of the IRS.