In this article I will explore how a teenager can set themselves up for retirement before even graduating high school. Indeed, it is possible to build over $1 million in future wealth before starting college.
Most teenage students can manage part time work during the school year and full time work during the summers. With few expenses, the teen is able to invest every dollar earned. Of course, not all students will fit this profile. Some won’t find work. Others will be required to help with family expenses. But I think – with enough discipline – many students can make this a reality.
I believe that the more hours you work at a part time job while in school the worse your academic performance. Therefore, I will keep weekly working hours during the school year at a very manageable level.
After all, this whole exercise is about setting up a successful future. That includes future earnings, which is dependent on a good education. So this experiment should not come at the expense of future earnings.
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- Let’s assume that during the school year the student works one 8hr shift per week.
- School year is 40 weeks
- During the summer, let’s assume the student works a 40hr week.
- Summer is 8 weeks
- Starts working in grade 9 through to grade 12
- Earns $15/hr ($1 above minimum wage in Ontario, Canada)
- No taxes or transaction costs
Based on these assumptions, the student would earn $9,600 each year (see table below) for four years.
But how does he turn this into $1 million by retirement?
If the student invests the $9,600 at the end of each of the four years and does nothing else, he could have over $1 million by age 65. The chart below illustrates how the investments would grow assuming average annualized returns of 5, 6 or 7%. (These are conservative estimates given long term historical returns are close to 10%.)
Of course, $1 million in the future will be worth less than $1 million today due to inflation. The chart below adjusts the investment returns to account for an annual inflation rate of 2%. Still, the student’s initial investment ($9,600 × 4) is worth between an estimated $166-430k by age 65 in today’s dollars.
That is more than most 40 year olds currently have saved for retirement. Can you imagine what this might look like if the student kept investing throughout his life?
The message here is simple. Start investing as young as possible and let the power of compounding grow your wealth.