Setting Kids Up for Success
Last summer, my 16-year-old took a job at a nearby pool.
In Howard County, Maryland, the minimum wage is $15 per hour, which is a solid rate for a teenager.
He earned roughly $2,800 after taxes over three months.
He wanted to invest those earnings, so we opened a custodial Roth IRA. The maximum contribution is limited to what he earned, and we agreed to match half of his contribution.
I explained the advantages to him, and he was immediately interested. A Roth IRA offers exceptional tax benefits. When funds are withdrawn—likely in about 50 years—they will be completely free of taxes.
He won’t have to worry about capital gains taxes, allowing the investments to grow much more effectively over time.
Assuming a 10% annual return, every $1,000 invested could grow to $117,000 over five decades.
Opening a Roth IRA at a young age is one of the smartest strategies for investors. Starting his account as a minor gives him a significant advantage toward a secure retirement.
Investing for 5 Decades Out
The toughest decision was choosing the investments.
As you probably know, I think U.S. stocks are generally overpriced right now.
History shows that when the S&P 500 trades at valuations around 21x forward P/E, average returns over the next ten years tend to be close to zero. This chart from Apollo illustrates this:
We’ve seen this before. After the dotcom crash in 2000, it took the S&P 500 about 7.5 years to regain its prior peak. Then the 2008 financial crisis struck.
For investors who bought near the 2000 tech bubble peak, it took approximately 15 years to break even once inflation and dividends were factored in.
The chart shows that when the S&P 500 trades at a forward P/E of 12, investors can expect annual returns near 15%. However, today’s valuations are far higher than those bargain levels.
Because of this, we decided not to include U.S. stocks in the portfolio.
Emerging Markets and Natural Resources
You can probably guess what we settled on.
That’s right—we gave him a diverse portfolio focused on emerging markets and tangible assets.
These are the selections we made:
- VWO – a broad emerging markets ETF with an extremely low 0.07% expense ratio
- FLLA – a Latin America ETF offering attractive yield and low fees, mainly Brazilian equities
- PBR.A – Petrobras, my preferred long-term oil stock
- VALE – the Brazilian industrial metal mining company we featured before
- GDX – the largest ETF focused on gold mining
For those wondering, why not silver?! Our kids are already well positioned in silver without realizing it yet.
The plan was to pick investments that can largely be left alone for 5 to 10 years. The goal is to let dividends be reinvested and to watch the growth compound over time.
So far, this portfolio has performed well. We’ll tweak holdings as market conditions evolve. Given the current energy crisis, we might sell some positions temporarily to hold cash and weather the turbulence. Still, the main approach is to hold long-term. Trying to predict the market over five decades is a losing game.
By establishing this account early, we’re giving his money 50 years to grow tax-free, an incredibly powerful advantage—even starting with a modest sum.
This summer, Sharp Jr. will return to work at the pool before beginning his electrician apprenticeship in the fall. All his earnings will go straight into his Roth IRA.
He is NOT taller than me. It’s just a bad angle…
Meanwhile, my 13-year-old daughter has spent the past three years working at the barn where she rides horses, earning extra lessons in exchange for labor since she was under 13.
This summer, she’ll finally receive a paycheck, and guess where that money is headed? Straight into her tax-advantaged custodial retirement account.
If you have children or grandchildren, I highly recommend opening a custodial Roth IRA as soon as they have a job. You can employ them yourself, but make sure they perform legitimate work, keep thorough records, and consult a tax expert if you have any doubts.
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