Tis the season for summer jobs for high school and college kids. These seasonal jobs are more than just an opportunity for teens and college students to earn some money and gain experience. They also provide the opportunity for seeding a significant retirement nest egg and even a down payment on a home through a Roth IRA.
Seems too good to be true? Well, it’s not – but as always, the devil’s in the details, and it is not exactly a free lunch. So, let’s walk through exactly how this all works.
Step 1 – Earned Income
First, teen or college students must get a job that pays – and the more the better. This is because the gateway to opening and contributing to a Roth IRA is earned income. The magic number for earned income to max out a Roth IRA in 2021 is $6,000, as this is the contribution limit. This is because contributions are limited to the lesser of the $6,000 limit or 100 percent of earned income.
Step 2 – Make the Roth IRA Contributions
The next step is to make the contributions to the working child’s Roth IRA. Let’s be honest here. It is a rare case where a kid is going to take all or nearly all their summer job earnings and stash them away in a Roth IRA for 50+ years down the road. There is a way around this, however.
A parent or grandparent can contribute to the Roth IRA in the child’s[h1] name, with two nuances. First, this contribution is still governed by the earned income limits discussed above. Second, these amounts count toward the $15,000 per year gift tax exclusion ($30,000 if married) so it will eat into that. Lastly, do not forget the deadline to make 2021 Roth IRA contributions of any type is April 18, 2022.
How Much is This Worth?
While $6,000 or so may not seem like a lot, it can make a significant difference over time due to the power of compounding returns from such a young age – coupled with the tax advantages of a Roth IRA.
To illustrate the power of this tax and investment move, let us take a scenario where a high school kid makes the $6,000 per year over three summers from age 16-18 before heading off to college, and the Roth IRA contribution is maxed out.
With contributions at just $18,000 and NEVER putting in another dime again, this will turn into the following amounts under different assumed investment returns by the time they are 66 (40 years of compounding).
- 6 percent return = $313,000
- 8 percent return = $783,000
- 10 percent return = $1.93 million
Now, before you get too excited, you must understand that 40 years from now $300,000 will not be what it used to be if inflation continues at historical rates – but the point remains. This simple move made over just a few years can create significant tax-free wealth.
Due to the characteristic of a Roth IRA, the other beneficial options relate to withdrawal. First, the contributions can be accessed any time before age 59 ½ without penalties or taxes. Second, even after all the initial contributions are removed, a first-time homebuyer can take up to $10,000 without the 10 percent early withdrawal penalty to help fund the purchase, although they will owe income tax on the withdrawal if it has been less than five years since the initial contribution.
Be VERY careful here though, because any withdrawals will dramatically lower the investment returns noted above.
Funding a Roth IRA for a high school or college child or grandchild can give them a tremendous head start in life. A few years of relatively small contributions early on can create substantial wealth over time due to compounding of returns and the tax advantages of the accounts.
According to the Bureau of Economic Analysis, consumer spending has seen some interesting trends over the first half of 2021. May was flat, April was at 0.9 percent, March was 5.0 percent, and February was at 1.0 percent. With varied consumer spending statistics as the nation comes out of the pandemic, it’s important for businesses to get demand forecasting as accurate as possible.
According to The University of Tennessee, Knoxville, demand forecasting is “a method for predicting future demand for a product.” It’s a calculated method to plan for inventory and helps prepare the supply chain for the future.
Demand forecasting helps businesses forecast their future sales, which is based primarily on historical data. However, relying exclusively on historical data is not generally recommended.
Historical data provides an incomplete picture because it does not factor in economic trends, seasonal ordering, or consumer behaviors. Multiple analyses are also recommended because young companies don’t have enough of their own data to perform such analyses.
It’s recommended to run through more than one method to forecast sales. It’s important to ensure that data is as accurate as possible and to consider factors beyond inventory. Such factors include how external players – shippers, material suppliers, etc. – will work with the company’s internal functioning.
It’s important to be mindful of the time frame of the different analyses. Short-term refers to the next quarter to four quarters (3 to 12 months) and helps businesses adapt to changes in consumer demand and market variations. Real-time sales data is used to manage just enough inventory. Long-term refers to at least 12 to 24 months, but sometimes 36-48 months, and is used for things related to the long-term business vision. Examples include creating a more reliable supply chain, capital expenditures, advertising campaigns, etc.
Similarly, demand forecasts run by a business can be done regarding intrinsic or extrinsic factors. External forecasts evaluate how the broader economy and systemic changes in commerce shifts future demand. Recommended indicators include exploring how many retail consumers spend, what they are interested in, and whether the economy is expanding or contracting. Internal demand forecasts look at the organization’s employee makeup and where and how the business can divert resources to help deal with additional capacity, if necessary.
Passive demand forecasting relies exclusively on historical data and is usually geared toward established companies with generally reliable sales histories.
Active demand forecasting is geared more toward startup businesses looking to scale and diversify their portfolio. It can be variable because it factors in changing trends of the fluid economy and how companies, especially startups, plan to accelerate growth. However, active demand forecasting also may be useful in order for businesses to work around fluid inventory and logistic network overview. Startup businesses are better geared for real-time demand planning, mainly due to a lack of historical data.
With the quantitative approach focusing on crunching data, oftentimes with complex “big data” processes, the qualitative method takes a more balanced approach with some data, but also cognitive-based analyses, including some of the following tactics:
- The salesforce approach gleans data from the sales staff to predict demand. Those doing sales are in direct contact with the company’s customer base; therefore, they can get info on customer needs and behavior and even report back on what the competition is doing.
- Market research looks at present market trends and sees where businesses can meet newly created consumer demand. Startups benefit because they have little or no historical data.
- The Delphi Method works by hiring an outside group of experts and asking them a series of relevant questions. From there, each expert creates a demand forecast based on their market knowledge. Then, the individual forecasts are shared among the experts anonymously. From there, experts are asked again to come up with a forecast; this is repeated until there is far greater consensus among all the experts.
While demand forecasting is individual to each company and each industry, the more businesses that understand the approach to demand forecasting, the more able they’ll be to react to any type of consumer trend.
According to the U.S. Energy Information Administration’s Short-Term Energy Outlook, the June price of $73 per barrel for Brent Crude Oil was up by $5 per barrel over May. With more vaccinations being rolled out, uncertainty over OPEC+’s production moves, and a reduction in worldwide oil availability, the outlook for oil prices seems upward. If the price of energy – especially oil – keeps increasing, will it halt the improving economy in its tracks?
As part of the commodity boom, crude oil is not immune from the rapid rise, creating an increase in inflation that’s subject to contention of being “transitory” or longer-term. Based on the World Bank’s semi-annual Commodity Markets Outlook, the positive price of crude oil is expected to remain at present levels through 2021.
The price of energy is projected to be, according to The World Bank, about 33 percent more in 2021 compared to 2020, when oil averaged $56 per barrel. In fact, The World Bank explained that crude oil is not the only commodity expected to increase in cost, and attributed it to the recovery from the COVID-19 pandemic.
With more economies coming online, fossil fuels experiencing greater demand, and OPEC+ maintaining production cuts, The World Bank projects the price of crude oil to average $60 per barrel in 2022. One noteworthy factor is that although present levels of demand for gas and diesel are nearly at pre-pandemic levels, jet fuel demand is still lacking since air travel is not back to pre-pandemic levels.
However, The World Bank sees lower crude prices in these situations: the pandemic wears on longer than projected; there’s a major change in U.S. shale production; OPEC+ changes its production agreement; or if some combination of these three factors impacts crude oil demand.
One noteworthy statistic the International Monetary Fund (IMF) points out regarding U.S. shale production is that before the COVID-19 pandemic, shale oil output reached 2 million barrels annually, versus present-day production of approximately 500,000 barrels. While the Biden Administration has banned drilling on federal land, this shouldn’t impact shale production much. However, it signals a bigger approach with the administration’s statements on green energy.
Based on statistics from the U.S. Energy Information Administration’s (EIA) Drilling Productivity Reports, different regions show changes in oil rig production from July 2020 to July 2021. There’s been an uneven recovery over the 12-month period.
In July 2020, the following regions reported the following regarding oil rig production: Bakken at 1,385, Anadarko at 1,001, the Permian at 824, and Niobrara at 1,460. Looking one year later to July 2021, Bakken hit 2,400, with Anadarko dropping to 993, Permian increasing to 1,234, and Niobrara growing to 1,919.
Factoring in OPEC+
On July 18, OPEC+ agreed to phase out production cuts of 5.8 million barrels per day by September 2022, in response to higher prices. With Brent Crude Oil rising 43 percent between the start of 2021 and mid-July 2021, oil is forecast to hit $80 per barrel during the back half of 2021. They will therefore begin to increase oil supply at a rate of 400,000 barrels per day on a monthly basis, which will eventually reduce prices again.
Additional unknowns to the price of crude oil and the economy include projected actions by The Federal Reserve. If The Fed increases interest rates, it increases the strength of the U.S. dollar and decreases the strength of a foreign currency. This, in turn, lowers the cost of oil for U.S. dollar purchases and increases costs in foreign exchange, providing mixed demand for fossil fuel demand.
Another variable, according to the Federal Reserve Bank of Kansas City, is that 16 percent of U.S. white-collar workers are expected to work from home at least twice a week. If the Delta variant increases work from home and overall lockdowns, it could also depress oil demand.
With many unknown variables still present with the COVID-19 pandemic and the impact to commodity prices, including crude oil, the economy at-large will remain touch and go until the globe gets the Coronavirus crisis under control.
According to Fidelity Investments, the average 65-year-old couple retiring today will need about $300,000 for out-of-pocket healthcare expenses during retirement. And that doesn’t even include long-term care. One way to help pay for this enormous cost is to open a health savings account (HSA), which is a savings and investment vehicle designed to help people pay for medical-related expenses on a tax-free basis.
To open one of these accounts, you must be enrolled in an HSA-eligible, high-deductible health insurance plan (HDHP). These are offered by many employers and also are available on the individual insurance market. One of the little-known advantages of the HSA is that if you delay withdrawing from it until retirement, you’ll have money ready to tap for those out-of-pocket expenses on as-needed basis.
An HDHP works exactly as it is named; comprehensive coverage does not kick in until the plan member reaches an annual deductible that is typically higher than other healthcare plans. The trade-off for the higher deductible is that monthly premiums are lower. Therefore, this type of plan is generally suited for healthy individuals or families that do not have a lot of ongoing medical expenses.
In 2021, the annual HSA contribution limit is $3,600 for individuals and $7,200 for family coverage. In 2022, these limits increase to $3,650 for individuals and $7,300 for families. Account owners age 55 and older may add another $1,000 “catch-up” contribution. With a work-sponsored HDHP, both the employee and the employer may contribute to the savings account, but their combined contributions may not exceed the annual limit. As long as you are enrolled in an HDHP, you may contribute to the HSA. Even when you no longer contribute, the account belongs to you and maybe invested for growth and tapped as needed.
An HSA is maintained at a financial institution, such as a bank. Once saved assets have reached a certain threshold, that custodian will allow the owner to invest a portion of the balance. While the HSA rules technically allow you to invest starting with your first dollar, many custodians have their own minimums required in the HSA (usually $1,000 to $2,500) to be available for medical expenses. Beyond that the balance, the savings can be invested for growth. Also, the owner can transfer money to and from the bank and the investment account as needed.
The invested portion of an HSA is transferred to a brokerage account. There, the owner has a variety of options to invest in, including mutual funds and individual securities. According to Morningstar, more than 80 percent of HSA investment funds have earned gold, silver, or bronze analyst ratings, and the lower end of investment fees range from 0.02 percent to 0.68 percent a year. Note that some investment management fees run higher, so it’s important to compare fees just as you would with any other type of investment.
Triple Tax Advantage
The health savings account features more tax benefits than any other type of investment, including a 401(k), a traditional IRA, or a Roth IRA. That’s because all contributions are tax-free (either through payroll deductions at work, which also avoid FICA taxes or as a tax deduction when health insurance is purchased independently). Moreover, HSA investments grow tax-free. If eventual withdrawals are used to pay for qualified medical expenses, they are not taxed either. So essentially, savings, investments, and gains from an HSA account that are used to pay for healthcare expenses are never subject to taxes. If you do use this money for nonqualified expenses, you’ll have to pay income taxes and, if taken before age 65, a penalty fee as well.
However, consider when most people encounter their highest medical bills: during retirement. If you pay for all out-of-pocket expenses with current income throughout your career, your HSA has the opportunity to grow into a substantial nest egg by (and during) retirement. The most effective use of these funds is to pay for health-related expenses, such as Medicare premiums, dental, and vision care, long-term care insurance premiums, and nursing home costs.
An additional advantage is that health savings accounts are not subject to required minimum distributions. However, be aware that when an HSA is left to a non-spouse heir, it converts to a taxable account – so it’s best to use up these assets while you’re still alive.
You’ve got loads of experience in your field. You know things that only time can teach you. However, all of your experience and knowledge can sometimes work against you. And even though age discrimination is illegal, it doesn’t mean it isn’t prevalent. You can’t turn back the clock, but you can reshape how you present yourself. Here are a few good ways to get started.
Learn New Skills
If you see a job posting in your industry that requires knowledge of the software you don’t know, hop on YouTube or enroll in an online class. Certifications help, too, and are available in some of the most in-demand programs, such as Amazon Web Services (AWS), Systems Applications and Products (SAP), Hootsuite (used for social media), and Salesforce. This way, you’re demonstrating to employers that you have the necessary qualifications for the job – you’re a viable candidate – and you haven’t fallen behind over the years.
Rethink Your Resume
First of all, limit your experience to the past 15 years, unless there’s a job that reflects a title or skill that’s relevant to the position. You don’t want to appear, upon first glance, overqualified. Second, make sure your CV includes the right keywords. The days of HR managers poring over resumes is mostly gone; they often use applicant tracking systems (ATS) to weed out the candidates that are filling up their inbox at warp speed. Finally, if you’re using AOL or Hotmail, get a new account; this is a red flag that screams too old. Sign up for Gmail instead.
Widen Your Net
Think outside your industry’s box. For instance, you might be attracted to a big-name corporation or a hot startup, but it might not be the right environment for you, especially if there’s a chance you’d report to a much younger manager. You might find a better fit by going outside your comfort zone. Colleges and universities might be good options; you can leverage your experience by teaching. Smaller companies or startups that aren’t as well known might also be good places to look; you could take on multiple roles. Being open to contract or freelance jobs is another good idea. Getting your foot in the door is half the battle.
Use Personal Connections
While job sites like Zip Recruiter and LinkedIn, leads on social media and head hunters are places you might have found opportunities before, reach out to friends and former coworkers. It creates immediate familiarity and, when faced with a sea of resumes, helps move your name closer to the top. When you do get introduced to someone who has an opening, ask about their industry, role in the company, as well as what tools they’ve used, podcasts they listen to, or online classes they’ve taken to keep current. This not only shows your business savvy but also could help keep you top-of-mind if they hear of anything.
Own Your Experience
Your age doesn’t have to be the elephant in the room. Demonstrate why the invaluable skills you’ve accumulated over the years differentiate you from others. Craft an elevator pitch and jump right in. Talk about how, for instance, your breadth and depth of knowledge can help junior executives learn and grow. Busy employers generally want to know how quickly you meet the job requirements and if you can make their life easier, or help them shine.
Remember, you have so much to bring to the table. That’s why serving up your accolades in the right way can make all the difference in the world.