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Why Your Teenager Won't Be Able to Retire

Pimples, popularity, and puberty -- ahh, adolescence.

And as if all that weren't enough, there's another issue that should be worrying adolescents -- a poor retirement.

Teenage retirement?
According to recent estimates from the Government Accountability Office (GAO), one out of three teens will have no money saved in a 401(k) plan when they plan to retire. For low-income workers, the GAO estimates that almost two out of three teens will have no savings when it comes time to retire.

With pensions quickly becoming obsolete and Social Security benefits slated to decline, young workers face a very grim retirement -- unless the trend is bucked.

There's one immediately clear takeaway: To reverse these stats, we need to teach our young ones the merits of delaying gratification (and not just with the birds and the bees).

The government is on the case
The GAO report says that automatically enrolling workers in company-sponsored retirement plans -- as the Pension Protection Act of 2006 allowed for -- would "cut in half" the number of future retirees without savings.

According to a report in Pensions & Investments, one 401(k) provider, New York Life Retirement Plan Services, has seen "significant" growth in the number of auto-enrolled plans. Its most recent figures found that 32% of companies that offer 401(k)s to their employees had started automatically enrolling workers.

While a good place to start, auto-enrollment won't affect most workers in the near term and it won't solve the problem altogether.

The good things in life are free
So if you don't have a 401(k) and your company offers one, sign up today. Don't leave your financial future to the government, or to the mutual funds in which your employer auto-enrolls you, or to chance.

See, 401(k) plans make a ton of sense. To encourage employees to save on their own, most companies match a portion of the amount you contribute to your retirement savings plan. It's free money.

Let's say your company matches 50% of the first 6% you contribute to your 401(k) and you have an annual salary of $50,000. By maxing out your 401(k) contribution, your company hands you an additional $1,500 a year.

By investing this over the course of 25 years, receiving the market's average 10% annual return, you end up with more than $150,000 -- which you'll kiss goodbye if you don't take advantage of your 401(k) plan today.

God, please bless America and lower my taxes
There's more. Contributions made to your 401(k) are tax-sheltered, meaning the money you contribute to the plan grows tax-free. You don't have to pay income tax or capital gains tax until you're ready to withdraw a portion when you're retired.

While that helps you in retirement -- your money grows tax-free -- it's also a great way to lower your taxable income today. Current 401(k) guidelines allow you to contribute up to $15,500 a year, or $20,500 if you are 50 or older. 

Happy, work-free days
By far, the greatest benefit of saving for retirement is that your money is tied neither to the mercy of our government nor to the existence of your former employer, but rather to investments of your choosing. 

Start simple. A great first option is a low-fee index fund that tracks the performance of the broader market. Vanguard 500 (VFINX), with top holdings of ExxonMobil (NYSE: XOM  ) and Bank of America (NYSE: BAC  ) , is a reliable choice, if offered by your plan. It lets you bet with the market -- as measured by the S&P 500 index.

You'd also be wise to throw in international diversification. One solid choice (again, if offered in your plan) is Vanguard Global Equity (VHGEX), which has positions in Canada's Research In Motion (Nasdaq: RIMM  ) , the Netherlands' ING (NYSE: ING  ) , and Russia's Mobile TeleSystems (NYSE: MBT  ) . Lastly, consider further diversifying with a fund like Vanguard Small Cap Index (NAESX), which counts Hansen Natural (Nasdaq: HANS  ) and Oceaneering International (NYSE: OII  ) among its top holdings.

Of course, that's just a start. If you'd like more help planning for your teenager's -- or your own -- retirement, including specific fund and stock picks, click here to browse through the wisdom of my Foolish colleague, Robert Brokamp, in his Rule Your Retirement service. A free guest pass costs you nothing for the next month. There's no obligation to subscribe. 

Fool analyst Adam J. Wiederman has no position in any of the securities mentioned above. Bank of America is an Income Investor recommendation. The Fool has a disclosure policy.


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