This week’s Two-Minute is about your child’s and your grandchild’s retirement. And we will be using our backward thinking again.
If you missed the think backward segment a few weeks ago, it means looking at money and investment decisions from the perspective of how much you would lose if you don’t do something, rather than how much you can make.
Sounds goofy, I know, but it works.[ad#Google Adsense 336×280-IA]So, here’s the question.
Can anyone afford to lose $575 a day in retirement? Because that’s how much they will not have if you ignore the dollar a day plan for newborn children.
Invest $1 a day, $30 a month, from the day your children or grandchildren are born, until they are 18 years of age, and that’s a total investment of $6,570.
Keep it in an aggressive, low-cost, small cap mutual fund, and assume a 12% average growth rate.
At age 66, your little darling will have around $4.2 million.
And they will never have to invest another cent after age 18, never! Not one cent more!
Withdraw 5% per year after age 66 and you have about $575 a day in income. And if the child leaves the money alone and lives on the $209,000 a year for 30 years, they will leave their heirs $30 million.
I know, in this market, 12% a year seems farfetched, but look at the long-term track record of small caps. It is not that unreasonable. Or use 10% and end up with $1.45 million at age 66.
So, back to our backward thinking…
For one dollar a day for 18 years, can any child afford to lose $575 a day in income in retirement? I know I don’t have to give you the answer.
And believe me, the way things are going, our children will have a much tougher time in retirement than we have now.
And I’m sure I don’t have to tell you that the magic here is not the amount invested, or the fund or ETF you chose; it is the time. Add an additional dollar a day from age 18 to 66 and you increase your final return by only 13%. That’s how important the first 18 years are.
$1 dollar a day is truly amazing!
The only thing I would add is to put it in a trust so they can’t nibble away at it. We all know how hard it is to leave a lot of money alone. Those small bites look so insignificant at the time but can blow the whole operation.
They may curse you in their 20s, 30s and 40s when expenses pop up, but long term they will remember what you did for them, and they’ll think of you at least once a month when the big check comes.
Source: Wealthy Retirement