Thursday, July 23, 2009

A Gift of Retirement Funds

As a mental exercise, I calculated how money invested today would give my four year old daughter a nest egg of over $100,000 at her retirement. Interestingly, depending on the actual returns, a relatively small lump sum investment of $10,000 can lead to a significant sized nest egg.

The table below show how much a $10,000 initial investment is worth for different years and different average returns.

Average Return

For a 3% average annual return, the target of $100,000 will not be achieved. However, at an average return of 5%, the account is worth over $100,000 at 50 years and almost $200,000 at 60 years. At an average return of 8%, the account is worth over $100,000 at 30 years and over $1 million at 60 years. For reference, the historical returns for bonds is about 5% and for stocks is about 8%, even including the dismal returns of 2008.

Of course, this is not a perfect retirement solution for our child, or else I would have done it :-) First, unless the money is put in a trust, there is no guarantee a child will wait sixty years to access the money. Second, if the child dies before 60, they do not get to use any of the money. Third, this example does not account for taxes on earnings. Fourth, in sixty years, $100,000 and even $1 million will be worth much less than , due to inflation.

However, even with these issues, the potential large value in the future makes the idea worth considering. An option may be to help our child to fund a Roth IRA as soon as she starts earning wages in her teenage years. If she's industrious, she may be able eligible to contribute $10,000 in two to three years, which we would probably donate as parents.

For more on Crossing Generations, check back every Thursday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2009 Achievement Catalyst, LLC

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