Login
Password

Forgot your password?

Leave Your Child $1,000,000 for Retirement

By Edited Oct 18, 2016 0 1


Who wants their child to be a millionaire?

The goal of any parent is to leave more money and provide a better life for their children than what they had. In today's society of rampant unemployment and financial uncertainty it is harder than ever for parents to provide for their child's financial future. Most parents worry about college funds for their child, but if they would put equal thought into a child's retirement fund then they could easily ensure that their child has a cool one million dollars waiting for them when they retire. That's right! It is very easy and affordable to guarantee $1,000,000 is waiting for your child when they need it most – the golden years. How is this possible? The simple and powerful concept of the time-value of money is all you need. Set it up and forget it and let time do the rest.

What is the time-value of money?

This concept refers to the compounding effect of interest. This means interest on interest. A simple example is $100 in an account with a 5% annual return. In one year, the account is now worth $105. At the end of year two, it is worth $110.25. You gained another $5 and an additional 25 cents on the previous year's interest. Big deal, you say. It is! This interest on interest compounds in ways that boggle the mind. For a better look we need to examine the mathematical formula behind the calculation of present value and future value of money.

The mathematics of time-value of money

The formula needed to calculate how much money is needed today to provide a specific amount of money in the future is actually fairly simple.

PV = FV / (1 + r)n

PV=Present Value of money
FV
=Future Value of money
r
=rate of return as a decimal (e.g. 10% a year is .10)
n
=number of periods interest is compounded

In our previous example we discussed $110.25 arising from a 5% return for 2 years. If we hadn't know hos much money it took to achieve this we could have calculated and found our original sum:

PV = $110.25 / (1 + .05)2

PV = $110.25 / (1.05)2

PV = $110.25 / 1.1025

PV = $100

(which is the original $100 we started the example with)

Now, what if we don't know the present amount needed but want to leave $1,000,000 for our child. If your child is 5 years old and will retire at 65 (probably not in the future), then the money can grow for 60 years!

It is easy to achieve a 10% return historically in a decent stock index fund. Do some basic research on the annual returns for the Dow Jones Index for the previous 30 years and you will see this is true. So how much do we need?

Well, we know FV = $1,000,000 and n = 60 and r = .10

PV = $1,000,000 / (1 + .10)60

PV = $1,000,000 / (1.10)60

PV = $1,000,000 / (304.48)

PV = $3284.28

!

That's right, by only sticking just over $3000 in a stock index fund for your child now, you can virtually guarantee a million dollars is waiting for them upon retirement. $5000 would give your child $1.5 million dollars in the same 60 years at 10% annual return. This is quickly determined to be true by manipulating the formula algebraically and calculating future value.

FV = PV x (1 + r)n

FV = $5000 x (1.10)60

FV = $5000 x (304.48)

FV = $1,522,400

This formula once again just assumes a lump sum deposit left to its own devices. You can adjust the interest rate and number of years and calculate options to your heart's content. If interest is compounded more often than once a year just divide the interest rate r by the number of times compounded and multiply n the number of times it is compounded by the same number. For instance, 10% a year for 60 periods compounded twice a year becomes 5% for 120 periods and this means even less money is needed. 10% a year for 60 periods compounded monthly means .83% for 720 period and, again, means even less money need. The more times money is compounded the less needed for the initial investment to reach a desired goal.

Just do it!

Imagine if you start an account for your child at birth and it grows for 70 years. You do the math! The best time to start is as soon as possible. Do whatever it takes: break out the HELOC calculator if you have to! The more time invested the less money initially needed and it can make a BIG difference. Young parents overspend on baby clothes, new toys, fancy SUVs in which to protect their family, etc. It is easy to downgrade the spending on a few things and set aside a few thousand dollars for your child's future. While many parents fret over college funds, they should consider this future benefit for their child instead. Many children do not succeed in college and that money gets flushed away. A career crisis can leave your future child poor and with few assets. Obviously a million dollars in the future won't be worth as much as a million dollars today when it comes to spending, but it is a start! Ideally, your child will have some retirement built up of their own and can retire worry-free and in style. Seriously, what will your child be more thankful and remember you for – the fact that you once had a gas guzzling SUV instead of a mini-van or the fact that you provided ONE MILLION DOLLARS for their retirement!

Advertisement

Comments

Jun 6, 2010 7:37pm
Glunn11
This is an incredibly excellent bit of good advice that people need to understand and love. Compound interest is amazing stuff.
Excellent article!
Add a new comment - No HTML
You must be logged in and verified to post a comment. Please log in or sign up to comment.

Explore InfoBarrel

Auto Business & Money Entertainment Environment Health History Home & Garden InfoBarrel University Lifestyle Sports Technology Travel & Places
© Copyright 2008 - 2016 by Hinzie Media Inc. Terms of Service Privacy Policy XML Sitemap

Follow IB Technology