WEALTHY KIDS

SECURE A COMFORTABLE RETIREMENT FOR YOUR CHILD OR GRANDCHILD

We've previously looked at the benefits of a Roth IRA, but I wanted to share with you a powerful strategy to pass along wealth to your children and grandchildren.

Let’s look at the benefits of a Roth IRA for a newborn baby. I love this example because it demonstrates the power of compounding, the future tax benefits of a Roth IRA, and the impact of the higher investment returns from our Beyond Buy & Hold system. If you have young children or grandchildren, you will want to pay close attention to this illustration.

Let’s say that a parent or grandparent of a newborn baby gives that child a gift of $200 at birth and every year through age 18. But rather than put that money in a savings account, they set up a Roth IRA in the child’s name and deposit that money into the Roth account every year. Let’s also assume that all of the deposits are invested in a low-cost, S&P 500 index fund and that the money just sits in that fund until the child reaches the age of 65.

The nineteen annual contributions of $200 made by the parent or grandparent would total $3800 over those 18 years. An S&P 500 index fund should generate an annual return of 9% per year over the 65 years in our example. That $3,800 would turn into a $528,000 retirement account when that child reaches the age of 65.

Pretty astounding, right? Your combined gifts of $3,800 result in over $500,000 for your loved one at retirement. This is a great example of the power of compounding. Giving money a lot of time to grow leads to exponential returns in the later years. When that child is 10 years old, the annual investment gains are only $273. By the time that child reaches the age of 65, the annual investment gains are over $40,000--ten times the amount invested.

Now, let’s look at the tax benefits bestowed upon that child when it’s time to start withdrawing money at age 65. If we assume a retirement age total tax bracket of 25% (20% federal and 5% state), one would need to have a total of $700,000 in a taxable 401(k) account to match the spending power of the $528,000 in the Roth IRA. The tax-free Roth account saves over $170,000 in taxes in retirement.

Finally, let’s look at the power of compounding when we achieve higher investment returns. Using the same $200 annual contributions into this child’s Roth IRA account up to age 18, we then combine our Beyond Buy & Hold investing system to the low-cost S&P 500 index fund strategy. Rather than earning 9% per year from the S&P index fund, this account should generate annual returns of 12.7% per year (details explained later in the book) over 65 years.

The compounding effect on the extra 3.7% earnings per year produces a retirement fund of roughly $3.8 million at age 65, versus the $528,000 in the previous example. That is not a typo! That is the combined power of compounding and better investment returns.

The tax savings of the Roth IRA compared to a 401(k) and using our Beyond Buy & Hold system would be over $1,000,000.

I would encourage every parent or grandparent to do something like this for your children and grandchildren. When you do this at the earliest ages, you are giving these fortunate kids a nest egg of millions of dollars--at the cost of a few thousand dollars. It’s never too late to begin implementing this strategy.

Happy Investing,

Phil

---

Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.

Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.