Want someone in your family to be rich?
You can make it happen with a mixture of affection, forethought, and relatively small sums of money. The mixture can be turned into millions of dollars if that 'someone' in your family is a grandchild. The magic ingredients, of course, are compound growth and time.
Suppose, for instance, you have a newborn grandchild. You're not so well off that you can make that child wealthy today. But you'd like to do something to assure financial security in a distant tomorrow.
It can be done.
Give $11,000 a year (the annual gift exclusion) for five years. Let it grow while invested in a low cost equity index fund. Your grandchild will have over $5 million at age 56 and nearly $16 million by age 69.
Spoilsports will be quick to point out that $5 million 56 years from now might not be enough to cover a major Starbucks habit. We keep losing purchasing power to inflation.
Well, yes we do.
But if you assume a long-term inflation rate of 3 percent (the average from 1926 to 2003 according to Ibbotson Associates in Chicago), the original investment will still grow to $1 million of current purchasing power by age 56 and $2 million of current purchasing power by age 69. These figures assume the 10.4 percent annual rate of return on large common stocks, fully taxed at 15 percent each year, or a net of 8.84 percent annually. Returns, of course, could be lower. Taxes and inflation could be higher.
Gifting $11,000 a year for five years could put a grandchild among the nation's top wealth holders. No, I'm not talking private-jet-and-houses-in-Aspen-San-Francisco-and-London rich. I'm simply talking about having a grandchild with higher net worth than most Americans--- before they make their own contribution to the family stash.
Recall, the most recent Survey of Consumer Finances showed that a net worth of $1,154,000 put a household in their 50's in the top 10 percent of all households. No doubt the figure will be higher in the future--- but however you slice it, a head start is a good thing.
And it really doesn't take that much.
Don't have $11,000 to give for 5 years? O.K. Let's try giving $2,000 a year for each of five years but investing it in small capitalization stocks, the ones that have returned 12.7 percent annually according to the Ibbotson Associates data. Shave off one-tenth of a percent for fund expenses and you end up with $6 million at age 56, less whatever you had to pay in taxes. A small increase in annual return will do a lot to overcome making smaller gifts.
Unlike the old joke, you don't make a small fortune by starting with a large one. You start with amounts of money that are imaginable, that many people have. Nor does it require brilliant investment management--- the money will be invested in low cost, tax-efficient index funds. With the recent announcement from Fidelity Investments that it will lower the annual expense charge on its index funds to only one-tenth of one percent--- less than price leader Vanguard---anyone can invest with no commission expenses, nominal annual expenses, and tiny annual taxes in the long term growth of America or the world.
Want to see for yourself?
Be my guest. I've created a new calculator at www.scottburns.com. I call it The Generous Grandparent Calculator but you don't have to be a grandparent to use it. You can also be a parent putting money away for a college education, or a pre-retiree trying to figure out what your current savings and 4 more years of savings can grow to.
What do you do? Simple.
• Enter the age of your grandchild today.
• Enter the grandchild's age when the money will start being used.
• Enter gifts in any amount over a five-year period.
• Enter an assumed investment return and rate of inflation.
The generous Grandparent Calculator
The calculator will show you how much your gifts will accumulate to before and after adjusting for inflation.
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