Just for fun I was trying to figure out how to make my kids millionaires by the time they retire, for the least amount of money out of (my) pocket.
They are young, so time is on their side. Gina is 16 and Anna 14, so they have ample opportunity to make use of compound investment returns.
Using Anna as an example, I used the following assumptions:
- 51 years to her retirement at age 65
- When she retires my “gift” to her will be a cool million dollars
- Average annual investment return of 10% over that period
- Annual compounding
- Investment earnings will grow tax free
- I will make a one-time investment today and never add to or take away from her investment
How much do I need to invest today to make Anna a millionaire by the time she is 65?
Using my financial calculator, I determined that it will cost me $7,744 today to make Anna a millionaire by the time she retires if my assumptions hold true. Gina’s investment came out to $9,370 because she has two fewer years of asset growth between now and when she turns 65.
Pretty cool. But there are real challenges with this.
First off, 51 years is a long time and a lot can happen during that period. I won’t be around to manage the money for that whole time, so there is a risk that the next person managing the money will not stick with the plan. Or what if Anna wants to cash in when the investment is worth, say, $600,000? What if climate change destroys the human race? And so on.
Should those risks hold me back from making this investment? I’m going to say no, because my investment in today’s dollars is relatively small and the potential payoff is large. I’ll take the time period risk.
Second, can we get 10% per year on average for 51 years? Nobody can know the answer to that, but I think it is possible. We have to invest aggressively, but if you look, you can find growth investments that have done better than 10% for prolonged periods.
How do we get this money to grow tax free?
I have a secret I haven’t told you. Anna works for me. Stuff like printing documents, scanning, stapling, mailing, cleaning up the office, filing, vacuuming, updating spreadsheet information etc.
I pay her as an employee, she gets a W2 and pays taxes. Meaning she can contribute to a Roth IRA. And that Roth IRA investment can grow tax free. And better still, with the Roth IRA she won’t have to pay tax on a nickel of her million dollar windfall when she retires! Problem solved.
Now I suppose Congress can mess with the tax benefits of a Roth IRA over the next 51 years, but this is still be best option I have to make Anna a millionaire for a (relatively) measly $7,744.
Is it a risk worth taking? I think so. I want Anna to be a millionaire. So I’m doing this…..let’s press on.
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