Posted by Dave on May 17, 2011
This is a guest post by Dave, who is also looking to retire no later than 45, but unlike Tim has no kids and doesn’t want any. Dave is from Ontario and is working towards his CGA certification.
My seven-year-old nephew had a very profitable Sunday – it was his first communion at his church and in total he received $500 in cash. I don’t know about most people, but I really wouldn’t know what to do with $500 at that age – I couldn’t fathom the amount of stuff that I would be able to buy with that much money . I don’t think I ever had $500 in my name until I started my first job when I was 11 years old.
I was curious, so I calculated what this amount of money would work out to at a conventional retirement age (65) at 7% interest compounded once per year (just a simple calculation) – around $25,000. This got me thinking – if I were a parent (which I never plan to be) would it make sense to set up a “retirement” account for my kids? If for example, you started a DRiP (Dividend Reinvestment Plan) with $1,500 and added an additional $1,500 per year until your child was 18, by age 65 (in an ideal world of course) the dividend account would be worth over $1,000,000*.
I understand that this amount of money may not be achievable for most people, but really any amount of money would work out to a sizable amount of money 65 years later.
To me, a parent starting up this kind of portfolio would have been much more useful than say an education account (something that I didn’t get, but is discussed at length sometimes in many personal finance blogs). Perhaps I would have appreciated the education account while I was scraping by going to school, but down the road I believe I would appreciate having the “cushion” of a future retirement account accruing money that I’m not having to save right now.
What a retirement portfolio started at age zero would provide is freedom later in life. If I knew at age 15 or so that I wouldn’t have to save for retirement (or at least not very much) perhaps my life would have been a little different. Right now I wouldn’t have to work full time, as I would only really need “subsistence” level wages (to pay for current expenses) rather than worry about future expenses. As long as the parent has provided at least a small amount of personal finance knowledge I think that most people would be able to experience more in life than working the normal 8+ hours a day 5 days a week.
Is this a wacky idea created by someone who doesn’t understand what it means to have kids, or would you parents (or “someday parents”) think about creating an account that would provide for your child’s retirement? For me, I think I would be more than appreciative as an adult having an account like this. I personally think that too much weight is put on saving for kids education, something that they should be able to pay for themselves. This is simply an option that may help down the road.
*I’m not looking at taxes or anything here, this is just the pure compounded portfolio.