What if you opened a Roth IRA for your kids at say, age 5? I know, you can’t open an IRA at that age because you can only contribute earned income into an IRA and 5 year olds don’t have earned income. So what if you opened one in your name and put $1,000 into it for your 5 year old. You made them the beneficiary and always considered that their money even if it’s yours legally. I mean, you’re a good parent you can handle that bit of extra responsibility. They would get the money if you died and if you didn’t die you could take it out and give it to them after you retire, ideally after they retire.
Wouldn’t that be nice?!
I know this is some extreme retirement planning. I also admit it has major flaws, for example, if you are able to do this it means you aren’t maxing out your own retirement contributions and you shouldn’t be planning your children’s retirement before you’ve set up your own. Yes, I know. It’s just a mind experiment. A game if you will, so let’s play a little.
If you put $1,000 into a Roth IRA earning 10% for 60 years you would have $393,515. That’s pretty nice! Your $1,000 turned into almost $400,00! Merry Christmas!
But what if you wanted to contribute a little more even after your initial investment of let’s say that little Johnny gets some birthday and Christmas money from his grandparents. We will assume that he gets $120 per year from this source til he turns 18. So you put that in there too. That turns our nest egg into$739,211! Holy cow! We’ve almost made Johnny a millionaire with $1,000 and some gifts from grandma! Well… that and 60 years.
But that’s not all we can do. Let’s say that at age 16 Johnny gets a part time job after work. You encourage him to start saving for retirement He’s a smart kid and agrees, after all he has some pretty savvy parents. So at age 16 he opens his own Roth IRA and starts contributing $25 a week from his paycheck. This starts a nice saving’s habit for him and he keeps socking away $100 per month into his Roth. But life gets in the way, he gets married, buys a house, and has a baby. Things start to get tight for him and at age 26 he decides he can’t do it anymore. He stops his contributions with the intention to start them again but it just never happens. After saving only $12,000 for retirement he never contributes another dime.
Even with such meager contributions from Johnny his account balance at age 65 is $1,007,348! He’s a millionaire. Plus he has $730,211 from the best parents in the whole world. He’s probably set.
Amazing right?! I love me some compound interest.