This extremely modest investment can yield $4 million when your child reaches age 65, says Paul Merriman.
Having a young child is expensive, and most parents can't set aside much money toward the long-term future of their offspring.
I'll also assume that Charlotte gives her folks enough time to figure out that an investment in small-cap value stocks is probably the lowest-risk way to invest with an honest probability of earning 12% a year. In her 19th through 23rd years, she doesn't have to add another penny as she funds an IRA and watches her money grow. On her 24th birthday, her investments are worth $35,857.
She may be startled to learn that her first-year distribution will be $209,267. That turns out to be $573 a day — a huge increase from the $1 her parents initially saved. But based on 80-plus years of history, I believe this scenario is very possible. It's a testament to the power of long-term compounding coupled with lots of patience.Here's one: Some people will scoff at assuming long-term future returns of 12%. So I made all the calculations as if the return were only 10%. In this case, Charlotte has $1,455,159 when she turns 66. The 30 years of assumed distributions would total $5.8 million, and she'd have about $7.2 million to leave to her heirs.
Out of curiosity I calculated the result if she continued saving $1 a day from age 19 to age 65, an additional 47 years. This made a difference, but not as much as you probably think. At 12%, this would leave Charlotte with $4.8 million at age 66 instead of "only" about $4.2 million.
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