Suppose you were born in 1952 and your grandparents had scrimped and saved $10 a month for you during the first 18 years of your life. Had this investment averaged 8% every year until your retirement at age 65, this relatively small investment of $2,160 would be worth $203,632.61!
Albert Einstein was once asked, “What is the most powerful force in the universe?” His reply? “Compound interest.” Compound interest is accumulated not only on the dollars you invest, but on the interest already accumulated by those dollars as well. If you invest $100 in an account earning 3% interest annually, you will make $3 the first year for a total balance of $103. The next year? If you thought $106, think again—$106.09. The second year, you earned 3% on $103, not $100. The extra 9 cents were the result of compounding. When your money earns money and it doesn’t take up your time… well, that is indeed a fine thing.
An easy way to calculate the impact of compound interest is by applying the rule of 72. Just divide 72 by the annual return on the investment and you will arrive at the number of years it will take for the investment to double. In the 3% example above, for instance, it would take 24 years for the $100 investment to double (72/ 3). An 8% return would take only 9 years.
Investments—what is suitable for your grandchildren? Well, there are several aspects to consider:
#1…What do you really want to help your grandchildren accomplish? Higher education? Windfall for their retirement? Taking care of the family they will have some day? Or is it a gift of wisdom that you wish to impart — learning to love learning, learning a sense of pride and accomplishment in saving or a job well done, learning to take care of the what if’s in life, learning to give back? Or is it all of the above? Or perhaps you simply don’t know yet.
#2…Consider the risk of inflation and time. Remember that earlier date—1952? It would take $1,035.13 today to buy something that cost $100 in 1952. Although many investment vehicles such as savings accounts or savings bonds may appear to be the safest route to take, your real return over time may be close to nil or negative. Think about it. If a guaranteed investment pays you 2 or 3%, what are you really gaining if inflation is at 3 or 4%?
#3…What is the right chassis? Is it a simple brokerage account, a herd of cattle, a Kiddie Roth IRA, 529 plan, life insurance, or an annuity? You have an immense number of choices. Some are more flexible than others, but others may have unique advantages that some do not. These choices must be carefully weighed against your wishes and your grandchild’s future interests.
By now, you’ve probably heard the latest version of my dad’s favorite line: His children may be dysfunctional, but his grandchildren are perfect. Maybe it is the opportunity for a bit of a do over coupled with the patience life teaches us over time, but one thing is certain—this time around grandparents want to get it right!
1.Inflationdata.com. Inflation Calculator, October 2021.