We all want a better life for our kids than what we have. Some things are beyond our control as parents, of course, but you can try to give your kids a solid financial foundation. Putting money away each month from the time they’re born could make them a millionaire by the time they retire.
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How much do you need to invest from birth so that your child can retire a millionaire? Here’s what you need to know.
The Calculation
The average return of the S&P 500 is about 10%, according to SoFi. This number doesn’t include fees, expenses or taxes, but it’s a nice round number to use.
Sixty-five is often considered “retirement age.” However, if your child is a newborn, their “full retirement age” would be 67, at least as far as Social Security is concerned right now. This could get higher in the upcoming years, but we’ll use that for now.
Assuming that you invest the same amount every month for 67 years, and that you invest the money at 10% interest, you would need to invest $13.47 per month to have at least $1 million by the time your child hits age 67.
The exact amount your child would have is $1,000,601.31. Note that, of that, just $10,829.88 is the principal. The rest is what your investments would earn, demonstrating the joys of compound interest.
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What Will $1 Million Buy When Your Child Retires?
To understand what it will mean to be a millionaire in 2092, we need to calculate what the value of $1 million in 67 years looks like today, in terms of purchasing power. The calculation for present value adjusted for inflation is: PV = FV/(1+i)n:
- PV = present value
- FV = future value
- i = inflation rate
- n = number of years.
For our example, the future value is around $1 million. Let’s assume a rate of inflation of 3%, or 0.03. The number of years is 67.
So the value is $1 million divided by 1.03 to the 67th power, or approximately $138,000. So for a child born in 2025, their future $1 million at age 67 would have about as much buying power as $138,000 today.
The Good News and Bad News
The good news is that you need to invest only $13.47 per month in order for your child to have a $1 million portfolio by the time they retire at 67, if you start when they’re born.
The bad news is that $1 million likely won’t be worth nearly as much in 2092 as it is today because of inflation.
The Magic of Compound Interest
The relatively small amount of money you would need to invest demonstrates the magic of compound interest. When you invest a little bit every month, you’re earning interest (or gain, in the case of equity investments like stocks). When you leave those returns in the account, you’re making money not only on the money you’ve invested but also on your previous returns. So you’re earning interest on your interest.
This is a good lesson for children of any age to learn.
Other Financial Lessons To Teach Your Children
Teaching the magic of compound interest is important, but there are other financial lessons you will want to teach your children too.
One of them is to start investing early and keep investing. Don’t invest what’s left over. Instead, make savings a line item in your budget. Many financial experts tout the wisdom of “paying yourself first.” This is a strategy that is very powerful because it helps you resist the temptation to cut back on savings in favor of other things.
Whether you have the means or the desire to invest so that your child can be a millionaire when they retire, instilling good money habits can help them attain financial security.
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This article originally appeared on GOBankingRates.com: How Much You Need To Invest From Birth To Make Your Kid Retire a Millionaire
