Teaching Our Kids on How to Plan for Their Retirement
You may not have children. You may not even like children. But the fact is you have the ability to completely change the course of a young person’s entire life.
According to our own CEO, Nigel Green, quoted in the FT recently, should we fail to teach our young people retirement planning, an increasing number could find themselves unable to enjoy the retirement that previous generations have taken for granted; the majority of people don’t have the basic numeracy skills required to meet the demands of everyday life and work.
Now don’t misunderstand me. For the most part you are not the majority or average. But are you doing enough?
And it also means you probably have a lot of influence over your family and friends when it comes to their money matters. I count myself extremely privileged to have helped a lot of young people get a handle on money, and I can tell you it’s been the most humbling experience of my life.
Now it’s your turn.
Over the next few minutes, I’m going to show you how I can arm you with every bit of information you need to help change the course of a young person’s life.
How to join the compound interest club
Compound interest is the great leveler in life (along with tea of course). Anyone can use it – and it’s absolutely the safest, surest way to become incredibly wealthy. But the best way to show you why wealth has nothing to do with income, and everything to do with smart decisions, is with a real example.
Prepared Child, Unprepared Child
On the birth of their baby (let’s call him Prepared) a hardworking young couple begins investing $5,000 a year into a basic share fund for their son. They continue investing each year until his tenth birthday, and then stop, having invested a total of $50,000.
Another family isn’t able to get themselves motivated enough to invest for their baby (let’s call him Unprepared) – until he starts showing some promise at school and they think they’d better start investing $5,000 a year into the same managed fund as Prepared Child’s parents. All up they invested $75,000 – half as much again as the other parents.
Both share funds average 10% per annum in capital growth and reinvested dividends.
Now neither son goes on to university, but on their 25th birthdays both boys cash in their investments. Despite his parents not having added to his investment for 15 years, Prepared Child has a whopping $420,336. And here’s the kicker. Unprepared Child, whose parents have invested $25,000 more, has less than half the balance of Prepared Child – $195,635.
This isn’t just a fancy table. I know plenty of young people who will really be prepared children – and all because their parents made a key decision early in their lives.
What would your life be like if you were handed $420,336 when you were 25?
And, what if Prepared Child took the money, bought an apartment and a car and left $100,000 sitting in the share fund until he retired? Well, with the power of compounding he’d have $4.5 million waiting for him (and he’d be earning around $600,000 a year in dividends).
Now regardless of whether you’re reading this to impact the life of a child, or trying to set yourself up for your own future, the miracle of compound interest works. All it takes is a basic understanding of investment, the ability to reinvest and compound your dividends, and the patience to get out of the way and watch your snowball grow.
Of course the figures I’ve used here are simplistic. They don’t take into account inflation, taxation or generating higher returns. But I will cover all these things in depth if you want to get hold of me to discuss further.
Remember, little and often over a longer period rather than having to find large sums in the future is key to your financial planning. And will give you less stress!