Wouldn't it be cool if you could give your kids or grand kids a million dollars? Sounds like a get-rich quick scheme, right? Actually, it's quite the opposite. Your kids get rich, very rich, very slowly.
I was listening to financial guru Paul Merriman, who discussed a brilliant idea in one of his podcasts. Here are the basics of how this works. Sock away $365 per year until the child is 16. You will have invested a total of $5,840 on their behalf. Stop. You are finished.
Now here's where the magic takes over. Assuming this teenager begins working at age 16, open a Roth IRA for him or her, putting the money into an all growth-stock index fund. Put in the maximum amount you can annually, drawing it from the $5,840 kitty. Keep doing that every year until the original fund is depleted and everything is transferred to the Roth IRA.
That's it. Then just wait five decades or so and, they'll have one decent pile of cash. When the kids are senior citizens about to retire, the IRA will likely be worth roughly a million bucks or more. Merriman says a 10% average return would not be overly optimistic for a growth fund over a very long time period, especially if one invests in value funds. Thank you, tax-free compounding!
I encourage you to listen to Paul Merriman explain it, as he does a much better job of laying out the details.
This idea takes me back to my teen years when I wrote out a check to my dad for a million dollars on his birthday. He absolutely loved it and laughed uproariously when he opened the envelope. With our kids, we're actually going to give them a million bucks. Dad would have just loved this plan, but his grand kids will love it more.