My son has about $2000 in his savings account, any recommendations of
the best place to put it for long term. I would like to make it work
for him so that he can have a great retirement. $2000 at 15%
compounded would be over $5 mill by the time he retires...
First, you're being totally unrealistic. 15% average for, what (?)
50 years. Not gonna happen. Maybe if you're lucky, very lucky
11, possibly 11.5%.
That's your first mistake. It's amazing what a difference a few
percentage point will make.
Second mistake: Inflation. Where, in your calculation do you
account for inflation?
Here's some history:
This may not be the best reference, but it's the first one I
found:
http://winke.com/hfpc/hfpc./hisret.htm
Note the *long-term* returns of the various indexes.
Nowhere near 15%.
Note the last entry in the table labelled "U.S. Consumer
Price Index" -- roughly speaking, this is the "inflation
factor".
For instance, if you invested in an S&P Index for the
last 40 years, you'd have averaged 12.12% return -- BUT,
that 12% you just earned this year is eaten away by the
4.46% erosion of inflation. You end up with a long-term
net return averaging about 7.6%.
Nowhere near your unrealistic 15%.
You're more than likely going to end up with half you're
projected 15%, by the time you take into consideration
both inflation itself, and your inflated expectations on a
sustainable return. Let's call it half and say, long term,
factoring inflation, you can assume roughly an 8% return.
Here's what I get:
age balance interest
9 $ 2,000.00 $ 160.00
10 $ 2,160.00 $ 172.80
11 $ 2,332.80 $ 186.62
12 $ 2,519.42 $ 201.55
13 $ 2,720.98 $ 217.68
14 $ 2,938.66 $ 235.09
15 $ 3,173.75 $ 253.90
16 $ 3,427.65 $ 274.21
17 $ 3,701.86 $ 296.15
18 $ 3,998.01 $ 319.84
19 $ 4,317.85 $ 345.43
20 $ 4,663.28 $ 373.06
21 $ 5,036.34 $ 402.91
22 $ 5,439.25 $ 435.14
23 $ 5,874.39 $ 469.95
24 $ 6,344.34 $ 507.55
25 $ 6,851.89 $ 548.15
26 $ 7,400.04 $ 592.00
27 $ 7,992.04 $ 639.36
28 $ 8,631.40 $ 690.51
29 $ 9,321.91 $ 745.75
30 $ 10,067.67 $ 805.41
31 $ 10,873.08 $ 869.85
32 $ 11,742.93 $ 939.43
33 $ 12,682.36 $ 1,014.59
34 $ 13,696.95 $ 1,095.76
35 $ 14,792.71 $ 1,183.42
36 $ 15,976.12 $ 1,278.09
37 $ 17,254.21 $ 1,380.34
38 $ 18,634.55 $ 1,490.76
39 $ 20,125.31 $ 1,610.03
40 $ 21,735.34 $ 1,738.83
41 $ 23,474.17 $ 1,877.93
42 $ 25,352.10 $ 2,028.17
43 $ 27,380.27 $ 2,190.42
44 $ 29,570.69 $ 2,365.66
45 $ 31,936.34 $ 2,554.91
46 $ 34,491.25 $ 2,759.30
47 $ 37,250.55 $ 2,980.04
48 $ 40,230.60 $ 3,218.45
49 $ 43,449.04 $ 3,475.92
50 $ 46,924.97 $ 3,754.00
51 $ 50,678.96 $ 4,054.32
52 $ 54,733.28 $ 4,378.66
53 $ 59,111.94 $ 4,728.96
54 $ 63,840.90 $ 5,107.27
55 $ 68,948.17 $ 5,515.85
56 $ 74,464.02 $ 5,957.12
57 $ 80,421.15 $ 6,433.69
58 $ 86,854.84 $ 6,948.39
59 $ 93,803.23 $ 7,504.26
60 $ 101,307.48 $ 8,104.60
61 $ 109,412.08 $ 8,752.97
62 $ 118,165.05 $ 9,453.20
63 $ 127,618.25 $ 10,209.46
64 $ 137,827.71 $ 11,026.22
65 $ 148,853.93 $ 11,908.31
66 $ 160,762.24 $ 12,860.98
67 $ 173,623.22 $ 13,889.86
So, by the time the kid's 67, s/he's got a bit under
175K in today's dollars (we've already adjusted
for inflation.)
Now, that's quite a tidy sum -- especially for not
doing a darned thing but let it sit for a few decades,
but it's hardly enough to retire on. It's not even
close to your goal of a "great retirement" for
your kid. It's a good start though.
I don't mean to bust your bubble, but people get
almost high/drunk when they start these types of
calculations and don't realize that they're projecting
based upon totally unrealistic assumptions. The following
assumptions, in my opinion, are gonna squash your
dream of 5 million dollars.:
(a) 15% return over the life of the investment.
Not gonna happen -- see above historical
rates.
(b) No inflation. Really, you don't take this into account
anywhere. This is a killer.
(c) No costs for managing the money. Investing *costs*.
You're planning on being in it for the long-haul, and there's
no single investment I can think of that you would buy and
hold for 60(ish) years. You're going to have to move the
money around at some point, and however much/little the
transaction costs are, they're only going to subtract from
the final result.
(d) Taxes -- you make no allowance for taxes. Whether the
investment is (or is not) tax advantaged/deferred/sheltered,
at some point, you've got to pay Uncle Sam what's due.
If you succeed in setting up an IRA, then those will be
deferred until withdrawal time. I have doubts about
being able to do this for a 9 year old, but there's no
reason you can't invest outside an IRA untils s/he gets
old enough to have real "earned" income and be
eligible for an IRA.
The point is, taxes will take an additional bite out of it.
Now, If you can get just a small amount in addition to
the initial 2000 added every year, your kid's situation looks
far better. As little as $100 a month, which your kid should
start investing with the first paycheck from the first job, will
bring the goal of a "great retirement" much closer -- especially
if there's an employer match on that $100 a month, making
the effective contribution $200 a month. Now we're looking
at:
Age Balance Interest Contribution
9 $ 2,000.00 $ 160.00 0
10 $ 2,160.00 $ 172.80 0
11 $ 2,332.80 $ 186.62 0
12 $ 2,519.42 $ 201.55 0
13 $ 2,720.98 $ 217.68 0
14 $ 2,938.66 $ 235.09 0
15 $ 3,173.75 $ 253.90 0
16 $ 3,427.65 $ 274.21 0
17 $ 3,701.86 $ 296.15 0
18 $ 3,998.01 $ 319.84 0
19 $ 4,317.85 $ 345.43 0
20 $ 4,663.28 $ 373.06 0
21 $ 5,036.34 $ 402.91 0
22 $ 5,439.25 $ 435.14 2400
23 $ 8,274.39 $ 661.95 2400
24 $ 11,336.34 $ 906.91 2400
25 $ 14,643.25 $ 1,171.46 2400
26 $ 18,214.70 $ 1,457.18 2400
27 $ 22,071.88 $ 1,765.75 2400
28 $ 26,237.63 $ 2,099.01 2400
29 $ 30,736.64 $ 2,458.93 2400
30 $ 35,595.57 $ 2,847.65 2400
31 $ 40,843.22 $ 3,267.46 2400
32 $ 46,510.68 $ 3,720.85 2400
33 $ 52,631.53 $ 4,210.52 2400
34 $ 59,242.05 $ 4,739.36 2400
35 $ 66,381.42 $ 5,310.51 2400
36 $ 74,091.93 $ 5,927.35 2400
37 $ 82,419.29 $ 6,593.54 2400
38 $ 91,412.83 $ 7,313.03 2400
39 $ 101,125.86 $ 8,090.07 2400
40 $ 111,615.92 $ 8,929.27 2400
41 $ 122,945.20 $ 9,835.62 2400
42 $ 135,180.81 $ 10,814.47 2400
43 $ 148,395.28 $ 11,871.62 2400
44 $ 162,666.90 $ 13,013.35 2400
45 $ 178,080.25 $ 14,246.42 2400
46 $ 194,726.67 $ 15,578.13 2400
47 $ 212,704.81 $ 17,016.38 2400
48 $ 232,121.19 $ 18,569.70 2400
49 $ 253,090.89 $ 20,247.27 2400
50 $ 275,738.16 $ 22,059.05 2400
51 $ 300,197.21 $ 24,015.78 2400
52 $ 326,612.99 $ 26,129.04 2400
53 $ 355,142.03 $ 28,411.36 2400
54 $ 385,953.39 $ 30,876.27 2400
55 $ 419,229.66 $ 33,538.37 2400
56 $ 455,168.03 $ 36,413.44 2400
57 $ 493,981.48 $ 39,518.52 2400
58 $ 535,899.99 $ 42,872.00 2400
59 $ 581,171.99 $ 46,493.76 2400
60 $ 630,065.75 $ 50,405.26 2400
61 $ 682,871.01 $ 54,629.68 2400
62 $ 739,900.69 $ 59,192.06 2400
63 $ 801,492.75 $ 64,119.42 2400
64 $ 868,012.17 $ 69,440.97 2400
65 $ 939,853.14 $ 75,188.25 2400
66 $ 1,017,441.39 $ 81,395.31 2400
67 $ 1,101,236.70 $ 88,098.94 2400
NOTE: I'm assuming you're gifting the initial 2K, and
there will be no contributions until age 22 -- roughly
when most kids graduate, get their degree, and get
their first job.
Now, we're starting to get into some money. It's not
RealMoney yet -- the kid won't be Bill Gates (at what
is he worth these days? 50 *billion* ?) -- but this is
certainly do-able from a retirement perspective.
Please don't expect that you'll have 5 milion dollars.
It's not going to happen.