It’s so simple and obvious, it’s amazing no one has ever thought of it before. Heck, it’s such a great idea, I’m even willing to concede the debate on whether there’s really a retirement “crisis.” Here’s how the idea first struck me …
Like my mother and father before me and like many other fathers and mothers today, I’ve had the honor to serve as a Scout Leader. In a way, it allowed me to ride shotgun with my son as he progressed from wide-eyed Tiger Cub, to a crafty Cub Scout, to an outdoorsman Boy Scout and finally through to a hands-on project management-oriented (and, yes, honorable) Eagle Scout.
Among the many fun things I did included counseling boys on their merit badges. My favorites were Astronomy and Robotics, but the kids mostly came to me for Personal Management. That’s the one that had to do with money and finances. For some reason, they figured I knew something about that.
There’s something about being introduced as an “investment adviser” that just leads people to generalizations. One of the most frequent questions I get from non-financial people who have just met me is, “How can I become a millionaire?” I usually laugh, hoping the person isn’t serious and turn the discussion to something eminently more fascinating like what an analysis ultraviolent radiation patterns in horizontal branch stars can tell us about stellar evolution. (For those of you who remember last week’s article recalling my happenstance meeting with Herb Brooks, there’s a reason why I’m such a wall flower in large group settings.)
Ironically, I actually discovered the answer to that omnipresent question while talking to a group of Boy Scouts earning their Personal Management merit badge. (You can read about it here in “What Every 401k Plan Sponsor and Fiduciary Should Disclose to Employees: How to Retire a Millionaire (Hint: It’s Easier Than You Think),” FiduciaryNews.com, February 25, 2014.) It was in writing that article, however, that the idea hit me like a ton of bricks.
There I was, playing with numbers in my spreadsheet models when, like a chemist whose accidental spill leads to the discovery of a fabulous cure, I inadvertently started at year 1 instead of year 15. (You’ll have to read the article to understand the significance of starting at year 15.) Curiosity getting the better of me, rather than correcting the error, I extrapolated upon it.
Lo! And Behold! Came the answer that is guaranteed to solve our nation’s alleged retirement crisis. OK, OK, I said I was willing to concede the point that there really is a retirement crisis. And, admitted so, if you consider Social Security a component of retirement, then, sooner or later, like any other Ponzi Scheme we will find ourselves in a crisis. Only, the thing is, this idea allows Social Security to die a natural death, wiping away forever our mournful addiction to this gangster era racket.
Here’s the idea.
I’ll call it the “Child IRA.” It’s actually something a few elite folks can take advantage of now, assuming their children have been modeling since before they could crawl. It effect – without the tax-deferred benefits – can also be duplicated today, mainly via trust funds but also through regular investment accounts.
But what I’m proposing is not at all like these. It’s a tax-deferred account that doesn’t require earned income. It would allow the parents (and grandparents and any other adult for that matter) to contribute an aggregate total of $1,000 (pre-tax) to any child every year until they reach the age of 19. By “aggregate” I mean a child can get no more than $1,000 in total contributions to their individual Child-IRA in any contiguous 12-month period. So, for example, the parents might contribute $200 and the grandparents might contribute $800. Better still, you don’t have to be related to the child to contribute to his Child-IRA.
Now, are you listening? Here’s the beauty of the plan. All Child-IRA’s would be required to be invested in long-term equities. They’ll be none of this “risk aversion” stuff because you can’t withdraw from them until age 70 (the “real” retirement age by the time they get there). With this kind of requirement, we’d expect these Child-IRAs to grow at the rate of return of stocks. Historically, that’s a tad under 10%, but let’s be conservative and say it’s 8%. Do you know what that means?
That means, by contributing $1,000 a year from the year of birth until the 19th birthday (a total of $19,000 in contribution), a Child-IRA will be worth $2 million when the owner retires at age 70. That’s on top of any other retirement savings that person might have. And with that $2 million head start, where is the need for Social Security?
Like I said, it’s so obviously simple, why hasn’t anyone ever come up with it before?