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How to Give Your New Baby a £1m Retirement Gift – For the Price of a Meal Out!
We all want a financially secure future for our little ones. Today, I have a fabulous guest post from Steph, who is sharing how we can achieve just that. Over to Steph!
Hi! I’m Steph and I write Debt Free Family, a blog about managing your money alongside the family. I’m really pleased to be writing this post because as anyone who reads my blog will know, I’m a huge fan of creating wealth and protecting the financial future of the little ones.
So many people are amazed to discover that you can actually give your new baby the gift of a totally worry free
retirement for the price of a meal out each month. It’s pretty incredible, and I’m usually met with suspicious eyes when I explain this to people. Yet it’s absolutely true and I’m going to show you how.
It’s really hard to think about our children in the future, all grown up and not being dependent on us. Of course we know it’s going to happen, but there are so many things going on in the present that the future rarely gets a look in. But, and I shout about this from the roof tops, it really should.
In less than an hour, you can be giving your child the gift of not having to put money aside each month when they’re older and need it the most. What an amazing thing to be able to give someone!
It’s also tax free, so yes, while we know what the tax rate is today, who knows what it will be in the future. This way, you’re safeguarding them against potential future tax rises.
Saving the way I’ll show you mean’s you’re saving now from your taxed salary so they can take it our tax free later on. (Sort of the opposite way UK pensions work now, where you save tax free now and pay tax later on).
The best time to set this up is as soon as your babies born. Even better, get it all in place before the birth so you’ve got less to think about once they’ve arrived.
You’ll want to be opening a Junior Stocks and Shares ISA, and you’ll be opening it on behalf of your new baby. Although it’ll be in your name, the money belongs to your little one, which is just the way it should be of course!
Pretty much every bank, building society and fund management company in the UK offers ISA’s. They’re the same as the ones for UK adults, except the investing limit is a lot lower. That’s okay for us though, we don’t need to be investing anywhere near the annual limits.
It’s really important that you open a ‘Stocks & Shares’ ISA, rather than a Cash ISA. The difference in returns is huge. Cash ISA’s are great if you need your money in the short term, but for this purpose you won’t be needing the money anytime soon, so make sure it’s a Stocks & Shares ISA.
So lets assume you’ve opened a Junior ISA account…….how much do you need to put into it each month?
Allowing your child to have a £1m retirement gift (at age 68 by the time they get there!) means you need to be saving £75 per month. No more, no less.
It’s quite a lot, huh. But… stay with me here…that’s a yearly total of £900, assume the baba gets the £120 for Christmas that is average for UK kids, and your down to £780. Then let’s say they get £50 for their birthday, we’re down to £730. Now you only have to find £61 a month. That’s £1,000,000 in a fund, tax free, for £61 a month.
Congratulations! That tiny baby has reached 21 and you’ve been saving every month. Your savings have grown nearly as fast as that baby. Believe it or not, your £900 each year, is now worth just under £42,000.
Your contributions will have amounted to £18,900 and the rest is, well, something pretty magical.
What IS compounding? Compounded interest is interest that’s earned on top of interest that’s already been
So… say you have £100.
At the end of the year the bank gives you £10 in interest (10%) (they won’t, they’re not that generous!).
Now you have £110.
The next year they give you 10% again, only this time it’s £11 (10% of £110).
Then you have £121.
The following year they give you another 10%, so £12.10.
Then you have £133.10.
And on and on it goes, with obviously much bigger numbers, as you’re putting more away! Einstein called compounded interest the eighth wonder of the world. He wasn’t wrong!
Your child’s Junior ISA is the first half of the story. The second part is where the magic really happens. Aged 21, your child has £42,000 or somewhere close to that amount.
Now this part is quite scary because it relies in part (quite a big part!) on your child having been taught some solid financial lessons 🙂
Be aware that from 16 years old your child has control over that ISA you’ve saved so long in. At 18, they can take money out…WITHOUT TELLING YOU!
Let’s assume your child knows the importance of their financial future….what happens next? Well, nothing. You no longer need to pay into the ISA monthly. You, or they, need to do precisely nothing – and the Junior ISA will turn into an adult ISA all on it’s own!
Over the next 47 years, that money you saved will grow into a rather amazing £1,009,919.18
So that’s how you give your child a £1m retirement gift. Let’s suppose you can only afford half that savings amount. You’re still giving them half a MILLION pounds. That’s some head start towards their retirement!
Well, that’s a tough question to answer, because invested money goes up as well as down. The last 10 years have seen a return of 8.8% in the UK (with all interest earned reinvested). Our calculations are based on a 7% return, so lower than has typically been seen. There will also likely be some monthly charges for the running of the account (I pay £4 monthly currently, with Barclays, per account).
The beauty of saving for this period of time is that the market has time to go up and down.
Just be aware that it is possible to not get out what you put in.
If you’re in any doubt at all, speak to a qualified financial advisor you trust.
You might also enjoy…Advice For New Mums and Mums to Be
I started Katie Saves while on Maternity Leave to document our adjustment to living on less. Now back in work - I blog about making extra money, saving money, getting my life organised and being a new mum. Join me!