In my last post, we learned about compounding and in my hypothetical example Mary worked from 25 to 67 and saved an impressive 1.5 million by only saving $200 a month during that duration. We are going to have another hypothetical person, Emma. Emma is born and her parents want to make her a multi-millionaire by the time she retires at 67. If the money grows at 10%, then how much do you think her parents would need to put in as a lump sum to get her to $2 million dollars. The answer is a little below $2,800 dollars. This isn’t 2,800 each year, but $2,800 one time when she is born. As explained in my earlier post, with a sum $2 million then if you were to make 10% the next year then you would have an additional $200k that year without putting another dime in.
This is a great technique for new grandparents or parents who may not have much money now to leave behind considerable wealth for our grandchildren and children decades in the future.
In my next post, we will look at some ways of making this money tax free so when they retire they get to keep more of their money.
Update:: With the new Secure 2.0 at the beginning of 2023 you can now roll a portion of a 529 to a Roth IRA for a beneficiary. This allows flexibility for recipients to turn education money into retirement money. This additional perk persuaded me to park our own daughters $3k in her 529 for her future retirement. There is still the requirement for this money once rolled to a Roth IRA to be earned income and you are still limited to the annual limits when you do the rollover.
Millionaire Librarian 