<THE FOOLISH FOUR>

Parental Dreams and Reality
by Ann Coleman
(TMF AnnC)

Reston, VA. (October 16, 1998) -- Warning: Altruism alert!

For some of us, it's too late to be millionaires by the time we're 30, an ambition oft expressed by high school students who haven't been beaten up by the world yet. OK, I can accept that I won't be a millionaire before I retire (and even that possibility is subject to the whims of fate and the market), but I can make my kids or my grandkids millionaires.

The wisdom of such an enterprise aside for the moment, let's just talk about the practical aspects. First, for lots of really good information on setting up investment accounts, be sure to see Investing For Your Kids, a new feature in our Fools & Their Money area. Here, for today, we will just look at the money -- can you do it?

Just how possible is it?

I will be the first to admit that it might not be possible for everyone -- shoes and food do take precedence. But it also doesn't take a huge financial commitment. What it does take is consistency and persistence and, sometimes, a willingness to just say "no" to Nintendo.

Don't worry, I'm not going to suggest that you raise your kids on peanut butter and thrift shops. (Although, that's not such a bad idea -- if you can get away with it. If that general philosophy appeals to you, head on over to our Living Below Your Means message board on the web for some more ideas.)

So what would it take to give your kids or grandkids a million bucks as, say, a wedding present?

First, you need TIME. So start early -- or marry them off late.

Second you need MONEY. But not as much as you might think.

Finally, you need a good RETURN on your money. That's where the Foolish Four comes in.

For the following examples I am going to use the RP variation of our Foolish Four strategy. Its return over the past 25 years has been 24.62%, which I am going to reduce to 22% to give us a safety margin.

For money, we will look at several scenarios and see how each affects the time it takes to reach the million dollar mark. (Assumptions for all scenarios: $28/year in commissions, an average annual return of 22%, and 20% capital gains taxes paid each year -- which is too high for early years but gives us a bit more of a safety margin.)

First, I created the Lunch Money Scenario, which assumes that you save $50 a month by making lunches and cutting down on trips to McTacoHut. This one takes a while, naturally -- 36 years.

[An interesting variation occurred to me while playing with this one. Could the Roth IRA be helpful here? Once a child starts to earn real money, the kind that goes on a W2, then s/he or anyone else can contribute up to 100% of that earned income to a Roth IRA, which is not subject to capital gains taxes or earned income taxes. Under this scenario, you drop the $600 annual contributions at year 16 and simply shift $2000 a year into a Roth IRA. Not only do you get to start patronizing Kentucky Fried Bagels again, but you hit the $1 million mark a year earlier. After 35 years, your kid would have half a million in spendable, after-tax cash and half a million that can grow on its own, with no further contributions, for a very comfortable early retirement. Thanks, Mom. Thanks, Pop!]

Then there's the Stock Certificates for Your Birthday Scenario: If you want to get there sooner, you can increase your annual contributions, but surprisingly, increasing the annual contribution doesn't get you there all that much sooner. It takes 29 years to get to the million dollar mark with a $2000 annual contribution, with or without the Roth scenario. (If you can start the Roth earlier than year 16 and keep up the $2000 contributions, it would shorten your time by a few years, though.)

Lastly, there's the Daddy Warbucks Scenario: You can also get there sooner by starting off with a nice big chunk of change, say $10,000, and contributing $2000 a year. But, again, surprisingly, it still takes 25 years.

Good news for folks whose kids are older: Once your kids start making money, you can do the Roth thing for them. A hundred bucks a month ($1200 a year) into this tax-free wonder will top one million dollars in 27 years at our assumed rate of growth of 22% a year.

Even if the market is less wonderful in the coming 30 years than it has been in the last 25, you can still get there. It will just take a little longer. For example, the $1200 a year Roth scenario above stretches from 27 years to 33 years if you reduce the rate of return to 15%.

What all this illustrates so very vividly is that what you contribute isn't nearly as important as how good a return you get and how long you keep it up.

In any case, while you are making your kids millionaires, you will have a nice, long time to teach them about all the other things in life that are so much more important than money.

Fool on and prosper!

Current Dow Order | 1998 Dow Returns

10/16/98 Close
Stock  Change   Last 
 -------------------- 
 UK   -   9/16  41.38 
 IP   +1  5/16  47.25 
 MO   -1  1/8   47.69 
 EK   ---       74.56 
 
 
                    Day   Month    Year 
         FOOL-4   -0.17%  -0.81%   9.94% 
         DJIA     +1.41%   7.32%   6.43% 
         S&P 500  +0.85%   3.88%   8.86% 
         NASDAQ   +0.62%  -4.30%   3.22% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  206 Eastman Ko    60.56     74.56    23.12% 
  12/31/97  289 Int'l Pape    43.13     47.25     9.57% 
  12/31/97  276 Philip Mor    45.25     47.69     5.39% 
  12/31/97  291 Union Carb    42.94     41.38    -3.64% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  206 Eastman Ko 12475.88  15359.88  $2884.00 
  12/31/97  289 Int'l Pape 12463.13  13655.25  $1192.13 
  12/31/97  276 Philip Mor 12489.00  13161.75   $672.75 
  12/31/97  291 Union Carb 12494.81  12040.13  -$454.69 
  
  
                              CASH    $754.73 
                             TOTAL  $54971.73