Sunday, March 27, 2016

Simple, cost effective long term retirement plan for your kids.

I haven't posted much about investment. I think about it a lot and I research it a lot, but it's such a tricky subject and so open to interpretation. Also, there is TONS of good (and tons ^ 1000 of bad) investment advice around.

That said, this is one piece I feel really strongly about.

I'm not going to spend a lot of time on investment theory, tax optimizations, transaction fees, inflation, value of advisors and the thousands of other topics broadly discussed.

I am going to make one, simple, specific recommendation that I'm doing myself.

Here's a step by step list:
1) When you have a newborn (or if you currently have a child). Open a simple trading account for them. ETrade, Ameritrade, Interactive Brokers, Vanguard, Schwab, whatever.
2) Put $5000 into it. (or whatever you can somewhat comfortably afford... but 5k is a really good number)
5) When your kids turn 18, convert it into an IRA (or some other tax deferred vehicle, if its possible).
6) Try to figure out how to not have them or anyone else touch it until they are 65 (or whatever normal retirement age is).
7) When they have kids, have them (or yourself) the same thing.

That's it. Set it and forget it.

I wouldn't rebalance. I wouldn't dollar cost average. I wouldn't track it. I wouldn't tell my kids about it (until I have to). I wouldn't include it in any budgeting, etc.


Because activity and information lead to decisions that work against the long term potential here.

If you're satisfied or totally dismissive, read no further, if you're not, read on.


Over the very long term, small cap beats all other types of investments. The ride is rocky. Timing is impossible and you can't possibly do this for money that you will need even over the next couple decades. But over 6 decades it's likely to produce fantastic returns... as long as you don't mess with it!

Google all you want. Read all you want. Study all you want. Historically over very long time periods... small cap value just crushes face. That won't help you if you're 40 years old and need to retire in 25 years and need a 15% compound return. But if you are 2 and have a 63 year window, and a modest amount of risk capital; It's as close to risk free as it gets. Since my 2 year old can't make investment decisions about their retirement 63+ years from now, I'm making one for him.

We love knowing how our investments are doing. Day to day, Hour to hour. Minute to minute. We want to research, we want to tinker, we want to beat the S&P. We think we are smart.

This is not the point here. If I could erase the knowledge of these accounts from my mind (and my child's mind) and then when they hit the age of 65 (or whatever) they wake up with recall... that's what I would do. Knowing how these accounts are doing and ANY activity puts the strategy at risk I am not even going to rebalance. The ONLY thing that would make me conduct any activity is if something like Vanguard went bankrupt or got bought or something and I was forced to take some kind of action. Then I'd try really hard to find similar low cost, small cap diversified investment vehicles and reinvest with whatever the asset allocation happened to be at the time.

I can FEEL people talking about how this isn't optimal for risk management, etc. That's not the point. I'm optimizing for psychological behavior of myself and my kids. We are short term rationalizing beasts. This strategy is in response to that.

OK. Here's the exceedingly simple math.
Let's say you have a baby and you do the above. Historically (since 1930) the small cap value return is 15.4%. If you compound that over 65 years, the result is?


That's right. doing absolutely nothing else at all, your 65 year old child retiree will have 55 million dollars. Granted. Inflation will chew at the value of that it will double and half many times. It will go through world wars, terrorist attacks, presidential assassinations, and technological changes you can't imagine. It might not even survive if the whole country collapses. But then, what investment will :).

Now let's be more pessimistic. At 8% it's only $743,899. That's a LOT less, but better than a hole in the head. At 11% it's a still respectable $4,415,334 .

By leveraging both global and US specific companies in this area I believe my kids will be well served by this trend as the world globalizes or (galacticalizes?).

Basically I give them partial ownership in the global collective of small, innovative, relatively "cheap" businesses around the world over the next 6 decades. I choose Vanguard because I believe as an investment company they are likely to be around a very long time and they don't charge huge fees or try to be too smart.

There are lots of headlines today about seniors who are scared of retiring. The reasons are very real. Failing or inadequately funded pensions... and in many cases no pensions at all. Potential threats to social security. Inadequate savings. Bad investment performance. Fees taking too much away. Etc etc.

I don't want my kids to face this. Nothing can guarantee that, of course, and ultimately I hope they are helpful, engaged and productive members of society. But I think many helpful, engaged and productive members of society face this terrible future as they age. Sometimes of their own making, sometimes not.

This is a blatant copy from an idea by a senator named Bob Kerrey in the 1990s called KidSave. I really liked the idea when I heard about it. It was simple. Each newborn child gets $1000 from the federal government put into a savings account managed in the same way the "Thrift Savings Plans" are managed (to avoid "professionals" taking their cut as much as possible). Then for the first 5 years of the child's life, the $500 (or whatever) child tax credit would go into that account. It's impossible to withdraw those funds until the age of 65 and they are tax deferred. At 8.5% it was projected that each child would retire with over a million dollars. At four million births per year, that is a four billion dollar government program that essentially wipes out retirement problems forever.

I don't think it would have worked as planned because the size of that pool of money would have created all kinds of nefarious and unethical practices by public and private sector institutions. And, of course, it requires that the country continue to grow and be successful... but so do all other alternatives. But that doesn't matter. We can recreate the basic concept.

It's simple, when it comes to compounding interest time matters MUCH more than amount. As a really crazy example, let's say you go back to the year 0 and invest 1 penny at 3% interest. 2,000 years later you have $472,551,787,558,269,000,000,000.00. Of course, that's impossible to actually have but it illustrates the point. Small sums over huge periods of time result in big numbers.

Also, please don't forget to make sure your kids pass that on. The goal isn't to create vast, indefensible dynastic fortunes. The goal is to promote a simple system that relieves a very basic and fundamental human problem.

Let me know what you think!


  1. You are right on!! I've been preaching Roth IRAs to my grandchildren for years and have made some headway getting them started. And your "buy, hold and don't mess with it" is additional information that I'll pass along to them for their own accounts.

    1. Thanks for the comment! I'm not sure how I will "reveal" this to my kids, but I suspect as they get older they'll find out and we can have fun watching and tracking (or not watching and not tracking :) ). It saddens me that so many people have so much stress in retirement. It shouldn't be like that.