SECURE A COMFORTABLE RETIREMENT FOR YOUR CHILD OR GRANDCHILD
We've previously looked at the benefits of a Roth IRA, but I wanted to share with you a powerful strategy to pass along wealth to your children and grandchildren.
Let’s look at the benefits of a Roth IRA for a newborn baby. I love this example because it demonstrates the power of compounding, the future tax benefits of a Roth IRA, and the impact of the higher investment returns from our Beyond Buy & Hold system. If you have young children or grandchildren, you will want to pay close attention to this illustration.
Let’s say that a parent or grandparent of a newborn baby gives that child a gift of $200 at birth and every year through age 18. But rather than put that money in a savings account, they set up a Roth IRA in the child’s name and deposit that money into the Roth account every year. Let’s also assume that all of the deposits are invested in a low-cost, S&P 500 index fund and that the money just sits in that fund until the child reaches the age of 65.
The nineteen annual contributions of $200 made by the parent or grandparent would total $3800 over those 18 years. An S&P 500 index fund should generate an annual return of 9% per year over the 65 years in our example. That $3,800 would turn into a $528,000 retirement account when that child reaches the age of 65.
Pretty astounding, right? Your combined gifts of $3,800 result in over $500,000 for your loved one at retirement. This is a great example of the power of compounding. Giving money a lot of time to grow leads to exponential returns in the later years. When that child is 10 years old, the annual investment gains are only $273. By the time that child reaches the age of 65, the annual investment gains are over $40,000--ten times the amount invested.
Now, let’s look at the tax benefits bestowed upon that child when it’s time to start withdrawing money at age 65. If we assume a retirement age total tax bracket of 25% (20% federal and 5% state), one would need to have a total of $700,000 in a taxable 401(k) account to match the spending power of the $528,000 in the Roth IRA. The tax-free Roth account saves over $170,000 in taxes in retirement.
Finally, let’s look at the power of compounding when we achieve higher investment returns. Using the same $200 annual contributions into this child’s Roth IRA account up to age 18, we then combine our Beyond Buy & Hold investing system to the low-cost S&P 500 index fund strategy. Rather than earning 9% per year from the S&P index fund, this account should generate annual returns of 12.7% per year (details explained later in the book) over 65 years.
The compounding effect on the extra 3.7% earnings per year produces a retirement fund of roughly $3.8 million at age 65, versus the $528,000 in the previous example. That is not a typo! That is the combined power of compounding and better investment returns.
The tax savings of the Roth IRA compared to a 401(k) and using our Beyond Buy & Hold system would be over $1,000,000.
I would encourage every parent or grandparent to do something like this for your children and grandchildren. When you do this at the earliest ages, you are giving these fortunate kids a nest egg of millions of dollars--at the cost of a few thousand dollars. It’s never too late to begin implementing this strategy.
Happy Investing,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
The market continues to be stuck in the same sideways pattern that we have been experiencing for the last year. The last month for the market has been positive, however. The S&P 500 has moved up from being down 18.7% in mid March to down 13.2% as of Friday, April 14th. We have moved nicely above the midpoint of the trading range.
A nice uptrend is also emerging since the October lows. The upper range of the channel below equates to a price for the S&P 500 of 4,280. From Friday's close of 4,137, the index would reach 4,280 with a 3.5% move higher. This would be a bullish sign for the markets.
Throughout 2022, we have been comparing this bear market with the bear market of the 1970’s. The graphs line up well as you can see below, and the seventies were the last period where we experienced high rates of inflation. The 1970’s market continued to decline from this point. It bottomed out with a price drop of 45%.
This year’s market is beginning to separate from the 1973 trend - another positive sign.
The market seems to be thinking that the economy can achieve a soft landing. The most recent inflation trends have been positive but inflation still remains well above the target of the Federal Reserve. Depressed prices for bank stocks and gold reaching its all time high tells us that there is still a lot of risk in the markets.
We remain cautious but our model has recently moved from high risk to medium risk. We are 50% in stocks and 50% in money market funds at the moment.
The reality is that no one knows if the worst is over or not for the stock market. Because of the uncertainty, it is important to follow a disciplined approach to stock market investing. Our approach to investing relies only on quantitative measures of actual price trends. We make no predictions about which way the market will head in the future. We simple react to what the market is telling us and can make money if the market goes down or if the market goes up. Stay disciplined, my friends.
Happy Investing,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
During volatile stock market periods like the one we are currently experiencing, it can be tough to know if stock prices are expensive or cheap.
Short-term price movements and the never-ending news cycle can make investors anxious and confused. But as long-term investors (which we should all be), short-term price movements are just noise.
One of the tools we rely on in our Beyond Buy & Hold system is what we call a Market Value Indicator (MVI). The MVI shows us at any point in time how the current value of the S&P 500 compares to a “Rational” value for the stock market.
We’ve previously discussed just how irrational the stock market can be. A rational stock market would move up in a fairly straight line over time at a rate of growth of about 7% per year or about 0.6% per month. This pace of increase would keep the price of stocks in line with the increase in corporate profits.
Remember that the value of stocks comes from the profits that the underlying companies produce. In the long-term, stock prices always track with corporate profits. The following graph shows just how irrational the stock market can be. You can see how the value of stocks was double what a “rational” value would have been in 1999 and how it dropped to half of the rational value in early 2009.
HOW ABOUT TODAY?
Looking at the past is interesting, but the more important question is, “What about today?”. After all the movement over the last 18 months, are we currently undervalued or overvalued? This chart shows the variance to “fair market value” of the S&P 500 from 2019 up to the beginning of April 2023.
As of April 1, 2023, the S&P 500 was sitting 9.3% below fair market value. This doesn’t tell us which direction that the market will move next, but it should make you feel better about the value of the stocks that you currently own. Over time, the S&P 500 will move up to its fair market value. No one knows when, but it will move up by at least 10% from the current level.
Our monthly Market Value Indicator is included in your subscription to Market Signals. You can sign up for Market signals by Clicking here.
Happy Investing,
Phil
Disclaimers *The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
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