We have all heard the retirement savings advice to start early and save regularly, but how much does this really help? While it may sound too good to be true, a $1,000 lump sum and $25 a week if you start early enough could provide a $90,000 house deposit for your children or grandkids.
The most valuable gift is time
It can be easy to kick the task of saving for retirement down the road. When you get your first job you may have a student loan to repay. Then a house deposit to save. Then a mortgage to pay. While the realities of life can make it hard to start investing, this doesn’t change the fact that there is an enormous benefit from starting early and getting your money to work for you.
Albert Einstein is reputed to have said “compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it”. Whether he said this or not is beside the point… Investors that start early will build a bigger retirement nest egg due to the power of compounding. Like a snowball rolling down a hill, the longer it rolls the bigger it gets.
This is where we see a lot of parents and grandparents step in to help. Setting up Managed Fund accounts and contributing a small amount each month from birth can really help the next generation. It provides the gift of another 20 years of compounding. This is one of the reasons the government initially provided a $1000 kick start to every new KiwiSaver member. It encouraged savers to set up KiwiSaver accounts, start early and get the benefit of time on their side.
Giving the next generation a kick start
How much would you need to contribute to give your kids a material head start? Surprisingly not very much if you start early.
To illustrate, lets assume you want to replicate the kick start the government used to provide, by tipping $1,000 into a Managed Funds Growth Fund when your child is born. That’s quite a sum of money, but it is just a one-off to get things started. Assume you then contribute a further $25 each week until they turn 20. That’s four flat whites, or one overpriced plate of avocado on toast…
How much of a head start would that provide?
By the time this young saver turns 20 they would have accrued a balance of about $40,000 (assuming a relatively modest return of 4.5% per annum). If at 20 they then step in and continue to contribute just $25 a week until they buy a house at age 30, they should have about $90,000 ready as a deposit. And a lot of that would be due to compounding of the parent’s early contributions.
Now that’s a great outcome for just $25 per week and parental kick start.
We are here to help if you'd like to set up a Managed Fund.