Financing the Next Generation's Retirement

Almost 12 years ago, Motley Fool co-founder David Gardner typed some thoughts that have stuck with me ever since. He suggested that by passing on your knowledge (as well as some money) to your descendents, you'd become "your family's Most Beloved Ancestor."

It seems that Great Britain has taken a page from David, as the nation now allocates so-called "baby bonds" to newborns. Each child gets a voucher worth roughly $375 to $750 depending on income level, and gets additional payments at age 7. Parents can take the vouchers to open an investment account, to which they can also make tax-free contributions. The thinking is that by age 18, the account will be worth a lot more and can help pay for schooling, a home, or a business.

Our way
This made me start imagining what we could do with such a program here in America. I imagined $1,000 being invested in an account for each newborn, and invested in the total U.S. stock market until the age of retirement. If it grew at 10% annually, in 65 years it will grow to $490,000. Imagine that -- nearly a half-million retirement stake, just from a measly $1,000 investment.

Then, after a little research, I learned that when she was running for president, Hillary Clinton proposed (and later dropped) a similar idea -- she proposed a $5,000 investment, in fact. But she also planned for it to be cashed out at age 18, which would get it to nearly $28,000.

That's nice, but think of what that $5,000 would grow to by age 65: more than $2.4 million! That would be enough to support an annual income in retirement of almost $100,000 at a reasonably safe withdrawal rate. Of course, by 2074, that might not be enough to live on, but it will surely make a meaningful difference.

Investment options
Some might suggest letting each family invest the $5,000 on its own, just as some were suggesting that Americans be able to invest their Social Security funds on their own. Of course, that raises the ongoing debate over whether everyone has enough knowledge and skills to manage their own investments. Certainly, with the bear market having ravaged people's life savings, many might not want the responsibility of successfully managing that money on their own.

Like the market, individual stocks fluctuate wildly in value over time. Some will beat the market by a big margin, while others will fall way short. Check out the variety in these 10-year average annual returns for a sample of companies:

Data: Yahoo! Finance.

See? The results are all over the map. And the S&P 500 number looks scary. But again, remember that it's for a decade, not many decades, and the decade includes several years with strong double-digit declines, which isn't the norm.

Best bet
For the masses, if we ever get U.S. baby stock funds, it might be best to just keep them in the overall stock market. Of course, given our nation's current financial condition, I don't expect to see $5,000 accounts being introduced anytime soon -- but that doesn't mean you can't set them up on your own, with your own money, for your children, grandchildren, or any children you care about.

It's not too late for you to set yourself up to become your family's most beloved ancestor!