# Blog: A Resolution for Generations

It is only about two weeks into 2021 and I expect that many New Year’s resolutions have already been forgotten and abandoned. Whether it was to lose weight, study more, or quit smoking, many of us have probably already given up on our resolutions. Perhaps we’ve told ourselves that we will stick to them longer in 2022.

Instead of short-term resolutions that do not last very long, wouldn’t it be nice to have a resolution that could change not only your life, but also the life of the generations that follow you? I have made one such resolution this year, which is to leave a legacy that will allow my income to continue forever for generations following me. This is nothing more than a savings plan, but it is a savings plan that is not for me, but for my children, their children, their children, and so on. It is essentially a family endowment fund that will last for generations. The best news about this resolution is that it is not as difficult as you might think.

We are all familiar with the idea of saving for our retirement. Whether it is a government pension plan, a company plan, our own personal plan, or some combination of these, we are all aware that we are saving (or that we should be saving). Unfortunately, statistics show that many people do not have enough set aside for their own retirement, and now I am suggesting that people save for their great-great-grandchildren? Before dismissing this as impossible, let’s look at some numbers.

(A preface to the numbers: I know that people in different countries have different rates of return available to them. The US stock market has had an annualized compound annual growth rate of 7.47% from 1950 through 2013, and because I live in the US, these are the numbers that I have to work with.)

Let us assume for the purposes of this example a more conservative 6% annual return on investment. This means that in order to have your annual salary be the annual return of a retirement fund, you need to have 17 times your annual salary saved when you retire. If your annual salary is \$40,000, then you will need \$680,000 saved when you retire.

How do you get to \$680,000? Any financial calculator will help you do the math, but if you have \$0 saved now and you invest \$131 a month for 50 years at 7%, you will have \$683,798.19 after 50 years. Then, for every year after that, your children and grandchildren will have \$40,000 of annual income, forever. The best part is that \$131 a month is less than 4% of a \$40,000 annual salary.

Now, let’s change the time frame and look at it from the standpoint of a gift that you can give your children starting when they are born. If you start saving \$100 a month for a child when the child is born, that \$100 a month at 6.2% for 65 years will be worth \$1,005,114! With just \$100 a month, your child can be a millionaire when they retire. If we are more optimistic (though perhaps somewhat unrealistic) and use a 9% return, then that same \$100 a month will be worth \$3,921,762 when your child is 65.

You can also use this plan to help teach your child about saving. If you put \$100 a month away for 16 years at 7%, it will be \$35,808 when your child turns 16. When your child gets their first part-time job, let’s say that they will start helping pay the \$100 a month by paying \$10 of it. After they finish college and get a job, you can have them contribute \$25 a month, and as they get older increase the percent that they pay increases until they are paying all of it. They will have learned from an early age that saving is the best insurance for the future and will continue to make the payment. Then, when they turn 65, they will have \$1.4 million, assuming a 7% average annual rate of return.

I understand that not everyone has access to a consistent 7% return, and that \$100 per month may not be realistic in some economies. But also consider that in an economy where salaries are smaller, a smaller amount is needed to be able to generate your annual salary. As a percent, if you save 3% of your salary every month and invest it at 7.2%, you will have a principal that will generate your annual salary in 50 years. Or, at a 6.2% annual return of return, if you save 5% of your salary every month you will have a principal that will generate your annual salary in 50 years.

I invite you to use a financial calculator and play with the numbers. When you do the math, you too may decide to make a resolution that will last for generations.

Brian Hock, CMA, CIA