STOCK QUOTES     More market data...

Scott Burns / Syndicated columnist
You've got the power to make grandchild rich

E-mail this article Print this article Search archive Most read articles Most e-mailed articles

Want someone in your family to be rich? You can make it happen with a mixture of affection, forethought and relatively small sums of money.

The mixture can be turned into millions of dollars if that "someone" in your family is a grandchild. The magic ingredients, of course, are compound growth and time. Suppose, for instance, you have a newborn grandchild. You're not so well-off that you can make that child wealthy today. But you'd like to do something to assure financial security in a distant tomorrow.

It can be done.

Give $11,000 a year (the annual gift exclusion) for five years. Let it grow while invested in a low-cost equity index fund. Your grandchild will have more than $5 million at age 56 and nearly $16 million by age 69.

Spoilsports will be quick to point out that $5 million 56 years from now might not be enough to cover a major Starbucks habit. We keep losing purchasing power to inflation.

Well, yes we do.

But if you assume a long-term inflation rate of 3 percent (the average from 1926 to 2003, according to Ibbotson Associates in Chicago), the original investment will still grow to $1 million of current purchasing power by age 56 and $2 million of current purchasing power by age 69.

These figures assume the 10.4 percent annual rate of return on large common stocks, fully taxed at 15 percent each year, or a net of 8.84 percent annually. Returns, of course, could be lower. Taxes and inflation could be higher.
 
Whatever.

Gifting $11,000 a year for five years could put a grandchild among the nation's top wealth holders.

No, I'm not talking private-jet-and-houses-in-Aspen-San-Francisco-and-London rich. I'm simply talking about having a grandchild with higher net worth than most Americans — before they make their own contributions to the family stash.

Recall, the most recent Survey of Consumer Finances showed that a net worth of $1.154 million put a household of those in their 50s in the top 10 percent of all households. No doubt the figure will be higher in the future — but however you slice it, a head start is a good thing.

And it doesn't take that much.

Don't have $11,000 to give for five years? OK. Let's try giving $2,000 a year for each of five years, but investing it in small-capitalization stocks, the ones that have returned 12.7 percent annually, according to the Ibbotson Associates data.

Shave off one-tenth of a percent for fund expenses, and you end up with $6 million at age 56, less whatever you had to pay in taxes. A small increase in annual return will do a lot to overcome making smaller gifts.

Unlike the old joke, you don't make a small fortune by starting with a large one. You start with amounts of money that are imaginable, that many people have.

Nor does it require brilliant investment management — the money will be invested in low-cost, tax-efficient index funds. With the recent announcement from Fidelity Investments that it will lower the annual expense charge on its index funds to only one-tenth of 1 percent — less than price leader Vanguard — anyone can invest with no commission expenses, nominal annual expenses and tiny annual taxes in the long-term growth of America or the world.

Questions about personal finance and investments may be sent to Scott Burns at The Dallas Morning News, P.O. Box 655237, Dallas, TX 75265; by fax at 214-977-8776; or by e-mail at scott@scottburns.com. Questions of general interest will be answered in future columns.