Today, I’m going to be going over a concept called Million Dollar Baby, and so what this is, is it’s a way to use a financial concept or a couple financial concepts together to help leave an inheritance for your children. And it leverages the most important asset that children have on their on their side. And that is time. So I’m going to go ahead and pull up my screen and we’ll get right into this.
So this concept, again, called Million Dollar Baby, I personally want to share my experience along the way here. This is a plan and a concept that I use for my nieces and nephews. I personally don’t have any children right now, but I’m getting ready to have one. And she’s going to be a million dollar baby as well. But I personally own for these plans and be putting another one into place this year for my own child. So what this is Million Dollar Baby is really the gift of the future. It’s a common sense strategy that empowers families to create a legacy for the children without having to be wealthy right now.
And kind of what’s driven our discussion around this is it through our research, we found that on 20 percent of children will receive an inheritance, which is really kind of a shame.
And when you think about it, it’s most likely because parents don’t know how to leave their children better off in the way that they had it. They all want to do that, but they don’t know how. And that’s kind of where we come in. Is that how many words company and we’re all about teaching people financial literacy. And so this is all about rethinking how we leave legacy.
There’s really two options when it comes down to leaving a legacy for your children. And so as we go through this, I want you to think about which legacy plan is more realistic for you. Is it one to save up money every single month so that you’re accumulating a million dollars in your own personal savings account to leave each of your children?
That’s option one. Option two is, is it more feasible for you to borrow a million dollars in retirement for each child, starting with a small fraction of that when they’re young? Now, either one of these options can work, but I’d be willing to bet that for most of us, option two is far more feasible than option one. So we’re going to talk through the pros and cons of both. And hopefully we’ll get to a place where you understand which option is more clear for you and your family.
So there’s three realities when it comes to trying to leave a million dollars with a resurgence from your own personal savings to your children that make it unlikely for us to do this. The first thing is we’re all living longer. And so that means that you are going to need those savings to fund your own retirement.
And some other factors that play along with that are that the average retiree spends about one hundred twenty two thousand dollars on medical expenses because health care has improved. But it costs a little bit more than what it used to. We don’t anticipate those costs going down either. And then the last thing is long term care.
Seventy percent of people over the age of 65 are going to need some form of long term care service or support. And on average, it can cost between 70 to three hundred ninety thousand dollars for each occurrence. So the average stay in a long term care type of arrangement is going to be just shy of four years.
And so those expenses can be rather hefty. And so those things in and of themselves all deplete your own personal savings that you may have accumulated throughout your lifetime, which makes it harder to leave a million dollars to each child out of your own savings account.
There is a really common sense way for us to approach leaving a million dollars to your children.
And since it is so hard to leave that inheritance today, we need to use that greatest financial asset that your children have. And that is time they have an entire lifetime of it. So why not take advantage of it? So we’re going to pair that with these three financial concepts here. The first one is compound interest or the potential of money to grow with interest paid on interest. OK, so when you talk about compounding, it’s really money that I’m putting in my savings. It’s earning interest and it’s being paid interest upon interest every single day.
So compound interest, that’s a first concept. The second concept is the time value of money. And this just basically is that money saved today is worth more than money. Say, tomorrow. And think about this. Any time that somebody asks me when’s the best time to start saving answers right now because it was yesterday or it was five years ago. But the best time to get started is right now. And then the last piece of this is wealth protection.
So depending on how we look, how we build this plan for you, you want to make sure that you save. This money from being used until the future, being used until when it’s needed in the future, and we do that through what’s
called a living trust. Now, that’s a pretty advanced topic. There are ways to do it without a living trust as well. But the best way is through that. Now, we’re going to talk to two examples. Dana and Hector are both characters from our book, How Money Works. Each of you can have a complimentary copy of this. Just shoot me an email or a text at that phone number at the bottom of the screen, and I’ll get you a copy of the book for free. But could you save a million dollars for your child?
And we’re going to talk through Danas example and Hecker’s example to kind of give you an idea of the different options that are available to you. And of course, these are hypothetical, but we’re going to start with Dana.
So Dana is in a financial position where she has thirteen thousand dollars cash today that she can use to fund this type of plan for her child. So we’re going to take a one time, thirteen thousand dollar lump sum that goes from birth until age sixty seven for her child. And we’re going to assume a six and a half percent average interest rate annual interest rate that compounds monthly in this plan.
Doing so will create that will take that thirteen thousand dollars at birth and turn it into one million four hundred forty two dollars at the age of 67 for that child. So very good way to leave money for your child. Now, in order to do that, you have to have that thirteen thousand dollars. Right. But this is an option for us. Now we’re going to talk about a second time frame. So using the asset of time, Dana decides to wait until the child turns 18 to do this instead of doing it at birth. So this is to demonstrate the difference between you should have started at X time, but now you waited until today.
So today, her child is 18. She puts that same thirteen thousand one lump sum into a plan that grows from age 18 to age 67. Assuming that same six and a half percent average annual interest rate compounded monthly, it’s going to yield three hundred eleven thousand four hundred eighty six dollars with her child that age sixty seven. So a big difference. Arguably, they’re both claiming her child better off than what she was because it’s still a massive amount of money that you’re able to leave for your children.
But two examples using the same lump sum amount and deposited at different times in the child’s life. Now we’re going to transition to Hector. So how is that a little bit different financial situation? He is able to come up with twenty five hundred dollars today as his child was born and then add two hundred and fifty dollars a month for four months to this plan. But he’s not able to do that.
Thirteen thousand dollar lump sum. So how does this pan out for him? Well, we’re going to take that twenty five hundred dollars a month and we’re going to put it in a plan today and then we’re going to start putting two hundred fifty dollars a month in the investing plan for four years and let it grow.
We’re going to assume that same six and a half percent annual interest rate compounded monthly. And then here’s what happens. So over the course of that time frame, Hector will have put in fourteen thousand five hundred dollars.
And I got that number from adding the twenty five hundred to the twelve thousand at twelve thousand two hundred fifty payment of two hundred fifty dollars a month or forty eight months. So when we do that, it actually yields one million eight thousand fifty nine dollars for each child at the age of sixty seven. So even though Hector wasn’t able to come up with that thirteen thousand dollars lump sum all at once, he’s still able to achieve his goal of leaving over a million dollars to his child in retirement.
Pretty cool. And our second example with Hector, we’re going to structure this the same way. The only thing that changes here is time. So instead of starting at birth, we’re going to wait until this child turns 18 to start that same twenty five hundred dollar lump sum, plus two hundred and fifty dollars a month for four years. And assuming that six and a half percent average interest rate compounded monthly, it’s going to yield three hundred thirteen thousand eight hundred fifty seven dollars at age sixty seven.
Again, not a bad thing. Just shows the difference between doing this early, using time and leveraging, getting those doubles in versus waiting until age 18 and having a few less doubles for that money along the way. So just to kind of bring us to a close here, according to the data from the United Nations, two hundred fifty children born in the world every single minute. Imagine how different their lives would be if every family created a savings away from the child that couldn’t be touched until retirement.
The world would be in a much different place economically, I would argue, and our children are being left in a
better place. So at the end of this, what I really want you to take away from this is that there’s a variety of different ways that we can structure a million dollar baby plan for you and your family. And I would love to sit down with you personally to kind of walk through what strategy makes the most sense for you and your family. And just as a just reminder here, this is a difference between how Zucker thinks that being a sucker versus how the world. We think so. Thanks so much for your time today. And we’ll see you later.