I don’t think I am an atypical parent in worrying about the financial future of my child, even though he is barely out of nappies and is blissfully ignorant of the difference between one dollar and a million. Our children are being born into an ever tougher world. Well-paid jobs are scarce – in fact, with rising unemployment in many countries around the world, jobs are scarce full-stop and home ownership is becoming an unlikely dream for many. With an ageing population and governments crippled by debt, who knows how old today’s pre-schoolers will have to be before they are entitled to a state pension, if indeed such a thing still exists.
When they enter the working world, our currently carefree toddlers will face financially challenging circumstances with pressures far greater than those of former generations. Trying to pay off student loans and save a deposit for a home, added to the expense of raising a young family, will stretch even relatively generous salaries and possibly leave little left over to save for retirement, although saving will be essential. The lifestyle of today’s Baby Boomer retirees may well seem like a bygone golden age when our little ones reach three score years and ten.
Hence, this is why I was so interested to hear about a growing trend in the UK to start pensions for children. It may sound bonkers to start saving for the retirement of someone who has not even started their education, but in fact it is an excellent idea. Over 60,000 savvy parents, grandparents and godparents in the UK have already started a pension for their lucky loved ones who have yet to reach adulthood.
When you look at the figures, it’s easy to see why this makes financial sense. Let’s say you invest the relatively modest sum of $100 into a pension fund for your newborn child every month until they are 18. Over that time, with an average return of 6 per cent, you will have accumulated $39,029. Now let’s say you stop contributing but the money cannot be accessed by your child until they reach the age of 50. Guess how much they will have when they reach their half century if they continue earning 6 per cent on the savings? Just shy of $265,000. And if they leave the money untouched until they get to the retirement age of 65, they will have a pension pot of $650,000 regardless of what they have saved themselves.
I have three key pieces of advice for those considering starting to invest in a pension for their children:
• Time in the market is more important than timing the markets so make the decision to be in it for the long haul, don’t get spooked by ups and downs and stay invested even through periods of volatility.
• Favour shares over cash savings or bonds. According to the Barclays Equity Gilt Study, which has been tracking data relating to equities for 114 years and is generally regarded as the leading study on investment returns, equities have delivered the best returns over the long term i.e. investments of 25 years and over.
• The reinvestment of dividends is an extremely important factor in boosting overall returns because adding compound interest into the equation is what will really turn your savings into big money.
Many expats in Asia earn good salaries with generous packages, leaving them with a high disposable income. This makes putting money aside for their child’s future entirely possible. If you are in that enviable position, why not make the most of this fantastic opportunity to secure the financial security of your loved ones for the entirety of their lives? I can’t think of many better things to do with your money. Not only will you be helping your own offspring, in all likelihood it will also put them in a position to pass wealth on to their own children, guaranteeing financial security for future generations of your flesh and blood. Now that’s a legacy to be proud of!