Friday, November 07, 2008

One additional note

Ok, so I’m a geek.


I ran the numbers on a hypothetical kid born on Jan 1 who received one of my $5000 vouchers for the endowment account.


I assumed that until age 16 the money just sat in a savings account and pulled down a measly 2.5%


At 16 I assumed he needed an extra $1000 to help buy a car, so I withdrew the $1000 from  his available funds of $1228 (1/2 of accumulated income).  Since he’s a minor it’s done with his parent’s consent, and since I created this fictional boy I approved the withdrawal.


I figured it was also a good time for him to put the money into a long term (60 months or so) rotating CD that would earn him an extra point and a half (4.0%).  At age 18 his balance is only $7000. 


8 months after he turns 18 he goes off to college and puts his $7161.28 into some index funds that average 6%.  He only has $580 available in accumulated income allowed to withdraw because he pulled the $1000 out to help buy the car, so he pulls $500 to help pay some expenses when he goes off to school (beer isn’t always free, though it’s better if it is).


He goes through school and gets his first job at age 22 in October.  He starts putting $100 into his fund because it’s a nice, tax free way to earn 3% (6% from the index funds less half of what is available to withdrawal) on his money and any funds he deposits can be completely withdrawn to pay for weddings or kids or motorcycles. (I decided these funds should be tax free since they were started with tax payer money that had already been taxed, anyway, and the inheritance tax will take care of recovering lost income tax).  His balance is $8551.12 before he starts depositing money from his first job into his “endowment”.  It has helped pay for books for a semester (ok, beer) and helped pay for his first car (a junker that’ll get him to school and back, most of the time).  The earnings on the account alone have equaled the original investment ($8500 + 1000 + 500 – 5000 = 5000).


He goes on with his bad self for many years automatically dropping his $100 into the account that’s earning an average of 6% a year.  At age 30 he starts his 3rd job and is making some good coin, so decides to up his savings to $250 a month.  At age 30 the balance in his account is $10,362.64.  He can withdrawal $13,031 for any reason he wants, any time he wants.


5 years later he decides he’ll be clever and deposit $10 for every year of his age, and starts putting $350 away, then $360, etc.  At age 35 his balance has grown from $5000 at inception to $49,899.41.  He has $33,299 available to withdrawal for his daughter’s wedding, a trip to Aruba, hair plugs for himself, a boob job for his wife, or whatever.  Incidentally, his wife has a similar account in her name with an equivalent balance.


For the next 20 years he keeps up his pattern of $10 for every year of his age each month.  The balance in his account grows to $361803.57 by the time he’s 55.  He has $240923.12 available to withdrawal.  What does a well managed perpetual trust of $240923 generate in income each month?  About $1200  after fees.


He could withdrawal all of that at age 55, as could his wife.  What do you do when you’re making an extra $2400 a month with no bills?  Whatever the hell you want.


Let’s assume he decides to keep the funds where they are and stop depositing money into the account.   At age 75 his balance stands at $1,265,185.91 and he has $694592.95 available to withdrawal and gift to whomever he wishes.


Sadly, he dies 2 days after turning 75 in a tragic/awesome rocket ship disaster.  The world has lost a wonderful man, but he gave his life saving a planet full of kittens, dandelions, and nuns and totally did this wicked cool thing with a laser and a teleporter.  He will be sorely missed.


His heirs get the full $694,592 that was available to withdrawal.  Of the remaining $576,918.88, the heirs get $285,959 and the government will take the remaining 50% as an inheritance tax plus its original $5,000.  The total back to Uncle Sam is $290,959.44, or roughly $3879 per year for 75 years.  Not a bad return on an investment of $5000 in the future of your country.


Returns, of course, could be higher or lower.  I was going relatively conservatively with 6% forever.  Fiction Boy could put a portion into some hot startup (google?  Apple?) and quintropupple his investment.  He could also lose a chunk of it and the market or investment firm gets rich off him.  He will not be able to withdrawal the original corpus or ½ of the earnings, though.  That will remain forever ensuring the feds get their cut, and the heirs get something, when he dies.


Of course, it’ll never happen…  unless I do it myself for my own child.

Maybe that’s the change in culture that has to be done.  Don’t look to the feds, do it for yourself.  Do it for your own family.  Just do something.


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