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Ron Harris

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Your Money Is Worth More Now Than Ever

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2 Concepts the Million Dollar Baby Strategy Puts to Work

2 Concepts the Million Dollar Baby Strategy Puts to Work

Most parents want their child to have a better life than they had.

While some parents are concerned they won’t have enough money for their own retirement, they have no idea what they can do to help their child’s retirement in 50 or 60 years. The good news is that they can do something now to put money to work for their child over those 50 or 60 years. What if you could start a small account now that has the potential to grow to $1 million dollars by the time your child is ready to retire?

The Million Dollar Baby takes advantage of 2 financial concepts:

Time Value of Money

The time value of money is the concept that money available to you now is worth more than the same amount in the future because of its potential to earn interest. Money saved today is worth more than money saved tomorrow because the money you save today has the potential to grow. That growth potential over time means you can save less today.

The Power of Compound Interest

The power of compound interest refers to the growth potential of money over time by leveraging the magic of “compounding,” which is interest paid on the sum of deposits plus all interest previously paid. In other words, interest earned on interest plus principal, not just principal.

Let’s consider a few hypothetical^ examples:

If at their child’s birth, parents put away $13,000 in an account that grows at an annual rate of 6.5%, compounded monthly until the child reaches retirement in 67 years, the account would grow to $1,000,042.

If they had waited 18 years before setting aside the $13,000, the account would grow to just $311,486 when the child reaches retirement at age 67. The loss of that 18 years leaves the child with almost $700,000 less for retirement.

For parents who aren’t able to set aside $13,000 at birth, they can still leverage the time value of money and compound interest by taking a more incremental approach. If at their child’s birth, parents put away $2,500 in a lump sum and then $250 every month for 4 years in an account that grows at an annual rate of 6.5%, compounded monthly until the child reaches retirement in 67 years, the account would grow to $1,008,059.

If they had waited 18 years before setting aside the $2,500 plus $250 every month for 4 years, the account would grow to just $313,857 when the child reaches retirement at age 67. Again, the loss of that 18 years leaves the child with almost $700,000 less for retirement.

How to start your own Million Dollar Baby program?

Step 1. Create a trust to own the account. If a parent owns the account, the account will pass through the parent’s estate upon death. With a trust, decisions are made by the parent trustee but the account will survive the parent’s death. The child can only access the trust account upon retirement or in an emergency medical situation before retirement. Depending on your budget, you can use a local attorney or an online service to set up the trust. NetLaw Inc. established a special Million Dollar Baby Trust just for this program.

Step 2. Select a long-term investment that will maximize the time value of money and the power of compound interest. Find a financial professional who will help you choose the right investment for you and your Million Dollar Baby.


– Kim Scouller


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^This is a hypothetical scenario for illustration purposes only and does not represent an actual product and there is no assurance that these results can actually be achieved. The hypothetical scenario does not take into account certain risks and expenses associated with an actual product such as performance risks, expenses, fees, taxes or inflation, if it had the results would be lower. Rate of return is an assumed constant nominal rate, compounded monthly. It is unlikely that any one rate of return will be sustained over time. Numbers are rounded to the nearest dollar in some cases. Retirement needs vary by income and cost of living - $1 million isn’t an adequate goal for every saver.

3 Practical Ways to Put the Rule of 72 to Work

3 Practical Ways to Put the Rule of 72 to Work

The Rule of 72 is useful for all kinds of financial estimates and understanding the nature of compound interest.

Here are a few examples of how the Rule of 72 can be utilized in the real world to get an estimate about how money will compound in various situations.

Example 1 - Estimating the Growth of an Inheritance.
You inherit $100,000 at the age of 29. What interest rate must you earn for it to become $1 million by the time you turn 65? You’ve got 36 years for your money to grow to $1 million, so it will take 3.25 doubles to grow $100,000 to $1 million dollars. Dividing 36 years by 3.25 doubles equals 11. Your money must double every 11 years. Knowing that, now you can run the formula to find your interest rate: 72 ÷ 11 = 6.54.

There you go. You need a financial vehicle that can offer no less than a 6.5% rate of return to hit your goal.

Example 2 - Estimating the Growth of an Economy.
Let’s say you want to approximate the growth rate of your country’s Gross Domestic Product (GDP). If your GDP is growing at 3% a year you can use the Rule of 72 formula: 72 ÷ 3 = 24. Therefore, in approximately 24 years, your nation’s GDP will double. Unless of course it changes. Were it to slip to 2% growth, how many years would the economy take to double? 72 ÷ 2 = 36 years. Should growth increase to 4%, GDP doubles in only 18 years (72 ÷ 4 = 18).

Example 3 - Estimating Inflation, Tuition, & Interest.
If the inflation rate moves from 2% to 3%, the time it will take for your money to lose half its value decreases from 36 to 24 years. If college tuition increase at 5% per year, costs will double in 14.4 years (72 Ă· 5 = 14.4). If you pay 15% interest on your credit cards, the amount you owe will double in only 4.8 years (72 Ă· 15 = 4.8)!


– Tom Mathews & Andy Horner


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How Inflation Eats Up Your Savings

How Inflation Eats Up Your Savings

Inflation is financial erosion, a slow and steady force that eats away at the value of money—YOUR money.

Here’s how it works. The trend is that over time, the prices of goods and services tend to rise. As a result, the purchasing power of your paycheck, your savings, and your retirement income is reduced.

The sucker ignores inflation—an abstract concept they may feel they have no control over. But the wealthy understand inflation and prepare for it—calculating the impact into their budget, their future purchases, and their retirement goals.

Here’s an example that drives it “home”…

Let’s say that in 1980 you received a $100,000 inheritance check. You were diligent enough to put the money into an account earning 2% annual interest. Your hope was that one day it would grow and be enough for you to afford a $200,000 dream home—a brick estate with a one acre yard, five bedrooms, three garages, and a pool in the back.

After waiting patiently for 40 years, retirement has arrived. The growth of your inheritance money had exceeded your goal—you now have over $220,000. Time to buy your dream home!

But while you waited, inflation was growing too. It increased at the average annual rate of 3.1%—more than tripling the average costs of goods… and houses.¹

Your $200,000 dream home with three garages and a pool in the back is now for sale at over $600,000.

The takeaway is that you can never ignore the impact of inflation on your goals for the future. You need to know how it could impact the value of your 401(k), the equity in your home, and the death benefit of your life insurance policy.

If you haven’t factored in the impact of inflation on your dreams for the future, there’s no time like the present. Consider scheduling a conversation with your licensed and qualified financial professional today to discuss strategies to beat inflation!

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¹ “Average Annual Inflation Rates by Decade,” Tim Mcmahon, InflationData.com, Jan. 1, 2021, https://inflationdata.com/Inflation/Inflation/DecadeInflation.asp

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