help me predict investment return of my kid's IRA

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eye.surgeon
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help me predict investment return of my kid's IRA

Post by eye.surgeon » Fri Dec 08, 2017 4:04 pm

As an object lesson in the power of compound interest I just helped my two children, ages 18 and 21, fully fund a roth IRA for 2017. Both had worked for me this summer in my office and had sufficient taxable income for me to contribute $5,500 each in Vanguard target 2060. I'm trying to estimate what that will be worth in 2060 based on historical market performance. Any takers?
"I would rather be certain of a good return than hopeful of a great one" | Warren Buffett

Dantes
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Re: help me predict investment return of my kid's IRA

Post by Dantes » Fri Dec 08, 2017 4:14 pm

4%,compounded annually, 42 years, would be $29,428.

But if you continue to put in 5500 (458.33 monthly) every year for the next 42 years, they would have $627,629. I think that would make a really good lesson for them.

Thats not based on historical market performance, but whats the point of everyone always saying that past performance is no guarantee of future returns?

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KlingKlang
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Re: help me predict investment return of my kid's IRA

Post by KlingKlang » Fri Dec 08, 2017 4:19 pm

With all due respect you are asking for a 43 year return projection for a fund that has been in existence for less than 6 years (01/19/2012). You can plug its 11.48% average annual return since inception into a compound interest calculator, but the chances of the result being correct to within an order of magnitude are slim.

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eye.surgeon
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Re: help me predict investment return of my kid's IRA

Post by eye.surgeon » Fri Dec 08, 2017 4:22 pm

KlingKlang wrote:
Fri Dec 08, 2017 4:19 pm
With all due respect you are asking for a 43 year return projection for a fund that has been in existence for less than 6 years (01/19/2012). You can plug its 11.48% average annual return since inception into a compound interest calculator, but the chances of the result being correct to within an order of magnitude are slim.
This new fund is 90% total stock market. Modeling the stock market as a whole will be quite predictive I would think.
"I would rather be certain of a good return than hopeful of a great one" | Warren Buffett

livesoft
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Re: help me predict investment return of my kid's IRA

Post by livesoft » Fri Dec 08, 2017 4:22 pm

Here's my prediction: The investment return will be decent.
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KlingKlang
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Re: help me predict investment return of my kid's IRA

Post by KlingKlang » Fri Dec 08, 2017 4:31 pm

eye.surgeon wrote:
Fri Dec 08, 2017 4:22 pm
KlingKlang wrote:
Fri Dec 08, 2017 4:19 pm
With all due respect you are asking for a 43 year return projection for a fund that has been in existence for less than 6 years (01/19/2012). You can plug its 11.48% average annual return since inception into a compound interest calculator, but the chances of the result being correct to within an order of magnitude are slim.
This new fund is 90% total stock market. Modeling the stock market as a whole will be quite predictive I would think.
In that case the annual nominal return for the stock market as a whole over that time period is 9.69% and the inflation adjusted return is 5.38%.

The chance that those numbers will provide accurate predictions is still minimal.

chevca
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Re: help me predict investment return of my kid's IRA

Post by chevca » Fri Dec 08, 2017 4:53 pm

Don't forget that the fund transitions to more bonds and less stocks over the next 40 some years also. There's no need to predict or try to be exact, because.... honestly, it's pretty silly to do so for that long a time frame.

As someone above said, pick 4 or 5% and show them what it would do to this one contribution over that time, and what continued contributions and returns would do.

Otherwise, shoot, go all Dave Ramsey on them and pick 12%... really make some big numbers for them to see. :happy

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Watty
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Re: help me predict investment return of my kid's IRA

Post by Watty » Fri Dec 08, 2017 5:01 pm

You can plug the numbers into Firecalc and see what the investment return would have been in the past.

https://www.firecalc.com/

AlmstRtrd
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Re: help me predict investment return of my kid's IRA

Post by AlmstRtrd » Fri Dec 08, 2017 5:40 pm

I did something similar for our daughter earlier this year as she had earned income in 2016.

I think at this point there are at least a couple of lessons your kids could grasp that are valuable. One is the rule of 72. You can play around with several rates of return and see where that gets them in 42 years. For example, at 7% they would double their money roughly four times. So $5,500 becomes roughly $88,000 in 40 years.

The other thing I asked our daughter to think about was what it would feel like to have that much money (didn't bother talking about inflation eroding buying power... can't cram too much into one teachable moment). Hopefully your kids appreciate what you are doing for them!

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Re: help me predict investment return of my kid's IRA

Post by Grt2bOutdoors » Fri Dec 08, 2017 5:50 pm

Use 7-8% nominal 4-5% real annual average returns. Show them the power of compounding as Livesoft suggested, initial contribution of X, subsequent annual contributions made at the beginning of the year of Y, ending value of Z. Show them as you add larger sums to the account, the value increases tremendously. Don't forget to show them the reverse, what happens when the market tanks and they fail to continue buying.
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Thesaints
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Re: help me predict investment return of my kid's IRA

Post by Thesaints » Fri Dec 08, 2017 7:48 pm

Vanguard 2060 will be 90% stocks only for another 18 years.

jsprag
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Re: help me predict investment return of my kid's IRA

Post by jsprag » Sun Dec 10, 2017 4:23 pm

I don't have a better crystal ball than anybody else, but here's what I suggest to accomplish your objective of making this a teachable moment:

1. Pick a return. Historical. Estimated. Whatever.

2. For this chosen return, use a spreadsheet or future value calculator to review several scenarios:
a. The $5,500 for 2017 is all that ever goes in between now and age 65
b. In addition to the initial $5,500, they continue to put in money each year (maybe increasing amounts, maybe not)
c. They don't add to the initial investment immediately, but wait 10 years before making additional contributions (again, maybe increasing each year)

The power of compounding and the importance of starting early can be illustrated with any interest rate. Don't focus on trying to guess the right one.

ivk5
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Re: help me predict investment return of my kid's IRA

Post by ivk5 » Mon Dec 11, 2017 2:46 am

eye.surgeon wrote:
Fri Dec 08, 2017 4:04 pm
I just helped my two children, ages 18 and 21, fully fund a roth IRA for 2017. Both had worked for me this summer in my office and had sufficient taxable income for me to contribute $5,500 each in Vanguard target 2060.
OT but are they free of the kiddie tax? Depends on whether their earned income covers more than half of their support, and for the 21yo, whether he/she is a full-time student.

If not subject to kiddie tax, Roth might be better than traditional IRA contribution (and this can still be achieved via recharacterization).

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eye.surgeon
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Re: help me predict investment return of my kid's IRA

Post by eye.surgeon » Mon Dec 11, 2017 11:55 am

It is a Roth for both of them. They're 18 and 21, both full-time students that worked part time in my office. One earned about $7k, the other $12k, all earned income, so I don't think the kiddie tax applies to them.
Last edited by eye.surgeon on Mon Dec 11, 2017 12:05 pm, edited 1 time in total.
"I would rather be certain of a good return than hopeful of a great one" | Warren Buffett

DrGoogle2017
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Re: help me predict investment return of my kid's IRA

Post by DrGoogle2017 » Mon Dec 11, 2017 12:00 pm

I’m thinking it could be at least $100k base on what my kid’s original investment now and it’s only been 10 years. But she has been in the PRIMECAP funds.

staythecourse
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Re: help me predict investment return of my kid's IRA

Post by staythecourse » Mon Dec 11, 2017 12:07 pm

All I know is it would have been more if you opened a VA with Vanguard with the child as an annuitant. This was advised by Mr. Clement some time ago. I did and put maybe 10-20k when she was 1 or 2. Will be interesting to see what that number will be in 60+ years. Of course, I'll be dead and won't see the results but a good exercise either way.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

staythecourse
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Re: help me predict investment return of my kid's IRA

Post by staythecourse » Mon Dec 11, 2017 12:09 pm

Thesaints wrote:
Fri Dec 08, 2017 7:48 pm
Vanguard 2060 will be 90% stocks only for another 18 years.
Correct. I would change that now to 100% stocks. Who cares what happens to this small amount of money so might as well increase the chances at the best overall return, no?

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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eye.surgeon
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Re: help me predict investment return of my kid's IRA

Post by eye.surgeon » Mon Dec 11, 2017 1:48 pm

staythecourse wrote:
Mon Dec 11, 2017 12:09 pm
Thesaints wrote:
Fri Dec 08, 2017 7:48 pm
Vanguard 2060 will be 90% stocks only for another 18 years.
Correct. I would change that now to 100% stocks. Who cares what happens to this small amount of money so might as well increase the chances at the best overall return, no?

Good luck.
I probably will. I picked a target fund more as a teaching moment for them than a long-term hold.
"I would rather be certain of a good return than hopeful of a great one" | Warren Buffett

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