Making a million. Why saving for kids is a terrible idea and why I’m doing it anyway

I love my kids. There’s nothing I wouldn’t do for them. When I get home after one of those days when nothing has gone right they’ll always put a smile on my face. How do children just mange to stay unfailingly cheerful even when I’m walking about with a black cloud over my head?

Turning a baby into someone that can confidently step out to tackle the world that we all live in is a terrifying privilege. For me the hardest thing it learning to rein in that natural temptation to protect them from things. I know that the right thing to do is to let them struggle and to fail and to get frustrated but there is a huge temptation to step in and help them.

One aspect of that is money. Saving for kids is a big question.  Should we save for them or not? If so how? This post is about what we’re doing about saving money for our kids’ future.  There’s a bit of child pensions and Junior ISAs in there.

It’s also about how we may be able to make them millionaires.  If you’re just interested in that millionaire bit you can jump to it here!

Finally, to be clear investing is uncertain, you can lose money, I’m not an adviser and, as always, I’m not giving any advice. Do your own research and make your own decisions. You know the drill right?

Should we save for our children’s future?

The underlying question here is whether we should be saving for our kids future. To be clear what I mean here is money that they will get when they’re adults. Part of the question is whether money is the most important thing that we can give them.

The answer to that has to be no right?

There are some basics that trump everything else when it comes to doing the best by our children. You have to make them feel safe. You have to give them your time. When they lash out you have to love them even harder. There are the physical things: food, shelter, warmth. There are the educational things: making sure they do their homework, teaching them to brush their teeth, and do the washing up and put on a laundry load.

But we’re trying our best to do those alr

eady. The issue is about whether we should do even more by putting some money aside for them.

I’ve been in two minds about this. I’m a big believer in the idea of: “you give a woman a fish and she eats for a day, teach a woman to fish and she’ll feed herself for a lifetime” If I had to choose I think I would prefer to accumulate skills and knowledge over money (although I probably need to think about that a bit more).

The same is true for what I want for my kids. I would rather that they learnt how to earn, manage and save money themselves rather than just my giving them money. If they feel self-confident and have self-reliance then my job is done.

The thing that I wonder about is whether this needs to be an either-or situation. Can I teach them to be self-reliant while also saving money for them?

The philosophical reason I’m saving for my kids

For me there’s a more philosophical reason underlying my thinking. The world is changing fast. Automation, even in white-collar jobs is coming. The economic power houses of the future are not just the BRIC countries of Brazil, Russia, India and China, but a whole raft of resource rich countries in Africa and the Asia. While there has never been a better time to grow up in the industrialised West I’m not confident that the West is going to hold the same world position that it has today when my kids are my age.

At that stage I think that the idea of a portfolio career may well be the norm. People will have a number of jobs and income streams. Similarly I think that there will more casualisation whether that’s freelancing or zero-hour contracts. There will also be more self employment.

What I do believe is that there will continue to be a market for originality, creativity, and inventiveness. As a result I’m doing what I can to encourage curiosity and a love of reading and the arts in my children. The way I see it, even if I’m wrong this will lead the to a richer life.

If I’m right though then those careers can take time to break into. You may have to serve your time in low, or volunteer, internship. In that world if I can buy some time for my children to break in through a money cushion I would like to.

By the way I should be clear that I’m not claiming that any of this is fair. Many kids who may well be more talented and hard-working than mine won’t have these benefits.

The practical reasons I’m saving for my kids

Given all that there are two specific reasons that we’ve started saving for our children’s future.

There is the obvious point about helping them if they go to university. University is eye wateringly expensive. Even if they get student loans there will be the cost of living when they’re there the living costs will be huge.

I know that they can work while they’re there and I’ll actively encourage them to get summer jobs. But, I want to allow them to focus on studying and taking part in all of the extra-curricular activities. In addition to it making the whole university experience more enriching, I think that this will lead to better long term benefits. A better class of degree combined with a wider social network should be better for their career. If my savings now means they have to do less paid work at university I want to do that for them.

Overall though, if all I do it to help reduce the amount of debt that they leave university with then that can only be a good thing.

The other aspect is pensions. I have very limited faith in the state pension being around in half a century or so when my kids retire. As I describe above, when my children start work in a decade or two it is going to be a job market that I really won’t recognise.

All that leads to it being harder to save for pensions in the early years of a career. In fact, it may make it harder to save for pensions even when you’re well into your career. Given the magic of compounding if I can put even a small amount into a pension now it could offset any inability to save early on.

What we’re doing

The decision that we’ve made is to save £4,000 a year into their Junior ISAs and also put £2,880 per year into a self-invested children’s pension for them.

We’ve put the Junior ISA money into Vanguard retirement funds with end dates around the point that they will go to university. The logic is that it will automatically manage the risk downwards as it gets towards the point they would need the money for university.

The logic of putting very specific amount of £2,880 into a child pension is due to the UK’s pension top up rules. My understanding is that is the limit up to which the UK government will top up their pensions by 25%. That means they will get £3,600 into their pension.

We’re putting that pension money into n all-world tracker fund (excluding the UK as that’s cheaper). The logic here is that, with the decades that this will have to grow, going all in on shares makes sense. If they don’t have the nouse to then reduce the risk as they approach retirement, then frankly that’s their problem!

What we considered before saving for our children

The question you may well be asking right now is the elephant in the room. Do we have the money to be able to consider this? If so how?

Before we decided to save for out kids like this we made sure that we had ticked a number of boxes:

• We are entirely debt free including having paid off our mortgage
• Our pension contributions are at the level where we get the full match from our employers (Update to note that on this it’s worth thinking about whether to put even more into your own pension.  It’s not right for me for the reasons I give in the comments below but it may be for others.  H/T to The Rhino for raising this point in the comments)
• We have a solid emergency fund – it’s at 2+ years of living expenses
• Our savings fill our personal ISAs first

The underlying principle here is that we put our own oxygen masks on first. Unless we look after ourselves financially we won’t be able to help our children. If we’re incurring debt or risk to save for our kid’s futures that isn’t going to be good for them either.  So we’re sticking with our underlying automatic saving rules.

Having done all that though we still have money available that we can save for them. Yes, we could put it aside to save more for ourselves and hit Financial Independence sooner. We could definitely put more into our pensions which would be more tax advantageous.  But it’s not like we are depriving ourselves. The satisfaction of being able to help our kids is worth working for a year or so more.

To be honest the key to having the money to do this is that we’ve paid off the mortgage. That means that we have a lot more disposable income. Before that happened we had an emergency fund of around six months and we didn’t have any savings in our ISAs. Now that we have done that we can think more expansively.

Why saving for my kids may be a terrible idea

While I have laid out all of the reason why I’m saving money for my children’s’ future there are also lots of reasons not to do this. Here are some of the things that I’ve been wrestling with:

• Do I really want to give my children control over a large pot of money when they turn 18? What if they blow it all? Or, worse, end up in a bad place or with a bad crowd as a result of the money.
• Won’t locking money up in a pension be really frustrating for them if they are struggling to pay the bills when they are young adults? In particular would it be better to use it to help them with a deposit for their first home?
• What if the government changes the pension rules?
• Even if they government keep their rules are my kids going to be stuffed from a Lifetime Allowance perspective?
• Don’t I want them to be independent? Essentially agonising over that point from the Millionaire Next Door about the risks of helping your kids too much.

To be honest I’m not certain that we’re comfortable that we are going to be able to address all of these points. But, what this ultimately comes down to is whether I think that I’m going to be able to raise my children well. If they’re level-headed and prudent with money then they will be fine with these pots. If not then they’ll have bigger problems.

What’s all this about millionaires?

Right, I’m sure that some of you are here for the bit about making your child a millionaire. You won’t be surprised to know that this is essentially about the magic of compounding.

The specific question that I’ve been looking at is around saving for kids through child pensions and what would I need to do to make my children millionaires by the time they retire

Let’s kick off by making a few assumptions.

• Their retirement age will be 70. Given that mine will be 68 I’m pretty sure that it will be higher when they get there
• I’ll pay in a lump sum once a year on their birthday with the last one going in on their 18^th birthday
• I’m going to put it into a low-cost all world accumulator index tracker i.e. dividends reinvested.
• The government will keep it’s 25% top up rule for amounts up to £2,880 each year
• There will be 3% inflation per year
• All results will be in 2019 pounds

What is uncertain of course is the return that I’ll be able to get. I’ll look at what happens assuming various different real (i.e. after inflation and charges) rates of return. The highest I’m going to model is 7%. That was the average annual real rate of return on the S&P 500 (the nominal return was 10%). That may not be an outlandish comparison for a world tracker over the next half century or so. But who knows? Certainly not me! It’s entirely possible that we have decades of stagnation and bears markets and so this could be a terrible idea

What’s also uncertain is when people will be able to start saving for their kids. I’ll play some tunes on that as well.

Getting the maximum UK Government top up

First up lets look at what happen if I can put in the maximum of £2,880 each year that I contribute and the government will continue to top it up so that it’s £3,600 in total.

		Age of child when you start paying into their pension
		Birth	5 years old	10 years old	15 years old
Annual real rate of return	4%	£575,811	£380,763	£201,537	£74,465
	5%	£1,046,434	£674,001	£346,028	£124,359
	6%	£1,895,147	£1,188,270	£591,423	£206,700
	7%	£3,420,341	£2,086,594	£1,006,346	£341,963

That’s not bad at all is it? If you’re super organised and rich enough to start paying in a child’s pension from their birth then they could be a multi-millionaire by the time they hit retirement. This could all happen without any new payments into the pension after their 18th birthday!

Sadly I was neither rich enough, nor organised enough, to do that. My kids are closer to the 10 year old’s column. But that’s not too shabby either. If my children get a ‘free’ half a million in their pension when they retire I don’t think they’ll be crying will they?

Applying the coffee test: Adding £3 per day to a child’s pension

Now there will be a lot of people reading this that say: That’s all well for you, but who has a spare £2,880 every year? I totally hear that so let’s look at it another way. When in doubt in the Personal Finance world, bring out the hugely irritating coffee test.

So this says if you buy a £3 coffee every day, what would happen if, instead, you put it into your child’s pension? (Although in my case I’ve already stopped buying coffees so this doesn’t help me….) Well here it is.

		Age when start paying into a child pension
		Birth	5 years old	10 years old	15 years old
Annual real rate of return	4%	218,928	144,769	76,626	28,312
	5%	397,863	256,261	131,563	47,282
	6%	720,551	451,790	224,864	78,589
	7%	1,300,442	793,340	382,621	130,017

To be honest, I look at that and it’s pretty good as well isn’t it? Even if you’ve got teenage kids the magic of compounding can do some extraordinary things can’t it?

For transparency, to make the maths easier I’ve taken the same assumptions at the start. So this is assumes that £1,095 (£3 x 365 days) goes into the pension as a lump sum every year (including their 18^th year).

Conclusion

What should be clear from this is that there is no answer on saving for kids that’s right for everyone. Your finances may be in a different place. You may see the future very differently. You may have an entirely different view on how best to raise your children. That is, or course, entirely reasonable. Everyone’s circumstances are different and so we all have to work our what’s right for us.

You’ll also notice that I’ve not given a lot of practical information detail of how to do any of this. That’s not my forte to be honest. But, if you pop over to Monevator’s site, Mr YFG has done a post that complements this one and goes through all of that and more.   It also, as always, has some great comments.

There may have been people reading this post with increasing incredulity. What I’ve written about here is the definition of a first world problem. I realise that having the money to be able to even consider this is an amazing place to be in. My intention is absolutely not to show off or to make people feel bad. What I hope is to provide some food for thought for people with kids, or who may have kids in the future.

From my side I’m not entirely sure that saving for kids like this is the right thing to do. However, we’ve made the call that we should start and keep thinking about it. If we change our minds then the worst that will happen is that our kids will have a small pot of money for their future. As someone said to me when we had our first child: If, on average, you’re getting more things right than you’re getting wrong then you’re winning.

Thoughts?

What do you think about saving for kids?  Do you save for your children’s future?

How do you hit the balance between helping them out and helping them be independent?

What are your views on setting up a pension for your children?

Have I got my maths and government top up right in my child millionaire section?

 

*UPDATED to correct the numbers to be in 2019 pounds and at 3% inflation.  But run your own numbers – don’t trust me.  Many thanks to indeedably for helping me.  All mistakes are all on me.

Also to reflect the excellent point made by The Rhino in the comments*