Leave a Living Legacy: A Little Now = A Lot Later

Let me start by saying that I am not a big fan of creating a plan to pass wealth to family members (or others) after death, except in cases of actual need. Too often, the expectation of a future inheritance has led to negative consequences and the knowledge of an impending windfall suppresses ambition. People have even been known to kill for money.

Alfred Nobel, explosives magnate and creator of the famous awards that bear his name, regarded “large inherited wealth as a misfortune, which merely serves to dull men’s faculties.”

Also, unless you’re seriously wealthy, there is no way to know if you will even be in a position to leave your family much money after your death. So instead of wasting a significant amount of time and money planning for a post-mortem legacy, why not start creating a truly valuable retirement legacy for your younger family members today.

Looking back, wouldn’t it have been nice—when you were young and working your first jobs—if family members pooled the money used for gifts of clothes you never wore or electronics that quickly became obsolete and instead put $500 in an individual retirement account (IRA) set up for you.

Assume that $500 worth of annual gift money was invested in an IRA using Vanguard’s S&P 500 index fund starting in 1977 and every year for the next 10 years. The value of the investment at the end of 40 years would be about $165,000, assuming an 11 percent average annual return.

Today, $2,000 in annual gifts is the inflation-adjusted equivalent of $500 in 1977. So, if you arranged for combined gifts into a Roth IRA of $2,000 per year for just 10 years, and assume a 7 percent hypothetical average annual return, in 40 years your family member would have almost $270,000 in their tax-free Roth IRA.

How should you go about creating this immediate legacy plan? First, open a Roth IRA account. Do not do this with a bank, broker, or insurance agent! The high fees and commissions they charge will erode much of the future growth. Use only pure no-load, low-fee, passive (not actively managed) mutual funds. For most investors, the best options are funds from Vanguard.

Since most of your gift recipients will be younger, it makes sense to invest in the one asset class that has topped the rest in long-term returns—stocks. Your young loved ones certainly have the time to ride the ups and downs of the global stock market. Because diversification practically eliminates the risk of total loss, I’d suggest a globally diversified index fund from Vanguard.

If you plan to invest more than $3,000 initially, consider opening an account with Vanguard and investing in Vanguard Total World Stock Index fund (VTWSX). Those starting with smaller amounts can avoid the account minimums by using Vanguard’s almost identical ETF (exchange traded fund), symbol VT which only requires the purchase of a single share (currently around $70). You can quickly set up a no-fee Roth IRA (with electronic statements) at vanguard.com.

In addition to providing your loved one with some future peace of mind, your living legacy of a Roth IRA can provide a powerful example to encourage additional retirement savings, further improving their future prospects.

The host of the nationally syndicated Don McDonald Show for over 20 years, Don now co-hosts Talking Real Money with Tom Cock on Seattle’s KOMO radio Saturdays at noon (talkingrealmoney.com). Don also publishes the investing magazine, real investing journal (realinvestingjournal.com).


Fine Print:

Past performance is not indicative of future returns and the value of investments and the income derived from them can go down as well as up. Future returns are not guaranteed and a loss of principal may occur. The material in this presentation is based on information from a variety of sources we consider reliable, but we do not represent that the information is accurate or complete. The material provided herein is for informational purposes only.

DISCLAIMER FOR HYPOTHETICAL RETURNS. All returns presented are hypothetical and back-tested. Hypothetical returns are net of estimated advisory fees and transaction costs; all dividends are assumed to be reinvested annually. Actual returns from live portfolios may differ materially from hypothetical returns. There is no substitute for actual returns from a live portfolio. PAST HYPOTHETICAL PERFORMANCE IS NOT A GUARANTEE OF FUTURE RETURNS.

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