First, let me address the difference between this generation (millennials) and my generation (baby boomers) by sharing the story of my first job after graduating with a degree in Economics in 1987.
My first job was selling trucking services for a company called Inter City Ttruck Lines in Montreal. My first year pay was $26,500. In today’s dollars this would be close to $75,000 as a starting wage. I had $9,900 of student debt (almost $40,000 in today’s dollars). But the day I started working, I had something today’s generation doesn’t have anymore: a company pension plan. y employer and I were paying into this pension plan right away, which means I had the freedom to spend my money and still have a retirement pension.
Today’s generation and my kids won’t have a company pension plan. They will have whatever they can earn and save. This is why, when my daughter was born, I began to save for her future pension plan from her first year of life.
So let’s do the math. Let’s say you start saving $200 per month from the day your child is born to age 18, and then he or she continued saving on their own up to age 50. If you built a bond or GIC ladder ( I’ll explain this in the next blog question) that will pay you a compounding rate of only 4%, your child will have $374,292 at age 50.
If your child starts the same savings plan at age 18 (which isn’t likely unless you teach them young how to save) he or she would have saved $153,724. Wow, what a difference a 18 years makes.
The first 18 years of their life spent not saving for his or her future is worth $220,000 to them. Now, I know what you’re thinking: where will you find a 4% constant today? But that’s not the question. The question is where do you save it. In a bank account? Income taxes must be paid every year. In an investment account, like stocks and mutual funds? Income taxes, capital gains taxes, plus the risk of the market dropping in value and losing the money.
How about a TFSA (tax free savings account) for your child? Wait, they can’t have their own TFSA until they turn 18. So for the first 18 years of your child’s life, you will either not save for their future or risk the money on the stock market, pay up to 3% in management fees, taxes on any gains and possibly even lose the money with the wrong investment.
That’s when I learned about a little known life insurance plan which allowed me to open a plan for my child as early as 14 days old,and use it as her tax free savings account. The plan is called “Participating” whole life insurance, which I called Child Plan since, after all, it’s for my child. From the moment I opened the Child Plan my daughter will receive a tax free annual dividend for life from the life insurance company, it would grow completely tax free and I can transfer it to her anytime after she turns 18, completely tax free.
The best part is all I have to do is take the tax free government gift called Canada Child Benefit and contribute $200 per month until she’s 20 and the plan from that day on is completely paid for. I won’t and she won’t ever have to contribute one more dollar again. And how much wealth did I build for her future with this little investment plan? A sum of $449,993, which will be totally tax free when she’s 50, with no fees and no risk in the stock market. The best part of the Child Plan is: she can use the cash over and over again when pursuing any education program, when buying a home, or for her own pension plan when she retires. She can use this Child Plan for any financial need in life. No strings attached.
This is the TFSA I set up for my daughter when she was born to build her future wealth.