The programme for government promises to explore a “managed savings account for newborns with an initial once-off contribution by the State, ensuring lower-income families benefit most”.
The wording echoes Fine Gael’s proposal to give €1,000 to most newborns, with families receiving child support payments getting €1,500, and parents being allowed to add up to €2,000 annually to the savings account.
A “conservative” interest rate of 4 per cent, noted Fine Gael, would result in the account reaching €53,316 by the time the child turns 18.
But why be so conservative?
An interest rate of 7 per cent would result in an account value of €71,348. Indeed, even that looks conservative, when one considers the S&P 500 has averaged annualised returns of 10.5 per cent over the past 20 years; 10.8 per cent over 30 years; 11.6 per cent over 40 years; and 12.2 per cent over 50 years.
Obviously, many international markets fared less well, and future long-term returns may be more modest. Still, if you’re locking your money away for 18 years, you should be looking to profit via cheap, globally-diversified index funds.
There is a cost to caution. Studies show people don’t grasp the magic of compound interest, resulting in them failing to adequately save for retirement. Note that a €10,000 investment compounding at 9 per cent annually will grow to €56,044 after 20 years; €132,676 after 30 years; €314,094 after 40 years; and to €743,575 after 50 years. Encouraging people to save is all very well, but we should also focus on saving smarter.
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