Re: My daughter is a millionaire
 

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Or at least that is the plan. She is 8 months old. I just bought her a $10k Vanguard variable equity/bond annuity, and by the time she reaches age 65, it should be worth around $1M in real terms (assuming the markets cooperate and inflation doesnt go crazy). Clever plan, no?

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Nope. Assuming 3% in annual inflation, this means you are assuming around 11.4% in annual return from an equity/bond annuity, after fees. Will never happen. At best you will see 8-9% annualized, or 5-6% after inflation, and end up with $440,000 in real money. Or worse given the forced insurance associated with annuities.

And why do you say "equity/bond" annuity. The moment you put bonds into the mix you are lowering your long term expectation. If you have such a long time horizon, I'm assuming you know to stick it all into an index fund?

In the end you'd might do better for her putting her in the total stock market index or some other index. You save .3%-.4% a year in annuity costs, and an index fund is almost as tax efficient as an annuity and has no 10% tax hit for early withdrawals.

But if you have to do an annuity, you've picked the right place, Vanguard's costs are very low. As has already been pointed out, add a thousand or so a year and you'll hit your goal pretty easily.

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Check your math. The Vanguard Balanced annuity (60-70% equity, remainder fixed income) has been around since 1991 and has returned 10.5% net of fees; inflation in the US has been historically 3%. In 65 years, this 7.5% real return compounds to 110x the original contribution, or $1M+

Think the return is too aggressive because the last 20 years have been atypical? No matter, I'm planning to make $10k contributions annually for the indefinite future. An additional $10k (contributed early) lets me hit the same $1M+ nut with a 1% lower rate of return.

Re: My daughter is a millionaire
 

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And why do you say "equity/bond" annuity. The moment you put bonds into the mix you are lowering your long term expectation.

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Also, this statement is totally wrong.

Re: My daughter is a millionaire
 

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Or worse given the forced insurance associated with annuities.

In the end you'd might do better for her putting her in the total stock market index or some other index. You save .3%-.4% a year in annuity costs, and an index fund is almost as tax efficient as an annuity and has no 10% tax hit for early withdrawals.

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The annuity is the perfect vehicle for this, because it is 100% tax efficient. No federal/IRS paperwork is generated. There are not filing/accounting fees associated with annuity ownership.

The only thing that even comes close is buying an ETF, but the problem with that solution, is that I won't be able to rebalance to a constant equity/fixed income ratio without incurring capital gains. (Rebalancing of low correlation assets = lower std. deviation for same return, at certain points on the risk/reward curve.).

Most importantly, the variable annuity (unlike the ETF/index fund, is invisible to her. Im not planning to tell her about this fund at all. I've written a letter that is sealed, and stored it with our wills, and the letter has instructions that it is to be opened upon the death of the second parent.

Hopefully, that will happen a long long time from now, at which point in time she will be mature enough to not do something stupid like raid it for beer money, or trade it around looking for the next internet bubble.

Re: My daughter is a millionaire
 

Contributing 10k annually to your daughter's retirement is a really friggin nice gesture. I oughta leave that post up on the computers my mom and dad use [img]/images/graemlins/tongue.gif[/img]

Re: My daughter is a millionaire
 

Unfortunately, if you're old enough to play poker and use a computer, it is too late. This plan requires early action to work. You can't afford to lose even a single doubling cycle (i.e., 10 years). Of if you do lose a doubling cycle, you need to double the size of the initial investment.

How can I deprive my daughter of security in her old age, when I probably blow $10k a year on absolute crap?

Re: My daughter is a millionaire
 

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Unfortunately, if you're old enough to play poker and use a computer, it is too late. This plan requires early action to work. You can't afford to lose even a single doubling cycle (i.e., 10 years). Of if you do lose a doubling cycle, you need to double the size of the initial investment.

How can I deprive my daughter of security in her old age, when I probably blow $10k a year on absolute crap?

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I don't need a million real as a gift, I would still appreciate 10k a year to invest. The age of the recipient doesn't negate the "frikkin nice"ness of the gesture : )

Re: My daughter is a millionaire
 

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And why do you say "equity/bond" annuity. The moment you put bonds into the mix you are lowering your long term expectation.

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Also, this statement is totally wrong.

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Historically, it hasn't been wrong.

Re: My daughter is a millionaire
 

not sure how well you are off, but this might be better used as tuition money?

Re: My daughter is a millionaire
 

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The only thing that even comes close is buying an ETF, but the problem with that solution, is that I won't be able to rebalance to a constant equity/fixed income ratio without incurring capital gains. (Rebalancing of low correlation assets = lower std. deviation for same return, at certain points on the risk/reward curve.).

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Any fixed income you add is going to lower your returns... rebalancing bonus is not going to overcome the equity risk premium.

Re: My daughter is a millionaire
 

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The annuity is the perfect vehicle for this, because it is 100% tax efficient. No federal/IRS paperwork is generated.

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By this you mean gains aren't taxed until withdrawn right?