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Maximizing Your Children's Future: Set retirement fund for children and Leverage Compound Interest

Updated: Feb 25

The current economic climate presents major challenges for consumers in South Africa, and an improved savings culture may not be on the minds of many, especially when the country's savings rate is 18% of GDP. However, the rate has since climbed from 5.4% in 2016, so the culture is slowly changing.

So, how do we change these figures and address the low propensity to save? An early-age introduction of financial concepts, such as retirement planning and budgeting, may be one of the best solutions needed to improve our savings rate and reduce dependency on the state.

Let's discuss setting up a retirement annuity (RA) for your children.

mom and kids working together


Before we jump into discussing retirement annuities for your children, you need to give some credit to how much those little (or big) ones know about handling money. Start the process of saving for your children by initiating a conversation with them about the topic, and establish learning markers for preschoolers, pre-teens, and teenagers. A blog by an investment management firm in the U.S. tells us that five-year-old's can understand terms like "savings," "goals," "banks," and "trade-offs." At age ten, children can understand concepts like "time horizon," "loans," "interest," "inflation," and "taxes." By age 15, more complex definitions like "stocks," "bonds," "asset allocation," and "diversification" should have entered the lexicon. As parents, you can guide your children towards understanding these important terms and showing them how they can secure their own financial path from a young age.

You will be surprised how much a toddler will love a money box and learning that certain age-appropriate chores earn them a coin or two. Later on, having a bank account like mom and dad adds more incentive as they discover the value of money and the responsibility of managing it.

Of course, educating children about money is not just a case of philanthropic parenting; it also forces parents to take responsibility for their own finances, which helps take the pressure off of younger generations in years to come. In the meantime, while your children discover the importance of saving on their own terms, give them a push in the right direction by investing on their behalf for a brighter and more secure future.

child saving with a piggy bank


While the idea of investments, with exposure to underlying asset classes such as equities, property, bonds, and cash, may be daunting to some, you don't need a fortune to start investing in your child's future.

You can invest in a retirement annuity in your child's name from R200, depending on the institution you are dealing with. This way, you could gift your child with multiple years of compound growth.

One of the providers supported by Wallstreet Financial Services offers a retirement annuity for children with a starting premium of only R200 per child. The parents or guardian pays the premium on the child's behalf, and the child is the owner and life insured of the policy.

Let's take a look at an example of the value of a retirement annuity fund for your child.

Below are approximate figures if you were to start a retirement fund for your child with a starting premium of R200 escalating by 5% over a period of ten years:

(Remember, this is just an example, terms and conditions apply).

illustrative value

The output result after ten years is R48,785. If you were to leave this amount in the fund without further monthly contributions, then the result would be a total of R2,207,973.00 after 40 years.

illustrative values calculation

Having a retirement annuity for your child also presents tax benefits for the contributing parent, which can be passed onto the child when they take over after the age of 18. Better still, some providers offer a wealth bonus which depends on the term that the client is invested. A wealth bonus could add an additional percentage of up to 110%.

child and mom hands with money


The sooner you start contributing to a RA for your child, the more they will have available to them in the years to come. It is never too late to start a retirement annuity for your child, even if they are a teenager.

If you want to build a better future for your children, then contact Wallstreet Financial Services to discuss the options of retirement annuities on their behalf.


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