In 1997, the author of this proposal, who hosts a national, award-winning radio show on personal finance, took a call from a listener, “John from Manassas.” John said his wife just gave birth and John wanted to know how to save for his son’s future.
The host assumed John meant saving for college, but John interrupted, saying he was interested in saving for the baby’s retirement.
The host was surprised. “No parent saves for a baby’s retirement,” he declared. “It’s difficult enough to save for college!” But he agreed that John had a point. So, while still on the air, the host used his calculator to see what the future value might be of $5,000 if invested for 18 years. At a 10% annual return (the average annual return of the S&P 500 Stock Index since 19269), $5,000 would grow to about $28,000. “That’s not enough to pay for college today, let alone 18 years from now,” the host lamented.
But then the host set the timeframe to 65 years. The result, he announced: $5,000 turns into nearly $2.5 million. Immediately, the host saw John’s genius. The power of compounding over six decades accomplishes something that shorter periods cannot achieve.
But the host also realized two obstacles were in John’s way. The first, he explained to his caller, is taxes. Income taxes would dramatically reduce the future value of the account, and estate or gift taxes could be incurred de- pending on how the account was structured.
The second problem is human nature: an account named for a newborn would have to be given to the child upon legal age – 18 or 21, depending on the state where the child lives. As the host joked with John, “At that point, the only question is, ‘What color is the Corvette?’” Indeed, throughout their adulthood, the babies would find many tempting reasons to raid the account – making it highly unlikely that any of the money provided at birth would remain untouched until retirement.
Still the host knew John was on to something. So he promised John he’d work on the idea. “We need a vehicle that lets the money grow on a tax-deferred basis while preventing access until the child reaches retirement,” the host said.
Two years (and lots of lawyers) later, the host introduced the solution: a variation of a Crummey Trust, with contributed funds invested into a variable annuity. The host was awarded two patents (6,064,986 issued May 16, 2000, and 6,085,174 issued July 4, 2000) for these innovations, and today more than 4,000 children are beneficiaries of these unique trusts. If all goes as planned, each of these children will retire with millions of dollars – thanks to one-time gifts of $5,000 from their parents or grandparents.
But few Americans – and certainly not those living in lower-income households – have the financial means to give $5,000 to each of their children or grandchildren. This is why the inventor reimagined his program, first as TFA as noted above, and now as RISE.