It seems like Baby Bonds are in the news. I’ve been reading at Dollar Roller and Money Smart Life. The idea seems to be that the government would open a $5,000 account for every newborn baby in the US. The money would grow and mature at the child’s 18th birthday. Through the power of compounding interest, this money could be used to pay for college or buy a home.
I love the idea. In fact, I loved it enough to propose the lazy man’s trust fund nearly a year ago. In my plan, the idea is to put $10,000 away and use it for child’s retirement. My rational is that this gives more time for interest to compound. The result is that it the initial $10,000 can cover a good portion of retirement expenses – even when you account for inflation, taxes, and investment fees.
I’m not sure I like the government’s version of the baby bond though. Where does this $5,000 come from? It has to come from raised taxes or a higher US deficit (which is already far too high in my opinion). How is the money going to be invested? If it’s safer bonds, I wonder how much buying power would be left after inflation, taxes, and administration/investment fees. I can’t see that much left over. It almost becomes the same problem that Social Security has. The funds don’t grow enough to make up for the growing number of people to take advantage of it.