What if your kids could have their retirement significantly funded before they graduated from high school? An impossible dream? Maybe not.

Consider the following scenario: your son or daughter has $3,000 saved by age 18 and invests it using SMI’s Sector Rotation strategy. (With time on their side, young people can afford to be super aggressive with their investments.) If SR continued generating the +17.45% annualized return it has produced since SMI launched it in 2003, by age 70 their account would be worth nearly $13 million!

Of course, $13 million will only go so far in 2070. But after factoring in a 2.5% average annual inflation rate, that’s still the equivalent of over $3.5 million in today’s dollars — far more than the typical retiree accumulates during a career. And this assumes they never add another penny beyond the initial $3,000 investment.

Uncommon financial freedom

Imagine the flexibility this would give your kids. With their retirement savings largely done even before they get their first full-time job, they would be free to save for other goals, such as a house or their own business. Perhaps they’d feel freer to pursue a career in full-time ministry — or at least be inclined toward greater generosity in their giving. If they get married, there might be less pressure for both spouses to work, providing more flexibility in child rearing.

Where will they get that savings?

In one of my favorite Saturday Night Live skits, Steve Martin and Amy Poehler play a husband and wife trying to figure out how to get out of debt. Suddenly, an infomercial announcer appears, promoting a new debt management program called, “Don’t Buy Stuff You Can’t Afford.” One of its recommendations is to buy things with savings. Looking very confused, Martin’s character says, “And where would you get this saved money?”

Where would your kids get $3,000 by age 18? If they’re very young, just banking a healthy portion of what they receive from relatives each birthday or Christmas may get them most of the way there. If they’re older and receive an allowance, have them set aside 50%. By their teen years, earning opportunities expand dramatically as babysitting and eventually part-time jobs become available.

The key is to get them saving early and often, allowing their long time horizon and ultra-high risk tolerance to combine to produce incredible long-term compounding. There are great benefits to having children save their own money (as we’ll explore shortly), but this is also a great opportunity for parents or grandparents to be creative, perhaps by matching a youngster’s contributions in an effort to ingrain the saving habit and expand their starting investment capital.

Which broker to use

In the Bell household, our three kids — ages 10, 12, and 14 — have custodial accounts at Schwab. We chose Schwab because there’s no minimum amount required for opening an account. In addition, with some of the funds used in Sector Rotation, the minimum required initial investment at Schwab is just $100 (at Fidelity it can be as high as $15,000!).

Yes, they may run into some transaction fees or commissions. For example, purchasing a non-NTF mutual fund at Schwab costs $76. As a workaround when these accounts are still small, if a transaction-fee fund is recommended we’ll buy the highest-ranked ETF instead for only a $4.95 commission. Even that can represent a high percentage of their investment, so we plan to cover their commissions early on.

Transition to a Roth

As soon as our kids have earned income (from babysitting, mowing lawns, etc.), we plan to open Roth IRAs for each of them and begin transferring the money from their taxable accounts to those IRAs. (Investing in an IRA generally requires the account holder to have “earned income” as defined by the IRS.) That way, all of the money eventually will be available to them tax-free.

Keys to success

The success of this plan largely hinges on the child’s commitment to follow the plan for the next 50+ years. As the balance grows, the temptation to tap those funds will likely grow as well. While you might control the account initially, it won’t be long until the money is legally theirs. As a parent (or grandparent), this gives you a relatively short window to impress upon them the importance of leaving that money alone!

This is a great opportunity to ingrain right from the beginning the idea that these Roth accounts are retirement-only accounts. To drive this point home, consider helping them set up other savings/investment accounts for other goals, such as saving for college.

Learning by doing

We’ve seen rapid benefits from having our kids invest their own money. Recently, our 14-year-old wanted to review his account online. There he saw many unfamiliar terms, such as “unrealized gains” and “cost basis.” He was sincerely interested in understanding what such terms meant. I doubt he would have been as interested if I had just brought those topics up without him having his own money invested.

That same night, our 10-year-old surprised me by handing over $100 and asking me to add it to her investment account. She had saved up her entire summer’s worth of allowances and had recently received money for her birthday. We’d been discussing investing quite a bit recently and apparently she got inspired!

While our kids’ early returns have been positive, I’ve been reminding them that the market doesn’t always move upward, and Sector Rotation is an especially volatile strategy. They may understand this theoretically at this point, but going through some actual market downturns while their personal stakes are still low should help build the emotional fortitude they’ll need to be successful long-term investors.

Realistically, it’s unlikely (though not impossible) that the savings a child accumulates by the end of high school will completely eliminate the need for them to save further for retirement as an adult. But if this approach provides enough of a head start to enable a young person to postpone saving for retirement while their own kids are young and money is tight, that’s a huge win in itself. And the investing lessons they are likely to learn through their experience will put them far ahead of the typical investing curve, which will serve them well for the rest of their lives.