Your Money

Next Government’s newborn savings plan for newborns needs to aim higher

A ‘conservative’ interest rate of 4% was noted in Fine Gael’s election manifesto for the savings out to age 18 but the S&P has performed much better than that over long time frames

Are the leaders of the new Coalition being too conservative with their proposal for a savings scheme for newborns in the programme for government? Photograph: Sasko Lazarov/RollingNews.ie
Are the leaders of the new Coalition being too conservative with their proposal for a savings scheme for newborns in the programme for government? Photograph: Sasko Lazarov/RollingNews.ie
Proinsias O'Mahony's picture
Proinsias O'Mahony
Sat Jan 18 2025 - 06:15

The programme for government promises to explore a “managed savings account for newborns with an initial once-off contribution by the State, ensuring lower-income families benefit most”.

The wording echoes Fine Gael’s proposal to give €1,000 to most newborns, with families receiving child support payments getting €1,500, and parents being allowed to add up to €2,000 annually to the savings account.

A “conservative” interest rate of 4 per cent, noted Fine Gael, would result in the account reaching €53,316 by the time the child turns 18.

But why be so conservative?

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An interest rate of 7 per cent would result in an account value of €71,348. Indeed, even that looks conservative, when one considers the S&P 500 has averaged annualised returns of 10.5 per cent over the past 20 years; 10.8 per cent over 30 years; 11.6 per cent over 40 years; and 12.2 per cent over 50 years.

Obviously, many international markets fared less well, and future long-term returns may be more modest. Still, if you’re locking your money away for 18 years, you should be looking to profit via cheap, globally-diversified index funds.

There is a cost to caution. Studies show people don’t grasp the magic of compound interest, resulting in them failing to adequately save for retirement. Note that a €10,000 investment compounding at 9 per cent annually will grow to €56,044 after 20 years; €132,676 after 30 years; €314,094 after 40 years; and to €743,575 after 50 years. Encouraging people to save is all very well, but we should also focus on saving smarter.

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