First, future returns of 12% aren't assured. Not by a long shot. (That's why this investment is best made with money that won't be essential for Brendon's future welfare.)
Second, by the time Brendon is a young adult he will figure out that he has a lot of money, and he will have to resist the temptation to spend it.
Third, it's extremely unlikely that today's tax laws will remain unchanged for the next 95 years. Congress could very well find ways to tax accumulations of wealth inside Roth IRAs.
Fourth, Brendon might someday have to relinquish half the account in a divorce.
Fifth, the elephant in the room, so to speak, is inflation. A withdrawal of $237,281 sounds like a bucket of money at age 65. But I can almost guarantee you that a dollar in the year 2080 won't be worth the same as it is in 2015.
Assuming future inflation of 3% inflation, in today's dollars, Brendon's account at age 65 would be worth $694,821, and his first withdrawal would be worth $34,741. (That seems much less spectacular than the previous numbers I cited, but in real purchasing power, that single withdrawal has more than 11 times the real value of your entire $3,000 initial investment.)
At the end of his life at age 95, Brendon's annual retirement withdrawals would total about $1.83 million, and his account would be worth about $1.84 million.
There, in "real" dollars, is the payoff: $3,000 becomes $3.6 million.
Brendon doesn't have to do much to achieve this result, except for probably paying some taxes along the way. Presumably he will have discretionary income to invest in his own retirement account. That plus (if he is lucky) Social Security and other savings may meet most of his retirement needs.
That means the small-cap value account may be available to him for "extras." And it also provides a very generous pool of money ($1.84 million in today's dollars) for him to leave to his heirs.
Starting with $3,000 when Brendon is born isn't the only way to achieve results like this.
You could invest $365 a year for the first 21 years of Brendon's life.
You could invest $365 a year until Brendon is 21 and rely on him to continue that until he's 64.
You could make an initial investment of $3,600 when Brendon is 21 and then count on either you or Brendon to continue adding $3,600 every year until he's 64.
Or you could wait until he's 25, invest $5,500, then count on him to add that same amount every year until he's 64.
In each of those scenarios, the total of withdrawals plus ending values come out about the same, ranging from $52 million to $59 million.
However you do it, this scenario illustrates how a very-long-term approach can create opportunities for future generations in a family. And, of course, it's not necessary to start with $3,000. Even a $1,000 initial gift can yield very rewarding results over a long lifetime.
Think of this as Einstein on steroids.
This topic has many facets. For readers who want to dig into the details for more information, I've prepared a page of links to three files that contain year-by-year hypothetical data showing how the plan I have outlined could work.
In addition, I have recorded a podcast called How to turn $3,000 into $50 million. This presentation outlines all the steps that parents and grandparents should consider in setting up this amazing strategy.
Richard Buck contributed to this article.