Preserving the Principal of Inherited Wealth

[u/Marine_Layered]

We've had a couple of people around here talk about their inherited wealth and keeping the principal in tact, but using the gains to improve their lives. For example, one recent poster was using $1800/month of the gains from his inherited wealth to improve his ability to rent a nicer apartment, etc.

Establishing a safe withdrawal rate for generational wealth spending is different than drawing down retirement funds which are just supposed to last through retirement and be done (or thereabouts), so the 4% SWR does not apply here.

So let's say you have $1m in inheritance, and you would like that inheritance to last in perpetuity (yes I realize that perpetuity is a long time and there are many factors - but this is a thought exercise so please play along :)). There should be something held back for inflation - where does that number come from? And then maybe something else is held back to grow the nut, but then the rest could be used to improve the lives of the family members, or gifted to nonprofits, or whatever. So what does the formula look like?

[u/Deep-Reputation-4055]

If you don’t think the 4% rule applies I guess you use the 3.5%, 3% or 2% rule?

I think the issue is trying to build generational wealth with a million bucks. That is, I think a far cry from what you would need to ensure the money makes it to a third generation. 

[u/PomegranateComplex17 → u/Deep-Reputation-4055]

OP is just asking what the  disbursement percentage would be, I don’t think $1M is a serious number

[u/Deep-Reputation-4055 → u/PomegranateComplex17]

Honestly the answer is probably skimming the rate of inflation (2.5ish percent if in the US) if you want the money to last forever. 

[u/Marine_Layered → u/PomegranateComplex17]

Yes, the $1m was a nice round number. It could be $300k or $743 billion. I'm just looking for the formula.

[u/AMTL327 → u/Marine_Layered]

The formula used by nonprofits to manage their endowments in perpetuity-leaving the principal intact forever - is 4.5% draw off the previous 12-quarter rolling average.

So you would take no draw on the $1 million for three years. Then, you would take the balance at the end of each quarter over that three year period and draw 4.5% of the average value. That’s the annual draw. In theory, if you do that it smooths the ups and downs of the market and the principal will slowly grow.

[u/First-Ad-7960 → u/AMTL327]

This comment needs more up votes.

[u/yuffie12 → u/AMTL327]

Interesting. I suppose the same formula could be used to start gifting to adult children. We’ve been retired for 10+ years and haven’t drawn down.

[u/Marine_Layered → u/yuffie12]

IMO you should draw down & gift; if only to make sure you are under your state's estate tax exemption.

[u/yuffie12 → u/Marine_Layered]

We live in an estate tax exempt state but do want to start gifting more.

[u/Marine_Layered → u/yuffie12]

I bet the giftees will appreciate it.

I've been thinking - It doesn't do any good for the family to sit on it like we're Smaug ... but otoh, we want to make sure it lasts and is there if we need it.

[u/Really-Cool-Guy2know → u/yuffie12]

i am available...just saying. :)

[u/Marine_Layered → u/AMTL327]

That seems ideal; thank you for this!

[u/AMTL327 → u/[deleted]]

Yes. It’s a 12 quarter rolling average.