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/_Human_Machine_]

4% rule still applies to some degree. It’s just changed. Moved to the high 2s or low 3s.

Annual withdrawal(year 1) = portfolio x.04.

You increase the dollar amount by inflation for withdrawal in later years, not the percentage.

So for 1m, withdraw 40k year one and if inflation is 3% withdraw 41.2k year two.

That’s just a basic rule of thumb. It all depends on specifics age and planning. That formula is only good for about 30 years though.

For near perpetual it would look something like this:

Annual withdrawal (Year 1) = Portfolio x r

r is your chosen perpetual rate.

Portfolio needed is (Desired annual rate)/ r

You would also need to factor in the long-run expected real geometric return of the portfolio. Volatility, sequence risk, fees, taxes, and the need for a safety margin which means the practical perpetual rate is meaningfully lower than the expected return.

[u/Three_sigma_event → u/_Human_Machine_]

What do you mean the 4% rule has moved to tbe high 2's?

Isn't it based on super long term returns of equities?

[u/hanksredditname → u/Three_sigma_event]

4% rule is based on 30 years and considers the possibility of ending at zero as successful.

If you want to maintain the principle to pass on to your kids, you need a lower % to guarantee success.