Earning to Give - how much to give?

[schoenbauer]

Hello dear board members,

I recently read an article about the Earning-to-Give philosophy (wikipedia + interesting TED talk).

So let's say I set up a foundation and decide to use only dividends and interest for donation purposes. I do not sell any shares/bonds etc. Of course I want to do more good each year. So I will reinvest a good portion of the earnings every year. But is there an optimal solution of how much I should invest and how much I could take out for donation purposes? What is the optimal ratio of reinvestments/donations. Is there such an optimal ratio? It doesn't seem to me that there is such a thing....but maybe I'm wrong?

I thought to reinvest more than I donate, but that is also a some what arbitrary conclusion/decision.

[velocistar237]

Sounds like similar issues to deciding a withdrawal rate. A WR of 4%/year would mean a good chance of your principal lasting forever and more likely than not growing to a much larger amount. Less than 4% would mean lasting even longer, and more than 4% would mean less growth and a greater chance of going to zero. Because you don't have to survive on the money, you can make adjustments more freely to make it last, perhaps even going to 0% withdrawal in some years.

Optimality is always relative to some metric, which you need to choose. Once you do choose a metric, like maximizing median NPV of donations over the next 25 years, figure out how to run some simulations, and pick a withdrawal method accordingly.

[Emg03063]

Your question appears to assume that maximizing the net present financial value of your donations is optimal, but you should really be concerning yourself with the effectiveness of your donations, rather than their size.  There are plenty of causes time sensitive in nature (climate change being just one, stopping spreads of diseases, etc), and its one of the reasons the Gates foundation plans to spend itself out of existence rather than existing in perpetuity.  As velocistar237 said, you need to pick your metric, but what causes are important to you, and when in time your money can be spent most effectively by the organizations working on them should factor in heavily.

[markum9]

In order to not pay taxes on your earnings, you would need to apply to the IRS for tax-exempt status. Typically there are two options: (1) status of a private foundation. With that, you will be legally required to distribute 5% of the total value of the endowment each year. This is generally calculated on a three-year rolling average. If you meet that 5%, you will still owe a 1% excise tax on your earnings. If you don't meet the 5% payout requirement, you will have to pay a 2% excise tax on your earnings. (2) status as a public charity. No annual payout requirement, but you'd have to receive donations (at least 33 1/3% of total income) from external donations. If you don't meet that requirement after five years, your organization would convert to private foundation status and the above-mentioned payout requirements. Unless you have a relatively enormous sum of money, I would suggest contacting your local community foundation and exploring creating a donor-advised fund. Then you could make annual (tax-deductible) donations to your fund and the community foundation would charge a relatively nominal administrative fee.