Author Topic: 100 year SWR  (Read 3820 times)

REatc

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100 year SWR
« on: November 09, 2020, 04:30:22 PM »
I have been thinking recently about generational wealth. I plan to read more books on the subject and see how a few massively wealthy families have kept their wealth in the family for generations and still are the wealthiest families in the world. I have been trying to research withdrawal rates for at least 100 years, and how endowment funds decide their withdrawal rates. The S&P 500 average dividend rate over its lifetime has been almost 2%. Maybe that is a good starting point? Anyone have better information what SWR would work for at least 100 years?

bmjohnson35

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Re: 100 year SWR
« Reply #1 on: November 09, 2020, 06:55:07 PM »

Have you tried using one of the online FIRE calculators and simply plugged in 100 yr period?

moof

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Re: 100 year SWR
« Reply #2 on: November 09, 2020, 10:54:23 PM »
The most likely risk is that within a generation or three that spoiled kids who need not work and fail to understand the value of money will blow it, no matter how well the investments do.  No income can eclipse undisciplined spending.

habanero

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Re: 100 year SWR
« Reply #3 on: November 10, 2020, 12:49:36 AM »
The most likely risk is that within a generation or three that spoiled kids who need not work and fail to understand the value of money will blow it, no matter how well the investments do.  No income can eclipse undisciplined spending.

The first generation builds wealth, the second preserves it and the third spends it. It is the classic outcome in family businesses etc. As time goes the number of heirs increase and more and more of those have a big interest in getting their hand on the money but have zero interest in running the business.

Here is a good article on building a portfolio lasting for a 100 years. It requires an email, but any valid address will do as you don't get a download link or anything
https://docsend.com/view/taygkbn

ericrugiero

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Re: 100 year SWR
« Reply #4 on: November 10, 2020, 06:48:25 AM »
I've never read any articles that talk about 100 years.  However, the original "4% rule" was built around a 30 year traditional retirement.  I've read articles that say the FIRE movement could allow a longer retirement such as 40-50 years and that the modified SWR for those would be more like 3.5% which should be pretty much indefinite.  A small percentage change has a pretty big impact so going all the way to 2% should lead to a pretty rapid increase in wealth.  Of course, this all depends on what the stock market does.   

One thing to keep in mind is how many people you are supporting.  Right now it's a 4% SWR for you and your wife.  Potentially, If you have 3 kids, they have 3 spouses and potentially 9 grandkids between them.  The grandkids have 9 spouses and 27 great grandkids.  With this impact in mind, a 2% SWR could make more sense. 

I do agree with other people's comments about the concerns around people who are raised knowing their family is wealthy and didn't earn it themselves.  It can lead to all kinds of negative consequences.  For me personally, I want to be able to help with college and give to my kids when I think it's beneficial.  I'd also like to leave an inheritance when they are old enough to be responsible with it.  I have no desire to provide enough money that they don't need to work.  Working is an important part of growing into a responsible adult. 

habanero

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Re: 100 year SWR
« Reply #5 on: November 10, 2020, 07:22:35 AM »
Apparantly in the 1970s there was a gathering over over 100 descendants of the Vanderbilts. Not a single one of them was a millionaire.

Mr. Green

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Re: 100 year SWR
« Reply #6 on: November 10, 2020, 10:39:25 AM »
You will not find any reliable data on 100 year SWR because there simply isn't enough data. Using market data all the way back to 1871 gives you only 48 100-year periods to examine, and those start with the oldest form of our equity markets, which look the least like our markets do today. We can use data from shorter periods to infer or make educated guesses about a period as long as a century but that is the extent of surety for the question you are asking.

bacchi

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Re: 100 year SWR
« Reply #7 on: November 10, 2020, 10:57:41 AM »
I have been thinking recently about generational wealth. I plan to read more books on the subject and see how a few massively wealthy families have kept their wealth in the family for generations and still are the wealthiest families in the world. I have been trying to research withdrawal rates for at least 100 years, and how endowment funds decide their withdrawal rates. The S&P 500 average dividend rate over its lifetime has been almost 2%. Maybe that is a good starting point? Anyone have better information what SWR would work for at least 100 years?

Private family foundations have to distribute at least 5% per the IRS.

« Last Edit: November 10, 2020, 11:00:13 AM by bacchi »

Metalcat

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Re: 100 year SWR
« Reply #8 on: November 10, 2020, 11:59:59 AM »
True multigenerational wealth is a totally different creature than passing some investments down to your kids and then having it diluted and squandered after about 2-3 generations.

Big time multigenerational wealth isn't just lump sums passed down, unless each generation only has one kid, it's always going to start being split into smaller and smaller pieces.  Instead, what I think you are thinking of are extremely wealthy families with enduring business empires.

I've known a family or two like this personally, and each generation is groomed to be actively involved in the business empire, not just handed some investments and expected to sustain them indefinitely. If you look at the top wealthiest families in the US, they're all still hustling their asses off, not resting on their laurels and sitting on piles of cash. So it's not so much the wealth they're preserving as the business and business skills/network/resources that they pass down.

Even then, a lot of those empires fall apart. All it takes is one fucked up generation, like the idiot Bronfman sisters who joined a ridiculous sex cult.

I'm not sure exactly what you are looking for, but no withdrawal rate is going to guarantee that your wealth exists in 100 years.
« Last Edit: November 10, 2020, 12:23:39 PM by Malcat »

joe189man

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MaybeBabyMustache

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Re: 100 year SWR
« Reply #10 on: November 10, 2020, 01:09:03 PM »
The most likely risk is that within a generation or three that spoiled kids who need not work and fail to understand the value of money will blow it, no matter how well the investments do.  No income can eclipse undisciplined spending.

I'm also not super interested in preserving my wealth for 100 years. I don't think it's good for the kids & their future kids, & would rather donate it. I guess my larger question is what are you hoping to accomplish with focusing on the 100 year milestone?

REatc

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Re: 100 year SWR
« Reply #11 on: November 10, 2020, 01:40:58 PM »
Thank you all for your input so far.

I am not interested at all in just having a huge net worth then giving it to family when I die. I think that is how these multibillion dollar families disappear. I think it would be more valuable to help/give to kids and grand kids when I would be able to interact with them and teach them skills about life, investing. If you raise them correctly, I think that should get rid of entitlement and laziness.

The article by joe189man is along the lines of what I am thinking. Pay for schooling and all the education kids/grand kids want, give them a head start without student loan debt. And maybe give each a one time amount to either start a business or buy a house.

 The 100yr SWR thought just came about for three generations of family (each starting kids at 30). By the time the grand kids would be 30, and hopefully mature with thinking, finances, that would be the time for the past 100yr SWR to compound even with substantial giving. I think past 3 generations of money becomes more mysterious money or free money rather than grandpa saved and invested money to give you a head start, especially if I’m dead lol.

Metalcat

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Re: 100 year SWR
« Reply #12 on: November 10, 2020, 02:29:14 PM »
Hey, if you figure out how to raise kids "correctly" and write a book about it, then the residuals on that will create enormous wealth for several generations.

vand

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Re: 100 year SWR
« Reply #13 on: November 12, 2020, 11:31:46 AM »
IMO the key to dynastic wealth is not in figuring out what withdrawal rates can be supported over 100+ years, it's in figuring out how to pass down the stewardship of the family wealth down through generations of the family.

Withdrawal rates will mean didly squat and no fortune is large enough to survive for very long if the money comes into hands that do not take the task of preservation of that wealth very seriously.

Like Malcat says, it usually means getting new blood into the family business. I would would suggest that business, & real estate probably has a much longer track record in this respect that your 60/40 portfolio.
« Last Edit: November 12, 2020, 11:35:36 AM by vand »

EricEng

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Re: 100 year SWR
« Reply #14 on: November 12, 2020, 12:29:51 PM »
Geopolitics will stomp all over any 100 year plan.  World wars, country collapses, pandemics, civil war, etc.  Just look at world changes in last 100 years and it is only changing ever faster.  Also, not enough data on modern society/modern stocks to determine how stable it is.  Betting 25-30 years out?  That's reasonable.  Betting on anything approaching 100 is a fools errand.  30 years out stock market as we know it could be replaced entirely by something else.

Bloop Bloop Reloaded

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Re: 100 year SWR
« Reply #15 on: November 12, 2020, 03:23:25 PM »
The reason that multigenerational family wealth so rarely lasts is that the traits that generate wealth (intelligence, resourcefulness, self-centredness) are not heavily selected for in mates. Okay, most of us would love an intelligent mate, and many would like a resourceful one, but there are many other attributes (chiefly, kindness and attractiveness) that tend to supervene, and that have little correlation with wealth-building. So that will lead to a dilution of wealth-building power over generations.
« Last Edit: November 12, 2020, 03:25:05 PM by Bloop Bloop Reloaded »

Metalcat

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Re: 100 year SWR
« Reply #16 on: November 12, 2020, 05:22:58 PM »
The reason that multigenerational family wealth so rarely lasts is that the traits that generate wealth (intelligence, resourcefulness, self-centredness) are not heavily selected for in mates. Okay, most of us would love an intelligent mate, and many would like a resourceful one, but there are many other attributes (chiefly, kindness and attractiveness) that tend to supervene, and that have little correlation with wealth-building. So that will lead to a dilution of wealth-building power over generations.

As someone who knows A LOT of dual doctorate couples with fucking useless children, I can ABSOLUTELY tell you that it's not a mate selection issue, it's an issue that success isn't something that can be passed down either through genetics or upbringing.

Bloop Bloop Reloaded

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Re: 100 year SWR
« Reply #17 on: November 12, 2020, 07:04:24 PM »
I think people who get doctorates are too small a sample size to extrapolate at all.  Anyway, your anecdotal evidence doesn't match up to the data.

Have a look at table 2 in this paper which summarises some of the evidence
https://www.irp.wisc.edu/publications/focus/pdfs/foc272e.pdf

This is a more limited Melbourne study
https://www.researchgate.net/publication/248968592_Do_parents_make_a_difference_to_children%27s_academic_achievement_Differences_between_parents_of_higher_and_lower_achieving_students

If it were true that "success isn't something that can be passed down either through genetics or upbringing", meaning that parental genetics or parental upbringing had no correlation with positive life factors, then the corollary of that is that parental intervention programs would have no validity unless they were applied equally to all parents. The fact that we have things like lunch vouchers for poor families goes against that.

Paul der Krake

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Re: 100 year SWR
« Reply #18 on: November 12, 2020, 07:08:41 PM »
How often do you reflect on your own ancestors and are curious about their lives and accomplishments?

Metalcat

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Re: 100 year SWR
« Reply #19 on: November 13, 2020, 05:14:50 AM »
I think people who get doctorates are too small a sample size to extrapolate at all.  Anyway, your anecdotal evidence doesn't match up to the data.

Have a look at table 2 in this paper which summarises some of the evidence
https://www.irp.wisc.edu/publications/focus/pdfs/foc272e.pdf

This is a more limited Melbourne study
https://www.researchgate.net/publication/248968592_Do_parents_make_a_difference_to_children%27s_academic_achievement_Differences_between_parents_of_higher_and_lower_achieving_students

If it were true that "success isn't something that can be passed down either through genetics or upbringing", meaning that parental genetics or parental upbringing had no correlation with positive life factors, then the corollary of that is that parental intervention programs would have no validity unless they were applied equally to all parents. The fact that we have things like lunch vouchers for poor families goes against that.

Yes, I phrased that poorly.

What I meant is that having two intelligent and successful parents doesn't guarantee success and I think in the case of 1%ers that factors other than mate selection are often playing a role into why their children often aren't as successful.
« Last Edit: November 13, 2020, 05:59:14 AM by Malcat »

Bloop Bloop Reloaded

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Re: 100 year SWR
« Reply #20 on: November 13, 2020, 06:02:16 AM »
Oh for sure. Nothing guarantees success.

Steeze

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Re: 100 year SWR
« Reply #21 on: November 13, 2020, 06:21:37 AM »
Portfolio Charts on Perpetual Withdrawal Rate

https://portfoliocharts.com/2016/12/09/perpetual-withdrawal-rates-are-the-runway-to-a-long-retirement/#:~:text=Perpetual%20Withdrawal%20Rates%20Are%20The%20Runway%20To%20A%20Long%20Retirement,-Retirement&text=There's%20a%20decent%20chance%20that,prematurely%20running%20out%20of%20money.

TL;DR - 3% to 3.5% seems to take care of it depending on your allocation.

Then of course, as everyone else discussed already, your descendants need to be on board with preserving & growing the family wealth.

SwordGuy

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Re: 100 year SWR
« Reply #22 on: November 13, 2020, 06:53:37 AM »
I think it's important to re-think the question.

Do you want to support future generations FIRE style or do you want to jump-start them to do what they want?

I ask because it makes a really big difference.

Example:

To support a descendent indefinitely at $40k per year on the 4% rule, you need $1,000,000 per descendant.   As the number of descendants grows the amount of stash needed is higher and the draws on the existing stash make it harder for the stash to grow.

Counter Example:

To donate $40k to a descendant when they are born only requires a stash of $1,000,000 and a one-time draw.    That $40k goes into investments and at age 20 is worth about $154,000 or $3.2M at age 65 in birth year dollars.  That's enough to jump-start someone with an education, or a house, or a business, fund their retirement, or just blow thru without affecting the rest of the family's generational fortune.   

It's got more time to grow with fewer draws on it, especially in the early years, as you'll tend to have 16-25 years between generations before the kids start showing up.   

Anyway, food for thought.

Rhinodad

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Re: 100 year SWR
« Reply #23 on: November 13, 2020, 07:41:04 AM »
Thank you all for your input so far.

I am not interested at all in just having a huge net worth then giving it to family when I die. I think that is how these multibillion dollar families disappear. I think it would be more valuable to help/give to kids and grand kids when I would be able to interact with them and teach them skills about life, investing. If you raise them correctly, I think that should get rid of entitlement and laziness.

The article by joe189man is along the lines of what I am thinking. Pay for schooling and all the education kids/grand kids want, give them a head start without student loan debt. And maybe give each a one time amount to either start a business or buy a house.

 The 100yr SWR thought just came about for three generations of family (each starting kids at 30). By the time the grand kids would be 30, and hopefully mature with thinking, finances, that would be the time for the past 100yr SWR to compound even with substantial giving. I think past 3 generations of money becomes more mysterious money or free money rather than grandpa saved and invested money to give you a head start, especially if I’m dead lol.

I think the best generational advice I've ever gotten, was to NOT pass on money to your kids when you die (assuming a normal life expectancy), but instead pass it on to grandkids and/or great grandkids. When you die, your kids will most likely be in their 50's, if they "need" the inheritance, then they most likely haven't exactly been responsible with money, and most likely won't be going forward. If you leave it to the grandkids (in a trust perhaps), they can use it to pay off college debt, buy a house, start a business, etc. Don't leave them so much that they don't have to work though.

Metalcat

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Re: 100 year SWR
« Reply #24 on: November 13, 2020, 07:55:00 AM »
Thank you all for your input so far.

I am not interested at all in just having a huge net worth then giving it to family when I die. I think that is how these multibillion dollar families disappear. I think it would be more valuable to help/give to kids and grand kids when I would be able to interact with them and teach them skills about life, investing. If you raise them correctly, I think that should get rid of entitlement and laziness.

The article by joe189man is along the lines of what I am thinking. Pay for schooling and all the education kids/grand kids want, give them a head start without student loan debt. And maybe give each a one time amount to either start a business or buy a house.

 The 100yr SWR thought just came about for three generations of family (each starting kids at 30). By the time the grand kids would be 30, and hopefully mature with thinking, finances, that would be the time for the past 100yr SWR to compound even with substantial giving. I think past 3 generations of money becomes more mysterious money or free money rather than grandpa saved and invested money to give you a head start, especially if I’m dead lol.

I think the best generational advice I've ever gotten, was to NOT pass on money to your kids when you die (assuming a normal life expectancy), but instead pass it on to grandkids and/or great grandkids. When you die, your kids will most likely be in their 50's, if they "need" the inheritance, then they most likely haven't exactly been responsible with money, and most likely won't be going forward. If you leave it to the grandkids (in a trust perhaps), they can use it to pay off college debt, buy a house, start a business, etc. Don't leave them so much that they don't have to work though.

My step father's family did this...it didn't end well.

habanero

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Re: 100 year SWR
« Reply #25 on: November 13, 2020, 08:00:59 AM »
From what I have read about the topic passing on a large swath of money to kids so that they don't have to achieve anything in life is one of the more fail-safe ways of making their lives void and miserable. So based at the evidence on hand I have no goal of providing them with a lot even if I should have the possibility to do so which I dont know if I will in the first place. My current aim is to teach then good money habits, give them a head start in life - like providing the needed money down for an apartment or similar, the rest they should figure out for themselves.

I never got much help from my parents on the financial side, nor were they ever in a position to provide me with a lot extra, and I now make vastly more money than they ever did before retiring. 

Just Joe

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Re: 100 year SWR
« Reply #26 on: November 13, 2020, 01:02:31 PM »
Thank you all for your input so far.

I am not interested at all in just having a huge net worth then giving it to family when I die. I think that is how these multibillion dollar families disappear. I think it would be more valuable to help/give to kids and grand kids when I would be able to interact with them and teach them skills about life, investing. If you raise them correctly, I think that should get rid of entitlement and laziness.

The article by joe189man is along the lines of what I am thinking. Pay for schooling and all the education kids/grand kids want, give them a head start without student loan debt. And maybe give each a one time amount to either start a business or buy a house.

 The 100yr SWR thought just came about for three generations of family (each starting kids at 30). By the time the grand kids would be 30, and hopefully mature with thinking, finances, that would be the time for the past 100yr SWR to compound even with substantial giving. I think past 3 generations of money becomes more mysterious money or free money rather than grandpa saved and invested money to give you a head start, especially if I’m dead lol.

I think the best generational advice I've ever gotten, was to NOT pass on money to your kids when you die (assuming a normal life expectancy), but instead pass it on to grandkids and/or great grandkids. When you die, your kids will most likely be in their 50's, if they "need" the inheritance, then they most likely haven't exactly been responsible with money, and most likely won't be going forward. If you leave it to the grandkids (in a trust perhaps), they can use it to pay off college debt, buy a house, start a business, etc. Don't leave them so much that they don't have to work though.

Yeah but you better have some face to face conversations about your intentions lest your grown children feel ignored and left out. Don't leave your own kids guessing about how well you valued them.

On the subject of genes and mate choice: doesn't guarantee anything. Your offspring could be late bloomers. Different levels of motivation. Different personalities. Your children could have similar IQ even and choose a different trajectory.
« Last Edit: November 13, 2020, 01:08:00 PM by Just Joe »

Michael in ABQ

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Re: 100 year SWR
« Reply #27 on: November 13, 2020, 01:42:51 PM »
I appraised some land in a downtown commercial area that was leased to build office and retail buildings. The leases were generally around 50 years and would usually include some language to increase the rent every 5-10 years based on some form of CPI or an appraisal (the original CPI measure used in the lease from the 1970s had long since been discontinued).

That's a good way to preserve wealth and still generate income. Imagine if your family owned the land under some skyscraper in Manhattan. Your principal is secure and it generates annual income. On the other hand, the rate of return for such a safe asset was only about 2-4%. By comparison the ground lease under a retail store in a suburban location might yield 5% or more because who knows what will happen in 50 years. That land in Manhattan is definitely still going to be valuable 50 years from now (short of the entire city sinking underwater).



How many people would continue living a middle-class lifestyle on $50-100k/year if they knew they had millions or tens of million in principal? I think there's a reason a lot of those situations end up with the heirs squandering the family fortune rather than preserving it for their kids and grandkids.

vand

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Re: 100 year SWR
« Reply #28 on: November 13, 2020, 02:44:02 PM »
The best example of family wealth being passed on and grown is probably the Rothschilds. Interesting bunch...

SwordGuy

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Re: 100 year SWR
« Reply #29 on: November 13, 2020, 03:12:45 PM »
The best example of family wealth being passed on and grown is probably the Rothschilds. Interesting bunch...

Ran across a cool story about the Baron de Rothschild and a young man.    This was in the 1800s when the Baron was considered one of the wealthiest men in the world.

People would wait in the lobby of his office in hopes of getting a meeting with him.   Such a meeting was pretty much always "Baron, I want your money for my project."     Different details, same request, day in, day out.

This young man came every day for months and every day he would politely ask the baron's secretary for an appointment with the baron.  But the young man was a nobody, so the answer was always "No."

But he was so polite and so persistent that one day the secretary went into the Baron's office and said, "Sir, would you be kind to me and meet with this young man so I won't have to deal with him every day?"

The Baron agreed and the young man was sent into the Baron's office.   The Baron had his head down looking at documents.   He never looked up, just said, "How much do you want and what do you want it for?"

"Oh, sir, I don't want any of your money at all!"

Now, that got the Baron's full attention, if only for the novelty of it.   

"What I would like is for you to walk with your arm around my shoulder and talk quietly to me in a friendly manner, through your lobby and out to your front door.   If you do that, my fortune is assured!"

The Baron laughed and complied.

People in Paris lined up to loan money to this young man who was so favored by the Baron.

That's called thinking outside the box!

Bloop Bloop Reloaded

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Re: 100 year SWR
« Reply #30 on: November 13, 2020, 03:13:15 PM »
From what I have read about the topic passing on a large swath of money to kids so that they don't have to achieve anything in life is one of the more fail-safe ways of making their lives void and miserable. So based at the evidence on hand I have no goal of providing them with a lot even if I should have the possibility to do so which I dont know if I will in the first place. My current aim is to teach then good money habits, give them a head start in life - like providing the needed money down for an apartment or similar, the rest they should figure out for themselves.

I never got much help from my parents on the financial side, nor were they ever in a position to provide me with a lot extra, and I now make vastly more money than they ever did before retiring.

I agree with this. The more your children expect, the less hard they'll work to get what they want for themselves. If you want your children to be successful, invest your time in them - take them to the library, take them on excursions, read to them every night, spend part of your extra FIRE time playing with them, don't half-arse it like many working parents who don't have the capacity to really be present.

Don't give them money directly. I can't think of anything worse than that. If you have to offer financial assistance, offer to pay off their student debt or whatever (though here in Australia, student debt is much less of a thing, particularly as it doesn't have to be paid back unless your income meets a certain threshold, and even then is indexed to inflation.)

Steeze

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Re: 100 year SWR
« Reply #31 on: November 13, 2020, 03:17:45 PM »
I think it's important to re-think the question.

Do you want to support future generations FIRE style or do you want to jump-start them to do what they want?

I ask because it makes a really big difference.

Example:

To support a descendent indefinitely at $40k per year on the 4% rule, you need $1,000,000 per descendant.   As the number of descendants grows the amount of stash needed is higher and the draws on the existing stash make it harder for the stash to grow.

Counter Example:

To donate $40k to a descendant when they are born only requires a stash of $1,000,000 and a one-time draw.    That $40k goes into investments and at age 20 is worth about $154,000 or $3.2M at age 65 in birth year dollars.  That's enough to jump-start someone with an education, or a house, or a business, fund their retirement, or just blow thru without affecting the rest of the family's generational fortune.   

It's got more time to grow with fewer draws on it, especially in the early years, as you'll tend to have 16-25 years between generations before the kids start showing up.   

Anyway, food for thought.

I like this idea a lot actually - thanks!

Just checked the following in excel:

Number of grandchildren = 4
Distribution to each grandchild at year 0 = $40,000
Stash = 1,000,000 at year -1 = $840,000 at year 0
Each descendant has 2 children every 25 years
Each descendant receives inflation adjust $40,000 at birth
Average return = 6%,  Inflation = 3%

Number of years until stash = 0$ = 125 years
Number of descendants = 128


If you start with $5,000,000 the money never runs out and the number of descendants gets really crazy after 1000 years !! Hope we colonize Mars and a few other planets nearby.

SwordGuy

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Re: 100 year SWR
« Reply #32 on: November 13, 2020, 03:34:45 PM »
@Steeze,

I think it will probably do better than that because it's unlikely all 4 grandkids show up in the same year.   :)
If they show up at the rate of 1 per year, your initial draw would come from that year's earnings and the stash would actually grow that year.  :)

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Re: 100 year SWR
« Reply #33 on: November 14, 2020, 12:54:43 PM »
I have been thinking recently about generational wealth. I plan to read more books on the subject and see how a few massively wealthy families have kept their wealth in the family for generations and still are the wealthiest families in the world. I have been trying to research withdrawal rates for at least 100 years, and how endowment funds decide their withdrawal rates. The S&P 500 average dividend rate over its lifetime has been almost 2%. Maybe that is a good starting point? Anyone have better information what SWR would work for at least 100 years?

Private family foundations have to distribute at least 5% per the IRS.

Yes, I think using a fixed percentage distributed from a trust every year would be a good way to go here as by definition the distributions would rise and fall with the portfolio and funds would obviously never run out.  Unlike your own FIRE SWR, I assume there is not as much concern over the fluctuating payments as the markets rise and fall as you don;t need to ensure someones lifestyle is completely covered year to year (i.e. a perpetual decedent FIRE, as you couldn't guess what their lifestyles would be anyway and how many would eventually be on the dole), which causes us to chose the very conservative 4% or lower.  You pick a percentage similar to whatever the historical average real return for your portfolio is and it would then hopefully continue to keep up with inflation over time.