Monday, September 01, 2014

Eternal Prosperity for Your Posterity

Assumptions and Definitions:

Individual X and spouse will raise two children each of whom will have spouses and raise two children (four grandchildren for individual X and spouse).

Individual X and spouse and all descendants successfully attend college around age 20, complete grad school and begin productive work or start and run a business from 20-30, marry for life someone of similar means and have two healthy children at age 30, raise their families successfully and are able to save modestly till retirement age, retire at age 60, live and retire comfortably (but not lavishly) the entire time, and die at age 90.

Undergrad education costs $200,000, and grad school or starting a business costs $100,000.

All such individuals live with spouse and minor children in a $600,000 home that required a 20% downpayment to purchase at age 30 with a 30 year fixed mortgage at an affordable interest rate and can invest money till age 60 at 7% real growth and 3% thereafter (i.e. nominal rates of 10% and 6%, respectively, above 3% inflation) taxed at reasonably low average rates.

Prosperity: Having such a life.

Protoparents: The original two spouses who begin the process of eternal prosperity for their posterity.

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Given the miraculous effect of exponential growth (compounding interest), there exists a minimum "critical mass" number N for which Protoparents could fund an endowment for each grandchild at birth that would allow each of these grandchildren to live prosperously and do the same for each grandchild, and so on, ad infinitum … effectively guaranteeing eternal prosperity for their posterity.

What is the value of N?

Turns out, N is about $80,000 in 2018.

Following are some key milestones along the way (attainment of any one of these by each prospective protoparent should enable them to achieve critical mass for themselves and all their posterity):

Age 0:

Grandchild G is born, whose grandparents establish a trust fund in the amount of $80,000.

Age 10:

G’s trust fund balance is $160,000.

Age 20:

G’s trust fund balance is $320,000, and G is in college. $200,000 is paid out to cover undergraduate tuition, leaving a balance of $120,000.

Age 30:

G’s trust fund balance is $240,000. G has completed graduate school and begun work or started a business, has married and has two children, and owns a home with spouse that required G and spouse each to contribute $60,000 toward the down payment. $100,000 is paid out to repay grad school or business loans and $60,000 to cover G’s contribution toward the down payment on the home, leaving a balance in G’s trust fund of $80,000.

Protoparent Goal: $80,000 + $80,000 + $60,000 = $220,000
Protoparent Spouse’s Goal: $80,000 + $80,000 + $60,000 = $220,000

Age 40:

G’s trust fund balance is $160,000.

Protoparent Goal: $440,000
Protoparent Spouse’s Goal: $440,000

Age 50:

G’s trust fund balance is $320,000.

Protoparent Goal: $880,000
Protoparent Spouse’s Goal: $880,000

Age 60:

G’s trust fund balance is $640,000. Parents of G and spouse all die at age 90, leaving G and spouse each $640,000. G now has liquid assets equal to $1,280,000. Since G and spouse were of similar means, G’s spouse now also has liquid assets totaling $1,280,000. Together, G and spouse have $2,560,000 in liquid assets. G and spouse establish $80,000 trust funds for each of their four grandchildren, at a total cost of 320,000. This leaves $2,240,000 total liquid assets for G and spouse, together, which provides them with a safe 4% real return of $89,600, with no mortgage payment. Assuming their home has doubled in value, subtracting 1% annual property tax leaves them with a comfortable $77,600 real annual income, with no housing expense, for the rest of their lives.

Protoparent Goal: $1,760,000
Protoparent Spouse’s Goal: $1,760,000

Age 90:

Total liquid assets for G and spouse have remained at $2,240,000 during their entire 30 year retirement, since they’ve only withdrawn real annual returns equal to 3% over inflation. G and spouse die with $2,240,000 in liquid assets, leave, and leave $960,000 to charity and $640,000 to each of their two children … and the cycle recurs.

Notes:

The above assumes that neither G nor spouse saves any of their own money from work. If together this couple can save an extra $10,000 per year on average for 35 years (age 25-60), this would add $1,400,000 to their total liquid assets at retirement, raising their annual retirement income to $145,600, enabling them to establish a nearly $2.5 million family charitable foundation at their deaths, which after 90 years (3 generations), assuming all descendants followed suit, would grow to almost $25 million in charitable endowments while doing almost $50 million in philanthropic work (in real 2018 dollars) by that time.

Starting at age 25, average annual savings of $20,000 would grow to approximately $440,000 by age 40 at 7% real interest, achieving the indicated protoparent savings goal for age 40. This is an achievable initial goal for many aspiring protoparents (double this average annual savings figure would be required for single-earner households).

Naturally, life rarely conforms to such rigid schedules and round numbers as these. Nevertheless, I think it's useful to have rough long-term financial and legacy goals. Makes working and saving more fun!

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