Wednesday, March 12, 2008

LONG term wealth planning

Most of us have experienced some challenges in life along the way, and many of those challenges have likely been related to money in some fashion.

Do any of these sound familiar:

  • You'd like to go to school, but student loans won't work out quite right, so you've got to hold down a part-time or full-time job, which interferes with your studies.
  • You'd like to buy your first house/car/etc., but the payments will be too high (or you don't have enough for a downpayment).
  • You'd like to run your own business, but don't have enough start-up capital.
  • You'd like to do anything at all (vacation, buy a new computer, etc.), but you're struggling to make ends meet as it is.

The list goes on and on, of course.

Many of us who have been in such a position will often want to save their friends and/or family some of the "trying" times we've seen ourselves. This desire seems to be more at the forefront for those who are planning to start (or have started) a family of their own.

There's so much self-help material on how to save, how to make sure you can retire comfortably, and so on (like "The Wealthy Barber" for example). In many such resources, you'll find some simple rules, which usually boil down to:

  • start young
  • save regularly (10% of your income is often suggested)

Sounds pretty easy, right? Well, if you're disciplined enough to stick to it, it is.

Many of us have likely looked at the sort of numbers involved, and know the power of compound interest, but dismissed them for the sake of heading off in our own direction. For those of you who are unfamiliar, here's a very simple example that doesn't take into account income tax (among other things):

If you saved $3600 per year ($300 per month) in some form which earned 6% interest, compounded annually, at the end of 40 years:

  • you'd have put $144,000 of your own money into these savings
  • your savings, with interest, would be worth over $567,000

So, we know these sorts of numbers. A question that popped to mind years ago was "what if we didn't stop there?" Suppose we had an altruistic bent which made it so that we wanted to do something which wasn't primarily for our own benefit, but for our family - or beyond - in generations to come? Even if you stopped contributing at that point, and just "let it ride" at 6% per year, at the end of 100 years your fund would be over $20,000,000. That far out, if you were able to get 6.5% along the way instead of 6%, you'd be over the $30,000,000 mark. At 8% you'd have surpassed $100,000,000. Even if inflation held at a steady 2.5% or 3%, you'd still continue to gain ground, since the amount your money would earn would be at a higher rate than it would be devalued.

In today's dollars, assuming 2.5% inflation, that would be like having a trust today with somewhere between $1.7 and $8.5 million, earning anywhere from $100K to $685K per year.

If you really want to head for ridiculous territory, tack on another 100 years. The trust would then hold somewhere between $7 and $200 billion. ($50 million to $1.4 billion in today's dollars)

What would you want done with that fund? Are you making sure that your friends and family are looked after? Are you providing scholarships to people, and tackling whatever societal issues may exist at that point in time?

Playing a mind game like this has brought me down a few paths:

1. Is it even possible to create an entity that would allow for this to occur? It turns out that it's difficult to have something like this that could last up to 100 years, let alone beyond.

2. Is it possible to ensure that the use of the funds would remain true to your vision? Sadly, this doesn't seem likely.

3. If you had chosen for your family to be supported by this, what would their morals and work ethic wind up being like? Would the structure of the "trust" have any bearing on this?

4. What would happen if a significant number of people did this sort of thing, and set up similar vehicles for others? What would happen to the structure of society as this evolved? If everyone eventually wound up independently wealthy in this fashion, would those who wanted to work be sufficient to meet the demands of that society? If not, how would the structure of society change so that those needs would be met?

I've rambled on more than enough for now, although I'll likely flesh out some of these ideas at a later date. Meanwhile, I'm very interested to hear your opinions on such things -- the most common reaction I've heard so far boils down to "Why would I want to do something like that, it's of no benefit to me now?"

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