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Comment by Psyonic | Hacker News Reader

Can we assume it actually makes more than 5% interest every year? Otherwise he's slowly draining it of its value, and if he lives long enough may empty it. It probably does, but it's a thought.

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Unwise to passively assume. It's my responsibility to make sure it grows by at least 5% or that defeats the whole purpose! :-)

http://sivers.org/book/SmartestInvestmentBook

http://sivers.org/book/InvestorsManifesto

http://sivers.org/book/FourPillarsOfInvesting

Good links, and I'm not at all surprised that you've put a lot of thought into it. Of all the writers that appear here on a regular basis, you have the highest signal/bullshit ratio I've seen. When you say you're giving back, I believe you.

Yeah, asset managers generally advise withdrawing no more than 4% annually to preserve wealth. However, I'm guessing that this is classified similar to a foundation, which must pay out 5% of its assets each year.

EDIT: Just read the wikipedia article he links to, and as the value of the trust is recalculated each year, and his annuity is based on the recalculated value (as opposed to the original value) it's effectively impossible to deplete the value.

Also, you can setup a net-income CRUT that pays out the lesser of the annuity income percentage, or the trust's net income for the year, thus ensuring that your annuity doesn't reduce the value of the trust from year to year.

Exactly. I'm required to pay out 5% per year to myself, but then I don't have to spend the whole 5%. I can reinvest it or whatever.

Can you re-invest it in the non-profit that you created? i.e., accept the 5% and then just give most of it right back?

but it's possible that the value at the end would be just a small fraction of the original sum.

That's what I was thinking. 5% is the upper limit of the fraction of his wealth that a rich person could safely spend each year anyway. So his income is no different than if he'd kept the money. The only thing he has lost is the ability to change his mind about where the principal goes when he dies.

Intentionally lost my ability to do something stupid with more than 5% the principal while I'm alive. :-)

That kind of salary still lets him build substantial personal wealth, so if he manages it wisely there will likely still be quite a large sum to pass to his heirs.

He should live so long. :-D As pointed out elsewhere, this is an exponential decay so it will never go to zero.

Bashing numbers helps me visualize this...

Looking at (nearly) the worst case, if the trust earns zero interest, he will be draining it by 5% per year, so the principle will be

  0.95^y * 22e6

where y is the number of years. If he lives for 40 more years...

  0.95^40 * 22e6 = 2.8e6

(13% of the original sum is left).

A less drastic case would be earning 4% but paying out 5%, i.e. losing 1% per year.

  0.99^40 * 22e6 = 15e6

(67% of the original sum is left).

OK, the absolute worst case is he invests the whole amount in subprime mortgages and loses it all. We won't bash those numbers, obviously he is a lot smarter than that.

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