There are two types of people out there – those that want to spend their last dollar on their last day on earth and those who wish to pass down an inheritance to family or charity. Which camp do you fall into?
I’ve had a few funny conversations with people over the years who are absolutely intent on spending every penny before they die. Even a subtle suggestion on leaving an inheritance to help out adult children or grand-kids and there are immediate laughs and resistance. “I’ve spent enough on those kids!” I almost admire the clarity and commitment.
Of course, how life will play out in the end is mostly out of our control. But it’s fun to guess.
In my series, “How Much Do You Need To Save,” we identified our expenses and established our withdraw rate in order to determine how much to save. I jokingly stated, “Tell me exactly when you are going to die and I will give you the answer.”The people in the camp of wanting to spend their last dollar on their last day really want to know the answer to this question.
The question remains, do you have a specific goal for what you wish to leave behind once you are gone?
How would a potential scenario play out financially at the end of life for someone who has saved, invested, and lived below his/her means?
The Bigger Picture
The Center on Wealth and Philanthropy at Boston College released a study in 1999 on American wealth and provides estimates on philanthropic giving. The final report estimated that wealth transfer (one generation passing down money to the next) in America in the 55 years from 1998 to 2052 would amount to $40.6 trillion in 1998 dollars or $52.0 trillion in 2007 dollars.
The study was updated and released again in 2014 to take into account the financial crisis of 2008 and also enhanced how the modeling was conducted. Despite the large impact of the economic crisis and recession of the 2008 era, the revised estimate was raised to $58.1 trillion in 2007 dollars. The amount of wealth generated in America is hard to comprehend.
If you are having trouble sleeping at night I might suggest reading the 68-page final report.
On to the Scenario!
In this article we met Jimmy who retired at the age of 56 with a total account balance of $1,539,305. At a 3% withdraw rate, this was going to provide him the $45,000 a year he needed to cover his expenses. He would also be entitled to Social Security (although at a reduced rate since he left the work force a little early).
How did it turn out for Jimmy?
- Lives until age 89 (not too bad)
- Managed to stay out of the hospital and assisted living in the later parts of his life
- Continued to live his life within a budget and only splurging occasionally
Although he has no children, he loved spending time at his local library and plans to secretly leave an inheritance to the library at the end of his life. So, how much will Jimmy have to give?
This charts shows a steady growth of $1.5 million at a 6% growth minus a 3% withdraw year after year starting at age 56 and going until age 89.
Big flaws with this spreadsheet
- There are never any DOWN years. Hardly realistic.
- There are never any UP years.
- Assumes that a 3% withdraw will continue to cover his expenses over 30 years regardless of inflation.
Putting all of that aside, a 3% withdraw rate and a modest 6% return over the life of Timmy’s retirement leaves him with a hefty sum at the end. Like, $3.7 million dollars hefty. But like a lot of people reading this, I think this is too simple.
Let’s Not Over Complicate the Oversimplification
To factor for my oversimplification of steady growth and steady expenses year after year, let’s just assume that it’s half wrong. Meaning, what if this estimate is overestimating Timmy’s ending balance at age 89 by 50%.
Factor in more inflation, more ups and downs of the market, a recession or two, and that would still leave him with $1.8 million dollars at the end to donate to the library. I’m thinking Jimmy’s getting a wing at the library named after him.
Imagine if Jimmy did have a child who shared his same views on savings. If instead of gifting that money to the library, he gifted it to his heir. What if that money was then rolled over to the next generation compounding again for another 30+ years. This is how generational wealth is created – all because Jimmy decided to save, invest, and spend wisely.
What are your thoughts on all of these assumptions and the power of compounding interest? Are you in the ‘spend it all before you die camp’ or the ‘leave an inheritance camp’? Was Jimmy foolish for leaving almost $2M to the library? He could have been living a larger lifestyle throughout his retirement.