Investing to Make an Inheritance Last

When my uncle died a few years ago, we received an unexpected notice from a life insurance company.  Apparently he had taken out a life insurance policy with each of his heirs as beneficiaries – six in all.  He certainly didn’t need to do this.  Normally the purpose of life insurance is to take care of a dependent in the event of an untimely death, and this was not the case since I was not a dependent.  I was grateful for the gesture, however.

The amount wasn’t huge.  It was around $10,000, which was substantial but it wasn’t something from which one could live off the interest.  I could have simply added it to an investment account and invested it, or maybe used it to pay off part of our home loan.  If I had done that, however, it would have gotten lost and probably mostly forgotten in a few years.  I wanted to do something that would remind me of my uncle and his generosity for years to come.

I decided to establish the “Uncle David fund.”  Here’s what I did:

1) I invested the money in an index fund (the Vanguard Small Cap ETF fund, to be exact).

2) Each year I sell about 10% of the fund shares.

3) We plan a special getaway – either a weekend vacation or part of a longer vacation, and designate it as the “Uncle David vacation.”  Nothing fancy – just a weekend getaway somewhere via car.  We try to make the scope of the vacation small so that we can travel well, rather than trying to string out a long vacation on a shoe-string budget.

Because I can expect a return of somewhere around 10-15% on average, the money should last for about 12-15 years at this spending rate.  This is enough time for our kids to grow up.  This means that we will have a nice family vacation financed through my uncle’s generosity for several years to come.  This is a way to remember him and get the gift of time together.

The same could be done with a larger inheritance.  It could also be designed to last indefinitely instead of only for a dozen years or so.  The  secret is to invest the funds in equities, which return somewhere between 10 and 15% historically over long periods of time, and then not withdraw more than about 4-5% each year.  That way the returns from the investments will pay for withdrawals and also keep up with inflation.

For example, if you received a million dollar inheritance, you could invest it and receive, on average, about $100,000-150,000 each year in return.  If you withdrew $40,000-$50,000 each year, the funds should last indefinitely.  Some years the balance would decline, other years it would grow substantially, but in general return it would stay about the same after inflation.

You could also base withdrawals on the return for the year.  Maybe take out 30% of whatever return is generated.  If the fund made $150,000, you would take out $50,000.  If it made nothing or lost money for the year, you would take out nothing.  To lessen the variations, you could keep a cash account with the withdrawals and withdraw a fixed amount from there.  For example, you could keep $150,000-$200,000 in cash and withdraw $50,000 each year to spend, adding money on years when the market had a positive return to help maintain the cash balance.  Since it is rare for the market to decline several years in a row, it is unlikely the cash balance would reach zero.  If it did, you could wait a couple of years for the markets to recover and replenish it.

Done correctly, an inheritance can last a lifetime and provide a special memory of the person who has passed.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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