Can You Design A Portfolio To Sustain Truly Multigenerational Wealth?

In this article: https://www.pihlfinancialplanning.com/post/how-long-can-wealth-really-last  I posed the thought experiment, “how might I design a portfolio designed to provide lasting multigenerational wealth?” This article shows a test of how that might play out, using a historical data set, and a very hypothetical family tree.

The Portfolio

For this idea to work, you need a portfolio with a high rate of growth. We are not only attempting to keep up with an exponentially-growing family tree and distributions to each of its members. We also need to beat inflation. 100 years of inflation at 3% will cut the purchasing power of a dollar by 95%. Neither bonds nor gold offers enough growth potential to accomplish these goals.

The other key to making money last for such a long period is removing relatively little money from the portfolio. 4% may work for a 30 year retirement, but when you look at periods exceeding 75 years, the sustainable distribution rate comes down to 3% or less.

Each of these factors are a match with stocks.

The downside to stocks is that you receive less income in the short term. However, in our situation, this fits with our need for the portfolio to have a low distribution rate relative to principal. This helps protect the longevity of the trust fund.

I propose that the principal is invested entirely in stocks, preferably a broadly diversified instrument like an index fund, and that beneficiaries only receive the income that comes from dividends. Historically, these dividends have grown faster than inflation, so in theory, this structure could offer a path toward a more durable, multigenerational estate.

Testing The Idea

I estimated what would happen to a trust managed on those terms. using data from Professor Aswath Damodaran. https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/spearn.htm 

For the sake of simplicity, I assumed that each generation has only 2 kids, and that income from the trust is split evenly among all beneficiaries of that family line ages 20 and over. The family dynamic might be a little weird, but I just wanted to start by testing the math. 

Suppose Grandma Mary was wealthy and died in 1960 with $1,000,000 in 1960 (worth $10,988,243.24 in today’s dollars), at age 80. The trust is producing $34,073.31 of income annually (over $500k per year today). 

She has two kids, Harold and Lola, aged 50. 

Harold has 2 kids, Harold Jr. and Marge (aged 20),

and Lola has two kids, Lolita. and Janice (aged 20). 

Truly a remarkable family with so many twins. But it makes the math easier. 

So at this point, 1960, there are 6 people receiving income from the trust, $5,678.88 each ($62,400.91 in today’s dollars). 

Ten years later, in 1970, the grandkids are married and each has another set of twins. But the babies don’t receive trust income until age 20, so the number of beneficiaries is still only six.

Because stock dividends have grown, the portfolio now produces $9,149.31 for each of the six adults ($76,696.68 in today’s dollars).

Now walk it forward 20 years. The year is 1990. Harold and Lola are 70. Harold Jr., Marge, Lolita., and Janice are all 50. And their kids (call them the Harold III generation) are all 20 and eligible for the trust income. 

At this point there are two grandparents, four children, and eight grandchildren: fourteen beneficiaries in total. Each receives $14,860.98 in 1990 dollars. Adjusted for inflation, that works out to $36,982.12 in today’s dollars. This is less than half of what each beneficiary effectively received in 1970.

In other words, while trust income has grown, inflation has consumed much of that growth, and the number of beneficiaries has more than doubled.

What happens if we jump forward another 30 years? It’s 2020 and the family tree has grown exponentially. Harold and Lola have passed away, ceding their portion of the trust income to younger members. But Harold III and the 7 other grandkids have each had 2 more kids. 

Harold and Lola have passed away.

Harold Jr., Marge, Lolita., and Janice are all 80. 

Harold III and co (8 of them total) are all 50. 

Harold IV and co (16 total) are all 20 and eligible for distributions.

There are 28 total beneficiaries sharing the trust income.

The trust is now producing $975,735.67 in 2020 dollars ($1,226,222.91 in today’s dollars). Divided among 28 beneficiaries, that works out to $34,847.70 per person ($43,793.67 today).

For the first time in thirty years, the per-person income has risen. Growth in the trust income has outpaced both inflation and the growth of the family. 

At this point, it is possible that income each person receives from the trust will decline more slowly, or even increase slightly, even as the family continues to grow. But we are a long ways off from each beneficiary enjoying the level of affluence of the original grantor, Grandma Mary.