How much money would this require? (Fantasizing about huge amounts of moolah.)

In My Humble Opinion
1

Let’s pretend everyone retires at 65 and everyone dies at 85.

Selma is a family matriarch who has a lot of money. She has two children, both aged 20. Here’s what she wants to accomplish. She wants to set up an account for each of her children, such that

*That child can receive a stipend of $50,000 per year, for life
When that child dies, the account can be split in half and passed on to exactly two of his or her own children, satisfying this very same pair of stipulations concerning themselves and their two children.

Bonus points for an answer that replaces “$50,000 per year” above with “The equivalent of $50,000 per year assuming average rates of inflation.”

In other words, Selma wants to make it theoretically possible for this account to support a basic income and perpetuate itself down her family line forever (assuming each descendant has only two children) or until civilization collapses, whichever is earlier.

How much money would it take?

*To clarify: If a family has just one kid, then half of the account goes to the kid and half goes to charity. And if a family has three or more kids, each kid past the second is out of luck.

2

I think it’s basically just a growing annuity payment formula:
http://www.financeformulas.net/Growing-Annuity-Payment.html

The growth rate being the rate of inflation in this case.

I’m too lazy to plug in the numbers.

3

After 40 generations or so, every person on earth is your great-etc grandchild. Some time before this point the whole edifice breaks down. Of course, by then the robots will be running everything anyway.

4

That’s right: The scenario also assumes something unpredictable or unrealistic about the expansion of the human race. :wink:

5

I’m not qualified to answer this, but are you envisioning this as some kind of retirement account? Or a “nobody ever has to work if they don’t want to” account? Two ways to interpret it:

A) Son #1 has twins right away. He’s collecting his $50k a year and loving life. 20 years go by, Son #1 is 40 and his kids are both 20. The kids get jobs and hate life. 45 years go by and Son #1 finally kicks the bucket, prompting a financial split (per the OP). His share of the initial investment is split between his two now-retired children who probably have 2 kids (each) of their own (ages 45-ish) who also have jobs and hate life.

or

B) Son #1 has twins right away. 20 years go by and even though Son #1 is still alive and kicking, his share of the initial investment is split so that his kids never have to work if they don’t want to. This gets ugly, because another 20 years go by and there’s now 7 people on just this one side of the family, potentially 14 people total, all aged 60 or under, who are sucking at Selma’s long-dead teat.

6

Wait, so if the kids also get the inflation-adjusted equivalent of 50K/year, then the year before the money goes to the kids there needs to be two times as much money in the account as is needed. So now you’ve got a few possibilities to resolve this:

  1. The account pays 50k/year on average, but pays less when the money first starts and most just before the person’s death

  2. The account invests in safer investments when a person is older and riskier investments when they are younger

  3. The account slowly increases in value over time.

Option 2 is probably the most reasonable way to resolve this.

7

Oops I screwed up. Stand by for clarified version of OP! :eek:

8

It really depends on the interest rate (surprise surprise)

Lets say “interest rate above inflation”, or just assume zero inflation to keep things simple (AKA, I can’t be bothered :wink:

Assume a generation length of 30 years. We don’t care when people retire, because they’re getting paid all their life, and we don’t much care when they die (as a first cut) because the really important thing is that the interest rate has to be at least enough to double the principle after a generation (so you can fission it to your two kids), after you’ve taken out whatever it is you’re taking out.

The interest rate has to be at least around 2.5%, otherwise you can’t double the principle in 30 years, even if you take nothing out, so the whole thing fails.

(Can we make everyone live to 90? Makes the maths easier…kthx)

Assume the head of the family has control of the money till they die, at which point the family fissions in two, with two heads, and each head being 60 years old, and having the amount of money that their parent had when they were 60. The head of the family is responsible for every living family member in the scheme getting their 50k per year. That is:

Self (age 60-90)
Two children (age 30-60)
Four grandchildren (age 0 to 30)

… seven people.

Now we can do the maths.

If the interest rate forever is, say, 3%, you can take out .5% of the principle and still double in 30 years.

But … and this is the bit I’m too sleepy for at this point … if you take out .5% every year, you’ll pay everybody more at the end of each 30 year cycle than at the beginning, violating the 50k every year principle. Still, that’s probably a good first estimate. You’d take out more, trending to about .7% near the beginning of the 30 year cycle, and trending towards .3% near the end. .5% would be average.

To make $350k out of .5% of the principal, the principal needs to be about 70 million, which actually doesn’t seem like that much, given the task. As the interest rate goes up, the task gets easier … if it’s 3.5% total, then you have twice as much take out available to work with, and you only need 35 mill. Pocket change! But if it’s a bit less, say 2.6% … add another zero on the end.

And, of course, you have to guarantee your interest rate stays over <whatever rate> … forever! Got a trick for that? :wink:

9

Since the OP did not specify that:
A) the answer had to be the minimum sum to accomplish the purpose, nor that
B) the fund could generate no more than $50k per year;

I’m going to go with 100 trillion dollars.

It’s too much work to figure it out the other way…

10

The basic idea is that almost all jurisdictions have some sort of law that says you can’t create a will or trust that leave money to people who don’t yet exist. You have to leave your money to actual people. Otherwise we’d have a situation where the decisions of long-dead people control the economy. There’s only so much you can do to protect your unborn descendants from themselves.

Of course it is possible for multigenerational fortunes to endure for centuries, but it requires the continual maintenance of each generation to preserve and pass down the fortune, if eventually someone wants to spend the family fortune on booze women and fast cars, or squander it, there’s nothing your long dead great-great-grandpa can do about it.

11

Essentially you’re looking at an annuity that pays $50,000 per year per direct descendant until the end of time.

To be honest, it can’t be done. Even if there weren’t rules against perpetuities, nobody would ever sell such a thing.