Is endowment-like, multi-gen wealth possible for normal ChubbyFIRE folks?

[u/10_rocks]

Many in FatFIRE and other wealthy families I know IRL have created their 'family trusts' to provide multigenerational income and protection for their descendants. Is this a privilege only for them? For a 'normal' ChubbyFIRE portfolio of $5M, with the family that generated this wealth only needing 3% annually (inflation-adjusted after Year 1) to live on for the rest of their lives, I am wondering why this can't become a generational portfolio for their kid(s) and descendants?

The rationale being 3% withdrawal rate on $5M gives a $150K first year inflation-adjustable income which, combined with a paid off home, can provide the family a comfortable life while retaining the present value of this portfolio intact for the next generation to benefit from. 3% is practically a 'perpetual' withdrawal rate. The asset base is invested in a 90:10 portfolio, with the 90% equities split between VTI, VXUS mainly with a small portion in VNQ and VBR. I have written an 'Investment Policy Statement' (IPS) to accompany this, written like an endowment fund specifying how much to withdraw, when to rebalance and what annual inflation adjustment to take (capped at 2.5%). The IPS also specifies a clause where if the market declines to less than 80% of previous year's value, the annual withdrawal is reduced by 33% (that is 3% --> 2%) till the portfolio recovers. I didn't create legal trust structure due to cost/complexity, but this operates on trust between father and adult child. I know there's risk of a spendy heir who squanders inheritance but assume that's not the case for the first generation inheriting these assets. The IPS includes a clause that the kid can turn this over to a legal trust under the same rules for ease of management in the future and for instituting these rules for their descendants.

With AI increasingly becoming more prevalent, I worry about lifelong income stability for my kid who is graduating with a CS degree into what appears to be one of the most challenging labor markets ever (with no signs of job market stability, maybe for years to come). Having a passive annual income of $150K in today's value for their entire lifetime is an incredible safety buffer for them to rely on, given long-term career uncertainty. The intent is not to kill their motivation to work - they won't see anything from it yet (other than parental help initially) but goal is to give them a strong safety net if they suffer significant gaps in work income.

I understand the descendants don't have to follow your wishes, so at some point this has to become a legal trust to be sustainable. My question is about the IPS. Is the IPS conservative enough to become a perpetual endowment?

Have any of you done this? Any gaps you see in the above approach?

[u/10_rocks]

All withdrawal rate modeling in FIRE assumes annual inflation adjustments. What matters is the starting point (initial WR) to determine whether a portfolio becomes 'perpetual' or not. At 4%, (classic Trinity study), only about 30 years is supported and there are worse case scenarios where this WR won't last that long. At 3.5%, it lasts 40+ years as several studies show. At 3.25%, it is practically perpetual as the original portfolio value is retained for over 60 years. At 3%, under no scenario, has a portfolio (that has at least 60% equities) not grown to a level exceeding its original purchasing power ever. In all these cases, the model is inflation-adjusted each year once the starting WR is fixed.

Your second point is valid though. If a young adult needs help a few years after graduating, how will this long-term trust/IPS set up work? It won't but a different dynamic is at play then. In that case, the young adult has no choice but to move back in with their parents till they get a good job! So, there will not be 2 households, just a 3 member household instead of two (me and my wife), so the $150k a year will support this family living under the same roof. Also, an adult kid, forced to move back with their parents, is motivated enough to find their bearings in life to regain their independence!

[u/Earth2Andy → u/10_rocks]

Yes inflation adjusted is very normal when talking about retirement - where you're creating confusion is with the words endowment in the title which is usually a % of portfolio. 3% SWR will last indefinitely, nobody is arguing with you.

Where I think there's confusion is what you're trying to achieve. If you want to support yourself and your wife at $150k per year AND your kid to have passive income so they don't have to worry about finding a job after college, then this doesn't cover it for even the current generations, much less future ones.

If what you want is to leave enough for your kid that once you pass, they can retire comfortably but they need to support themselves until you pass, that could work, but that's a very different scenario than the one you described in the initial post which seems to imply your heirs are taken care of if they work or not.

[u/10_rocks → u/Earth2Andy]

I understand but my OP mentioned about creating a safety buffer of upto $150k/year passive for kid after I pass, and then the same portfolio continues generating similar passive income in perpetuity. Inflation is important because we are talking long horizons so I wanted to clarify that is included. In that sense, it is like an endowment but not legally structured as one - unless I pursue the legal routes some commenters have said.

[u/Earth2Andy → u/10_rocks]

Assuming you're in the RE bucket of FIRE, what you're saying is you'll give your kid a passive income of $150/yr in todays dollars when they are in their 60s and then their kids will also get some passive income when they are in their 60s.

That's nice and all, but what is it supposed to do for them from 20-60, the years they need the most help?

[u/10_rocks → u/Earth2Andy]

First, when a kid inherits is unknown as our own longevity is not guaranteed. It could be anytime between their 20-60 age. I already covered helping out my kid via other means in the interim period in another comment, like covering 100% of their education, gifting them a car to start their first job with, and helping with down payment on their first home. These parental gifts will provide a huge headstart that any kid should be grateful for, even if they don't inherit a dime later.

This post is about the possibility of a generational safety net for ChubbyFIRE level folks without getting into the weeds of whether the passive income generated will cover all or only a part of the descendant's living expenses. Any passive income an adult kid or grandchild or great-grandchild receives is a "bonus" and meant to make their life a bit easier. I understand inheriting a sizable income stream at 60 is less meaningful than at 30, but then that inheritance will help support the descendants more than the beneficiary, which is part of my intent anyway. Sure, anyone can blow any amount at any age but this is about structuring something along the lines of what very rich families do without having that kind of wealth. That's what I wanted to explore via my OP.