Perspectives on Philanthropy - Part 1
August 15, 2011Do you view philanthropy as the last leg of a comprehensive wealth strategy, the financial “cherry on top?” It’s considered by many to be a deeply personal matter and many individuals and their advisors would just assume it stay that way. However, for those inclined, charitable giving can be more than an optional luxury reserved for excess cash flow and unneeded assets. By developing a disciplined and innovative giving strategy that is integrated with your retirement and wealth transfer goals, your generosity can become more purposeful, impactful and exciting.
Over the next few articles, I will discuss how we think about planning for philanthropy at Brightworth, examine current trends and strategies in giving and share stories from clients who are using their wealth and time to make an impact in our community and the world.
How Much Can I Give?
One of the major barriers for giving is fear of the unknown: “Do I have enough for today and retirement?”; “How much do I need?”; and “Can I afford to give?” These are all valid and appropriate questions and concerns. At Brightworth, we help our clients answer these questions utilizing our Wealth Assurance Report™. This analysis calculates how much you need at retirement to support a given lifestyle over the long-term with a low probability of running out of money, even in choppy investment markets. If what you need is lower than what you have (or expected to have) in investment assets, you are left with an asset surplus. So, now what do you do? You could consider it an extra reserve in case things don’t go well in the investment markets. Increasing your planned annual spending and retirement lifestyle is another option.
You may decide to leave it to your children or grandchildren as an inheritance. If charitable giving is a goal, you could turn your asset surplus into a catalyst to increase your planned charitable giving. Let’s take a look at an example. Assume you have just retired and your current annual living expenses are $150,000, after-taxes. You would like to make charitable gifts during retirement at a rate of $50,000 per year, but are uncertain as to how that will work, now that you are not working. After factoring in pensions, Social Security and paying your income taxes, the annual withdrawals needed from your investment portfolio are about $200,000. Given timetested probability analysis, which we have further tested and verified at Brightworth, in this example we determine you need an investment portfolio of about $5 million. Assuming you have investment assets worth $7 million, this results in a $2 million asset surplus.
Using the same example, your asset surplus could be translated into additional capacity for annual giving. If 4 percent is your prudent annual withdrawal rate, a $2 million surplus could yield $80,000 in additional charitable giving capacity each year without decreasing your statistical probability of success in retirement. This represents a 160 percent increase from your planned annual giving. This can be done with a high probability of not running out of money, assuming you stay in a sound fi nancial strategy. Additionally, this supplementary giving can be monitored each year and adjusted up or down if things change with your situation.
The example above assumes that the entire surplus was earmarked for giving. This may not be the case. Individuals should examine their goals and the purpose for their wealth. By understanding how much you need for retirement, with a high level of certainty, you have the freedom to determine how best to utilize the excess. If giving is a goal, work with a financial advisor to develop a giving strategy that is best for your financial situation. You may be able to be more generous than you ever thought and make a lasting impact on the organizations you support and the lives they touch.
