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The “Basic Income” Trust Fund

I’ve been toying around with the idea of setting up small trust funds for my potential future grandchildren. My objective is to provide them with a base-level amount of support, not to make them filthy rich. The trust would require a university degree and a part-time job for anyone receiving money. I would target about half the median income, roughly $2,000 per month.

Running an analysis on cFireSim we find that we would need $560,000 invested in at least 75% equities to have a 90% chance of success over a 30 year period. This drops to around 75% chance of not exhausting the trust over a 50 year period.

So, we need a little more than half a million for each beneficiary of the trust. Assuming that you have 3 kids who have 3 grand-kids, you would need to support 9 people or so. 9 x $560k = $5,040,000. Not exactly chump change. The good news is that we have the power of compounding and plenty of time.

Assume that you are 20 years old and have kids at age 30. They have kids at age 30, and your grandchildren must be 20 before they receive distributions. That’s a waiting/accumulation period of 60 years.

If you earned the market average 6% after inflation (9.7% growth – 3.5% inflation ~= 6%), you would need a lump sum of $152,784 today to meet your target. Not exactly chump change, but much more reasonable. Again using cFireSim, we can estimate that at an 80/20 allocation, we would need to put away $1,000 per month for 60 years . In the best case historically you end up with $9.5 million in the trust while the worst case is around $3 million.

While saving $1,000 a month isn’t easy to do, especially on top of saving for your self, it can be incorporated into your other retirement plans. Your assets at retirement, life insurance payout, any future inheritance, or your Roth IRA could all be combined together to make this a very workable plan.

Go run some numbers for yourself. Perhaps this scenario is too aggressive. Nonetheless, the idea is an interesting one.