Due to a combination of my wife serving in the military, Romneygate, the disaster that Washington is creating and this insightful article by the Oracle of Omaha, I have been thinking about creating a will in a way that will have an impact on those that Amber and I care about plus a couple select non-profits that Amber and I care about. That thought process also led to the internal debate of 'should I donate to those charities now'?
However, when you do the math, you find that you can actually have the same (or greater) impact by saving and investing what you would have donated, and giving it away upon your exit from this planet.
Let's explain:
We have two generous and disciplined people. Person A is saving $6,750 a year for retirement and Person B is saving $7,000 a year for retirement. Both earn 6.5% annually on their savings and live in a world where there is 3% inflation. Both A and B started saving at age 25, and both will retire at age 65. Upon retiring, they will withdraw 5% of their savings annually, and it will continue growing at the same rate.
Additionally, every year person A and person B are managing to increase their savings by 2% while person A is also increasing their charitable donations by 2%.
Let's assume that person A and person B both die at age 80.
Here's what their situation looks like, in today's dollars:
A) They die with $359,000 present value dollars in assets. They have made $10,400 present value dollars in giving.
B) They die with $373,000 present value dollars in assets. They have made 0 present value dollars in charitable giving.
This means that if B increases their giving through their will to match A, he will still have $3,600 to split between leaving money to his heirs and charitable donations that A does not presently have. Additionally, B has a marginally smaller risk of not being able to cover an emergency AND was able to enjoy a higher standard of living in retirement.
Let's suppose both parties had more to save, and started saving $8,000 a year at age 25 using the same assumptions as above, except now, A donated $750 a year to charity - meaning that A is being more generous than before. Certainly, A will have a relatively lower standard of living compared to B than in our prior analysis but perhaps he will have made a bigger impact.
Under this scenario, A dies with $386,000 present value dollars in assets and have made $31,200 in present value charitable givings.
B dies with $425,000 present value dollars in assets and has not made any charitable givings.
Due to the time value of money, B has actually increased his delta - now if he gave the $31,200 off the top, he now has $7,800 additional present value dollars to play with to divvy up between his heirs and his favorite non-profits. His donations will have a larger impact than A's will.
This isn't an argument made out of selfishness, in regards to my own parents, or for my own living. One could think of giving as spending - every dollar spent today cannot be invested; the whole point of investing, per Buffett's article is to allow you to consume more tomorrow than you could today. If one spends less today, they can enjoy more tomorrow. By contrast, if one gives less today, they should be able to give more tomorrow.
This is a controversial position to take, but in lieu of donating, I'll talk with my wife about what 2 or 3 charities we would like to donate to at the end of our life, and in lieu of a donation, send them a note stating that we appreciate what they do and are setting aside X % of our estate for them in our will.
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