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Sponsored by: Golden Pond Wealth Management
August 30, 2024

How to Spend and Give Away Your Nest Egg


Brian Bernatchez, CFP®, Managing Director at Golden Pond Wealth Management, Waterville, ME

When I sit down with clients in our office, we often spend time discussing how they intend to use their money to live their life and accomplish their goals. For those who have been fortunate and disciplined enough to be categorized as high net worth (HNW) with investment assets of more than $1 million, or very high net worth (VHNW) investment assets of $5 million to $30 million, I often recommend a simple spending and giving strategy. The goal is to find a healthy balance between personal spending and sharing with family members and charities, and for both to be a source of enjoyment and satisfaction for the client.

For discussion purposes, let’s assume we are working with Sally Saver, a recently retired client who is 73 and has $5 million in investments, of which $1.5 million is in an IRA. She has 3 children and 6 grandchildren, all of whom she supports financially. Sally also has five local charities to which she makes significant annual donations of at least $10,000.

Spending and Giving during Sally’s Life: The 3/1/1 Strategy

Sally has both pension and social security income which covers her basic needs. She will use withdrawals from her investments to enhance her lifestyle. We recommend she frame her annual withdrawals as a percentage of the total value of her portfolio—with a $5 million portfolio it looks like this:

  • 3% for Sally ($150,000 annually): If we assume $30,000 for taxes, this will give her $10,000 per month in additional income for travel, hobbies, major purchases, home improvements, etc.
     
  • 1% for family ($50,000 annually): This will provide for family vacations and outright gifts to children and grandchildren—including contributions and or matching contributions to her grandchildrens’ 529 college savings plans.
     
  • 1% for charity ($50,000 annually): Because Sally is 73, she must make an annual required minimum distribution (RMD) from her IRA. Her RMD is based on the previous year end value. At 73, the amount is slightly more than $50k. We will satisfy her RMD by making five qualified charitable distributions (QCDS) of about $10,000 directly from her IRA to each of her five favorite local charities. A QCD is the most tax efficient way for her to support these charities as the gifted amount is not included in her taxable income and is not subject to itemized deduction limitations. 

Spending and Giving at Sally’s Death: The 60/20/20 Strategy

Sally’s children will indirectly inherit the family lake house which has been placed in a family trust. She has also funded an investment account designed to spin off enough interest and dividends to pay for the lake house’s annual expenses and maintenance.

We also recommend clients frame their gifts at death as a percentage of the total portfolio value.

Let’s assume Sally’s investment portfolio has grown by 3% annually over and above her 5% annual withdrawal (which is not guaranteed), and is valued at $8.5 million at her death at age 90:

  • 60% to children: $5.1 million (about $1.7 million each)
     
  • 20% to grand and great grandchildren: $1.7 million
     
  • 20% to charity: $1.7 million - By simply listing her 5 favorite charities as beneficiaries of her IRA, those assets will pass directly to the charities with no income tax liability (the best assets to give to charity are those that would be taxed if received by family members). If she would like her family to have influence over future charitable contributions, another option would be to have the IRA beneficiary be a Donor Advised Fund (DAF), and have family members serve as grantors who recommend future donations from the DAF to local charities.

Accumulating significant wealth requires a tremendous amount of discipline, stewardship and hard work. Distributing wealth, even for high-net-worth individuals, can be overwhelming and very stressful, unless a simple strategy like the one described above is embraced.

Of course, all of this requires the investment portfolio to grow, which is not guaranteed. We would use a simple investment strategy for Sally with a fairly consistent allocation: one third of the value allocated to primarily high-quality bonds, and two thirds to primarily high-quality, wide moat large company stocks, with tactical shifts during times of extreme market stress and corrections. In our experience, the portfolio becomes an engine that can provide the long-term returns necessary for Sally to realize her financial dreams while lending a helping hand to family and community.