Saving vs. Donating
I think that effective altruists need a new kind of financial instrument.
I feel inspired to:
Currently, I see these two goals as being in conflict. I want to save but I also want to donate.
I want both, and I could save now and donate later – but I don't fully trust my future-self to stick to the plan.
I think the right kind of financial instrument would align these parts of me such that I could satisfy my cravings for savings and donate much more than I otherwise would have. Win-win.
(epistemic status: I've thought about this for like 30 minutes and it seems reasonable to me).
The basic mechanism
The alternative investment option would:
- Keep all of my money invested and pay me 4% per year (with the option to reinvest this if I chose).
- Donate all of the money at the end of my life to effective charities.
Provided the mechanism for (2) was sufficiently robust, I could reasonably consider every dollar given to this fund as a donation to an effective charity. I would actually donate more this way, I think, because I would not feel the need to save for myself.
For the rest of the post I'm going to call it a Personal Donation Fund, or PDF.
Big Purchases and emergencies
The proposal above isn’t ideal if I want to buy a house, or if I need money in an emergency. Let's deal with each of these individually.
Suppose I need to pay emergency medical expenses. I could give the option to take money out of the PDF with a promise to pay it back later. (Each year the amount owed would be adjusted for inflation). I could spend this money that I've "borrowed" on the emergency expenses. I would pay back these loans later. If I failed to pay them back, then the loan amount should come out of my estate if I failed to pay them back.
For buying a house I would (at least) need a deposit. I could borrow the same way as above, but this might make it hard to secure a loan for the rest of the house. An alternative would be to co-buy the house. This way, when the house was sold the PDF and I would both receive a portion of the profits. From the perspective of the PDF, this would be just like making another investment.
Open Questions and Opportunities
- I would be personally willing to use a PDF if I could, would you?
- Have I missed any salient features that seem really important?
- I do not currently feel like this would be my comparative advantage to set up, maybe you know someone who would like to set it up?
- It's possible that this would work best as a trust, in which case you might need other trustees. I'm not sure exactly what the best set up would look like.
Acknowledgements
Jo Small helped shape my thinking on this. Tyrone Barugh and Ismam Huda gave me helpful comments on an earlier draft.
From my limited knowledge of finance and law, I think that a trust would do everything you are looking for: you put your money into the trust, and the the trust follows particular rules that you set up. Rules such as "give me a 4% distribution annually" and "give all money to X upon my death" would be pretty easy to set up. The idea of borrowing against it might be a bit trickier.
But I think that the advantage of having the money outside of your control is relatively minor, while the disadvantages seem a bit larger. If you really do not trust your future self, then it might be worth it to set up a trust. But in general I would simply recommend putting the money into an instrument like a 401k or an IRA so that you are able to access the money early in case of emergency, but with a financial penalty to motivate you to not touch it. Excess money can be invested into a target date retirement fund in a brokerage account. Overall, I'm not convinced that the idea is worth doing, although I do find the concept interesting.
A very nit-picky note: the study that is famous for suggesting 4% of your assets as sustainable is only intended for a retirement of 30 years: it had a .95 probability of still having 0 or more dollars in it after 30 years. If you plan to live off of your investment for more than 30 years, then 3.5% should serve you pretty well (all the normal caveats apply: allocation matters, sequence of return risk matter, market performance matters, etc.).
Thanks, this is really helpful information about trusts and the 4% rule!
On self trust: I feel that a common pattern might be that when you're young, you're 'idealistic' and want to do things like donate. When you're older, you feel like spending your money (if you have it) in ways that might not make you particularly happy. I might even decide I would rather give it all to my kids (if I have some). This makes me think there's a good chance I won't donate it later if I haven't pre-committed.
On safety: I am from Australia, and to some extent my context is probably quite different to many others. (On the whole, Australia tends to look after you if you get severely injured or run entirely out of money. This makes quick access less of a pressing consideration for me). But to the extent that it is an important consideration, why not have a little money that's easily accessible and most of it in a trust?
Oh, Australia. I fell prey to the common mistake of "assuming other people people are like me." I know a good deal about personal finance in a USA context, but only parts of that are universal: good chunks of it are particular to a specific national context. The national context matters a lot in personal finance issues.
Your idea of "have a little money that's easily accessible and most of it in a trust" does make sense. Have an 'emergency fund' or 'support myself fund' with enough money for a a year or two of expenses, and then have everything else in a fund that transfers X% into your 'support myself fund' each year (or 1/12th of X% each month). If you do it right, the trust should grow indefinitely, and the inflow to your 'support myself fund' will be larger than your expenses.
I think that I don't have anything particularly wise or useful to write about the whole 'trusting your future self' topic. But I imagine that there are likely personal finance professionals who have done research about that time of thing. It might take some poking around to find it though.