Tool: Legacy

A free tool to create a Legacy. The goal of this tool is to allow your heirs to withdraw money in such a way that they are able to leave just as much to their own heirs. 

To access the tool, click the link above. It leads to an Excel file with no macros. See below for more relevant information about the file. 

This tool allows to : 

• Establish set of rules when an heir can start using the inheritance
• Establish the rules to divide the inheritance among the heirs
• Establish decumulation rules (how funds are withdrawn) to ensure the amount remains the same or increase over time 

The decumulation can start when the funds have grown back to the original inheritance amount before distribution. For example, if one receive $1,000 from a $2,000 inheritance, it must grow the fund to $2,000 before using it. To encourage work of the young retiree, the tool put a minimum age utilization of 35. if the funds have not grown back at age 65, the tool permit utilization at age 65.

To divide the inheritance, it first provide 100% to the spouse. This percentage is reduce by 1/30 per year the spouse is younger.  The rest is split between all the children and the spouse. The grand children get a quarter of the children or the spouse. The great grand children get a quarter of the grand children. Ex: no spouse, 2 child + 2 grand children= 40 % to the child and 10% per grand children. 

Finally, the decumulation follows the strategy of decumulation "ADD" which permits to keep the principal year after year. 

Analysis :

At term, each generation should receive 2 to 3 heritance. Suppose a death at 85 with a 50 years old child and a grand child of 20 years old. The grand child could grow his inheritance for 45 years, thus increase it by about (1+7.1%)^45=21x.  More than enough to reestablish the original inheritance before the split. For the children, This would provide some time to almost triple the inheritance before age 65.  

Winning a million and spending it all in 1 month is eccentric and it does not feels like the best way to use this money. Instead taking a few dozen of thousands per year would last for a lifetime or two.  

The rule of decumulation of the strategy ADD rest upon the fixe percentage of the regular balance, 75% of the initial fond. Using a fixe 5% implies that the fund will never get to 0. However, this bring a great fluctuation in the decumulation. As first countermeasure, we use the smoothing of the asset to reduce some of the fluctuation. Then the reserve is used to smooth any negative shortage.  

The Institute of financial planning predicts (guideline 2025) that the Canadians equity and US will return 7.1%(excluding a security margin of 0.50%). With the approach of taking 5% per year, that would permit an increase of about 2% per year of the balance, which is coinciding with the desired inflation of the Bank of Canada. 

This tool has no legal tender. A real legal will is still required.  

How to use the tool:

• Save the file on your computer
• Copy the tab Test. 
• Complete the cell in beige of the section Informations sur l'héritage reçu(cell O3), Information pour vos héritier(cell O19), Informations personnelle (cell B29)
• Input simplify the entry of the regular and reserve balances which are respectively 75% and 25% of the total balance prior to the decumulation. The decumulation is done on the regular balance, a % of the actual balance. About 5% of the total balance. the reserve balance permit to ensure a minimum withdrawal after the start of decumulation. Thus permit a variable decumulation, using the metric (the level of the reserve) when there's economic turmoil. The reserve by default tries to cover 90% of the preceding decumulation or them with the indexation of the minimum between 1% and 50% of the CPI.  
• If you desire to maintain inflation infos, you should also update your inflation in the tab IPC or enter Stat Can information. See the processus (cell H9)
• The Tab paramètre avancer contains various parameters if you want to modify the strategy  
• Go to the tab Note for more details

Tabs:

• Note: tab including notes details on the tool 
• Paramètre avancer: tab  with advanced parameter. Column E parameters is to be modified. Column F parameters  is the original parameters. The Column G use the new parameter and is not to be modified.
• IPC: tab contains the IPC information
• Test EN: tab contains the tool

Inspiration:

The inspiration came from a fusion between the game "Talos Principle" and actuarial mathematics. In the game, we experience an android which is the millionth version of the robot. Each of the iterations trying to resolve puzzle until one succeed. Each iteration learning a little from the past. Similarly, we want the best for our children. If in 1900, one of my ancestor would have grant me 100$ of equity these would be worth more than 1 million today. Why not systematize this inheritance to provide similar results.  

In finance, we love to accumulate. However, a lot of us have the philosophy to be the poorest at the cemetery. Why would we not want our descendant to profit. The idea that to success come from ourself is noble. However, given the means, wouldn't we increase our personal  growth? Having financial trouble does not seems to be necessary to wanting to become better.  

A person with a grand desire to grow will accomplish great thing. The same person with more resource will accomplish more. Inversely, a person with a desire of destruction will do more with more. Let's hope there's more good people in the world than bad. In brief, this file have been created not to be the richest in cemetery, but that my children can accomplish more. 

Let's do a concrete example, at 25 years old you win a 1 million. 

• Without investing, you can spend $ 100 000 for 10 years. 
• By investing it in equities, you can withdrew $100 000 per year 
• if beginning in the year 2000, you would still be short after 10 years  
• if beginning in the year 1980, you could still withdrew $100k in 2024 without fear of missing in future. Adding a100% inflation on the $100,000, you would have enough to cover 23 year from 1980.  

Using actuarial mathematics, we have a formula to determine either the number of payment, size of payment according to a fix rate of returns and a current balance. Let's consider a factor = (1-(1+interest)^- #periods)/(1-(1+interest)^-1).  At 8% per year, we could divide our million by that factor to determine that for a 20 year period, we could withdrew 94k, over 30 years, 82k. It become interesting when we push it to 100 years, we could withdrew 74k. For those who did limits, we could push it an infinite period and we see the second term vanish. The factor become =1/(1-(1+interest)^-1). Here's a table showing the withdrawal permitted against a certain % and number of years up to infinity. 

To come back to our millionaire, lets suppose a return of 7,0% and 2.0% inflation, our millionaire could withdrew $62k during 30 years, increased by 2% each year or of $48k increased by 2% until the end of time. More the return is great, less is the discrepancy. 

For me, the conclusion is that losing a little (14k) is worth my children to receive a large inheritance instead of trying to send it all. If you truly believe that its by living in adversity that you can grow, why not live in a third world country to see what you can become?