We’re huge believers that those of us who are even in a position to consider early retirement are some of the luckiest humans who’ve ever walked the Earth. Financial independence is not something within reach for most people alive on the planet today, and it certainly wasn’t an option for the vast majority of people of past eras either. Even just traditional retirement is not a historical concept, and it’s not something average homo sapiens throughout history could look forward to.
So take the tiny fraction of all humans who’ve ever lived who even got to retire, and then take a tiny fraction of those folks who were able to retire comfortably and securely, and then take an even tinier fraction of that group who can retire comfortably, securely and early – and that’s us in this community. We’re like a tiny speck on Waldo’s hat in a Where’s Waldo? puzzle.
But though we are small in numbers, we possess enormous strength. That ability to decide how we wish to spend our lives, free from the constant worry of money, is a superpower, one we’re lucky to have. And I always love quoting Ben Parker (Peter Parker/Spiderman’s uncle), or maybe just a comic book sidebar, who reminds us: “With great power comes great responsibility.”
Related post: With great wealth comes great responsibility
Just as I urged folks who came to the FIRE panel at FinCon17 to consider this question, I pose it to you as well: How will you use your superpower? Not just for your own benefit, but for the benefit of others, and for the greater good. And might it take the form of a charitable mission?
Let’s talk about using that power, and about one big tool that’s here to help us: the donor advised fund.
Charitable giving is enormously important to us. So much so that it has actually made me question whether we really want to retire early, because it will mean being able to give less in the future than we’ve been able to give while working. This isn’t because we’re some amazing, altruistic people. We’re normal people who think selfishly plenty of the time, too, and want to be sure our portfolio covers our needs first.
But through our upbringings and our work, we’ve seen firsthand how very real many of the challenges facing humanity and the planet are for people, a large number of whom do not have the financial or community resources needed to change their situation. So while some problems like poverty may seem to those who’ve never experienced it as a situation anyone should be able to get out of with enough determination and hard work, we’ve seen with our own eyes how different it is when you’re actually in that situation. And we’re not willing to stand by and do nothing, when we are some of the lucky few who have the means to help our fellow humans who haven’t been so lucky.
Psychological research shows that most people give for selfish reasons. The act of doing something to help others gives us a boost in our self-image, and that good feeling we get from it is addictive. That’s for sure true for us, too. We selfishly don’t want to look back on our lives and know that we only looked out for ourselves. We want to be remembered as people who helped where we could and did our best to leave things in better shape than we found them. That is 100 percent selfish on our part, but I’m okay with it, because ultimately that selfishness will mean helping others, and that’s a net positive for society and the planet. If you’re motivated to give by the thought of getting your name etched in granite somewhere, I’m good with that — so long as you give. You don’t have to have a perfect, selfless heart to act selflessly. The action is what matters.
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Giving Charitably In Early Retirement
We have a mission in early retirement to go on more adventures, a mission to be more creative, and a mission to figure out what we want to be when we grow up. But we also have a charitable mission, in part because we feel that is our responsibility as incredibly privileged people. (And also because if we don’t give, who will? Data show that rich people are pretty darn stingy with their giving, especially relative to poor people.)
Our early retirement budget is not huge, but we hope that we’ll always have room in it to give. (Keep reading for more on that.) And while we plan to volunteer a lot, volunteering itself isn’t enough. Many nonprofits accept volunteers only in hopes that those volunteers will feel a connection to the organization and later donate money, not because the volunteers are actually that helpful. Oftentimes, training and supervising volunteers takes more staff time and resources than those volunteers return in value. Which is not to say we shouldn’t volunteer, but that we shouldn’t only volunteer. To get their real work done, charities need our money.
Given that the entire concept of early retirement is based on spending far less than you earn so you can save at a high rate, we know by definition that those of us who do retire early will see a large drop in cash flow. And that shift from a larger active income to a smaller passive income could easily translate into a newfound scarcity mentality. And scarcity is the enemy of generosity.
There’s also just the practical matter of less money to work with in retirement, at least if you want your nest egg to last. And that’s what I was hung up on for a long time, worried that we wouldn’t be able to afford to give much in retirement.
Fortunately, a donor advised fund answers both the scarcity concern and the cash flow reality.
The Donor Advised Fund
A donor advised fund is an account you fund to be able to give charitably over time. Funds in a DAF are invested just like in a retirement account, in a range of funds offered by the manager like total market stock index funds, bond funds, money market, target date, large or small cap funds, etc. Unlike your retirement account or other tax-advantaged accounts, you can’t ever get this money back. But otherwise the fund feels very similar to an IRA, 401(k) or 529.
In many ways, donor advised funds are ideal for early retirees, because you can fund a DAF while working and have cash flow, and then spend out your charitable funds in years when you don’t have earned income coming in, and might not otherwise have much to give.
The biggest benefit tax-wise to a DAF is that you get the full charitable write-off in the year you fund your DAF, not based on when you grant funds out. (That’s assuming the alternative minimum tax, or AMT, doesn’t reduce your charitable deductions, as it often does for us.) And if you’re like us and aren’t trying to reduce your tax bill, it’s still an answer to the scarcity problem, because you fund your DAF when you’re flush with funds, and spend it when you’re more constrained.
Choosing a Fund Manager
We decided to open our donor advised fund with Fidelity Charitable, which may be a surprise to the Vanguard lovers of the world, us included. But Vanguard’s donor advised fund options just weren’t as appealing. Here’s a head-to-head comparison of the major factors:
No significant difference (vary by investment option, with the same overall fees)
Minimum to open a DAF:
Minimum grant amount:
Minimum amount for additional deposits:
Fidelity: No minimum
Note: There are a number of other DAF options out there that are comparable to Fidelity’s offering, especially Schwab Charitable. DAFs are also offered by community foundations, though the terms and fees can vary widely. Ultimately, we went with Fidelity over Schwab because Schwab requires additional contributions to be at least $500, and Fidelity has no minimum. We could imagine throwing in a couple hundred here and there and prefer having no minimum.
The minimum to open a DAF with Vanguard was annoying, but not a dealbreaker. The bigger issue was the $500 minimum grant amount and the $5000 minimum for additional contributions. We want to be able to send small increments to a whole bunch of causes, or to give money whenever the urge strikes us, without having to write a bigger $500+ check. And we want to be able to contribute more to our fund in the future even if we have less than $5000 available to do so.
We opened our DAF with the minimum last week, and will put everything over our stretch magic number at the end of the year into it, as well as doing another big round of charitable giving before December 31.
For those who are concerned about what tax changes may be coming, as Congress debates various options (my advice: don’t get too attached to any of the current provisions. Everything in the bill will change many times), a DAF is also a good answer to potential future tax uncertainty. If you’re worried about losing some of your ability to itemize deductions, then why not open a DAF or add more funding to it this year, while you can for sure still itemize and get the added benefit of compounding? Or if you are a fan of itemizing every other year and taking the standard deduction the other years, you can fund the hell out of your DAF in those itemized years and spend out some of the funds in the standard deduction years.
I may not love the idea of avoiding as many taxes as possible, but I’m way more okay with it if it’s in the service of more charitable giving.
Our Best Case Scenario
I spend most of my time planning for and writing about worst case scenarios. What we’ll do when the next recession comes, which will likely be early in our retirement when we’re most susceptible to sequence of returns risk. What our many contingency plans will be. What we’ll do for health care if the Affordable Care Act goes away. It was worst case scenario thinking that motivated me to want to retire early in the first place.
But we think about best case scenarios, too (I swear we do!), and all of our best cases include being able to make it raaaaaaaaaain for the causes we care most about.
You probably know that the four percent rule – a rule I challenge not based on the percentage itself, but based on the assumption of level spending over time (a concern that JD Roth recently backed up) – gives such a high chance of success that most people who don’t hit sequence of returns peril will, in fact, end their lives with far, far more than they will need to have saved. And if that happens for us, then our favorite charities will be getting some major love when our time’s up, especially if we should happen to die while our term life insurance policies are still active. Leaving a big charitable legacy is definitely a best case scenario for us.
But we don’t want to wait until then to give, because there are so many urgent problems that need our support now. Global warming won’t wait until the first round of FIRErs kick off. People living in poverty and without basic health care here and all over the world need help now. Wild places under threat need protecting today. And if our best case scenario plays out, we’ll be able to give generously in the near term, too. Being able to continue giving regularly is part of our motivation to build lots of extra conservatism into our financial projections, in hopes that our investments will beat the projections and we can donate the overages. Best case = looooooooots of rain for those great organizations fighting the good fight.
The DAF is the third part of this best case planning. If the markets continue to climb, or resume climbing after the next correction, then our DAF investments will grow, and we’ll have more money to grant out each year.
Not Relying on the Best Case
Of course, none of our plans ever rely on best case scenarios. We’ve been extraordinarily lucky in our lives, and we do believe that we’ve played a role in creating some of that luck. But we aren’t dumb enough to think we’re in control of everything, or that we can always expect to have good health or able bodies, or benefit from market tailwinds instead of headwinds.
And having the donor advised fund ensures that we can fulfill our charitable mission no matter what. Even if markets are grumpy for a long time, we’ll still have charitable dollars to spend because once they’re in the DAF, they can’t be used for anything else. There’s no DAF conversion or 10 percent penalty — what’s in the fund is there for giving and no other purpose. So we have to give, whether we can “afford” it or not. That’s something – selfishly – we love.
How Will You Use Your Superpower?
Let’s talk superpowers! Do you have a charitable mission for your early retirement or traditional retirement? Or any other vision for how you’ll make a positive difference in the world with your superpowers? Do you have a donor advised fund? Who did you choose to manage it? For those who haven’t opened one, what’s the biggest hurdle in your mind? Let’s discuss in the comments!
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