A family spending policy worked per heir rather than per family: the formula, what familiar rates do over three generations, and what moves the answer.
The spending rate that preserves a family's wealth across generations is the net return, less inflation, less the growth in the number of heirs. On an illustrative $500m family earning 8.0 per cent before costs and tax, with the number of households doubling every 30 years, that rate is 1.3 per cent a year. The more familiar 3.7 per cent keeps the family's total real wealth intact while halving each heir's share every generation.
Worked in full in The Family Office Professional by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Most family investment policies set a spending rule borrowed from endowments: spend the real return and the capital lasts for ever. An endowment has one beneficiary that does not have children. A family does. The question the policy has to answer is not whether the capital survives but whether each descendant inherits as much, in real terms, as the generation before. That is a different number, and the arithmetic shows how much lower it is.
| Input | Value |
|---|---|
| Family wealth, $m | 500.0 |
| Households today | 4 |
| Gross portfolio return | 8.0% |
| Office, manager and advisory costs | 0.8% |
| Tax drag on returns | 1.0% |
| Inflation | 2.5% |
| Households multiply by, each generation of 30 years | 2.0 |
Net return r = gross − costs − tax = 6.2%
Growth in households g = 2.01 ÷ 30 − 1 = 2.34% a year
Spending that holds real wealth per heir: s = (1 + r) − (1 + inflation) × (1 + g)
In Excel, with r in B1, inflation in B2 and g in B3:
=(1+B1)-(1+B2)*(1+B3)
| Objective | Spending rate | Year-one spending, $m |
|---|---|---|
| Preserve nominal capital | 6.2% | 31.0 |
| Preserve the family's total real wealth | 3.7% | 18.5 |
| Preserve real wealth per heir | 1.3% | 6.52 |
At 1.3 per cent the family spends $6.52m in the first year, about $1.63m per household. That is the spending which leaves each heir in 30 years exactly as wealthy, in today's money, as each household is today: $125.0m.
Real wealth per heir, as a percentage of today's $125.0m, at each spending rate held constant:
| Spending rate | After 30 years, 8 households | After 60 years, 16 | After 90 years, 32 |
|---|---|---|---|
| 1.3% | 100.0 | 100.0 | 100.0 |
| 2.0% | 81.9 | 67.1 | 54.9 |
| 3.0% | 61.3 | 37.6 | 23.1 |
| 3.7% | 50.0 | 25.0 | 12.5 |
| 4.5% | 39.5 | 15.6 | 6.2 |
At 3.7 per cent the family's real wealth stays at $500.0m for 90 years, and the policy reports success every year. Each of the 32 households at the end holds $15.6m, an eighth of what its great-grandparents' household held. At 3 per cent, which most investment committees would call prudent, each holds $28.8m. The pattern behind the old saying about wealth lasting three generations needs no extravagance: an ordinary spending rule and an ordinary family tree are enough.
| Variant | Spending rate |
|---|---|
| Households multiply by 1.5 a generation | 2.31% |
| Households multiply by 2.0 a generation | 1.30% |
| Households multiply by 2.5 a generation | 0.52% |
| Costs of 0.4% instead of 0.8% | 1.70% |
| Costs of 1.5% instead of 0.8% | 0.60% |
The family tree matters more than the portfolio. Moving from 1.5 to 2.5 households per household each generation takes the sustainable rate from 2.31 to 0.52 per cent. Costs come second: every basis point of cost is a basis point of spending, so halving the office's cost load from 0.8 to 0.4 per cent raises the sustainable rate by the same 0.4 points, a 31 per cent increase on 1.3. That is the most direct link between how a family office is run and what the family can draw from it; the cost side is worked in at what level of wealth a family office starts to pay.
Measuring the policy on total wealth. A report that shows the family's real wealth intact after 30 years at 3.7 per cent spending is accurate and misleading: the number of people it belongs to has doubled. The measure that matches the family's intention is real wealth per household, and the policy should report it.
Two refinements matter in practice. Spending is rarely a fixed rate on current wealth; smoothing rules that blend last year's spending with a percentage of a rolling average change the path but not the long-run arithmetic. And a family can grow its wealth through new enterprise as well as investment, which is the honest way to support a higher rate: the formula assumes the portfolio is the only source of growth.
Set the spending rate against three numbers: net return, inflation and the growth in households. Here they give 1.3 per cent, not the 3.7 per cent an endowment rule would allow. Anything above that is a decision to spend capital that belongs to later generations, which may be the right decision, but it should be made knowingly. The cost model and the working documents for a family office are in the free workbook for this case; for the private equity programme that often carries the return assumption, see how much a family office should commit each year to private equity.
It depends on the objective. Preserving the family's total real wealth allows net return minus inflation, 3.7 per cent in the worked case. Preserving real wealth per heir also subtracts the growth in households: with households doubling every 30 years, the sustainable rate falls to 1.3 per cent, about $6.52m a year on $500m.
Often through ordinary arithmetic rather than waste. At a 3 per cent spending rate, a 6.2 per cent net return and households doubling each generation, each heir's real wealth after 90 years is 23.1 per cent of the original household's, while the family's total real wealth has grown. Dilution across heirs does most of the work.
One for one. Every basis point of costs on the portfolio is a basis point less that can be spent without eroding wealth per heir. In the worked case, costs of 0.4 per cent instead of 0.8 per cent raise the sustainable spending rate from 1.30 to 1.70 per cent, while costs of 1.5 per cent cut it to 0.60.
This article is one calculation from The Family Office Professional. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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