loooooong term bank account
July 12, 2007 2:46 PM Subscribe
ok, i know this is crazy. but is it possible to:
--set up a cross-generational US bank account (say, not to be accessed for say, 200+ years)
-- aquire a substantial gain, using the factors of TIME/INTEREST to build a sizable amount money to accessible a distant relative yet to be born.
(don't think this would be a Dynasty Trust, since I would be starting out with some nominal amount, say $1000.)
When you're looking at time periods of 200+ years, issues come into play that most folks don't generally think about. One is mortmain and its friend the rule against perpetuities. Those don't affect savings accounts - today, in the U.S.A. - but those laws could change in the future. At the moment their main effect is to prevent contingent grants of property that could vest at indeterminate times in the far future. One of the reasons this applies to you is that your grant to a distant relative yet to be born is contingent on this relative actually being born, which may not happen. It could turn out that your attempt to deed this money to him is eventually ruled void, not because he was never born or never will be born, but because his birth is contingent on something too far ahead in the future.
Now, when talking about investments, we speak a lot about risk. A savings account is something you probably think of as low risk. Over the short term in 2007 America, it is. But in the crash of 1929 - not even 100 years ago - a lot of people lost their savings accounts when their banks folded. Today, we have FDIC insurance. We used to have a separate FSLIC, which became insolvent in 1989, although not too many individual accountholders lost their shirt in that boondoggle.
We think FDIC is pretty bulletproof, but it may not be bulletproof 200 years from now. Investors like you in 2194 might see the handwriting on the wall and take their money out of FDIC-insured savings accounts. But you won't, you'll be dead. So when the banks collapse in 2198 no one will have taken your money out of the account and your distant relative who was to inherit in 2207 gets nothing.
FDIC also limits its coverage to $100,000 per institution. Assuming you are accruing at 4% annually, which historically is about average for savings accounts over the long, long term, your $1000 will be worth $100,000 in 117 years, well short of the 200 years. Who knows if the FDIC limit will still be $100,000 then, or if the FDIC, or the bank you put the moeny in, will still be around. Not you; you'll be dead. (And if you think that, for example, a 243-year-old bank couldn't go under in less than two years, due to the malfeasance of one trusted individual, think again.)
So you're accruing away merrily at 4%. You are earning dollars, more every year. (Some entity, presumably, is earning more than 4% and paying the taxes this interest incurs.) However, dollars are not a stable asset; they are subject to inflation and fluctuation in exchange rates. Look at Zimbabwe - 9000% inflation this year. Or 1930's Germany, which until recently had been a thriving nation, leader of the free world. Or 1980's Mexico. How many years of 9000%, or 90000% inflation would it take to wipe the value of your savings account to the point that the $1 million it contains would no longer buy a slice of bread? (Not very many.) Are you really sure that'll never happen in the U.S. in the next 200 years? I'm not.
In fact, if you accrue at a post-tax rate of 4%, and inflation kicks along merrily at its historical average of 3.6%, in 200 years the present-day-adjusted value of your $1000 will be $2222. If someone handed you $2222 today, would you say, "Oh, thank you, great-great-great-grandfather, your foresight and fiscal prudence have made me wealthy beyond my wildest dreams?" No, you probably would not. I mean it beats a kick in the head, but for 200 years it's not a very good real rate of return.
Finally, let's not forget sovereign risk. If the United States government stops existing, so do dollars. I think this is pretty unlikely, but not impossible. I can certainly foresee the possibility of geopolitical events that would cause your savings account either to be seized by a U.S. government or foreign power, or to simply be declared worthless.
Bottom line: high chance of losing the money completely; if not, inflation probably makes this idea a non-starter.
posted by ikkyu2 at 3:36 PM on July 12, 2007 [14 favorites]
Now, when talking about investments, we speak a lot about risk. A savings account is something you probably think of as low risk. Over the short term in 2007 America, it is. But in the crash of 1929 - not even 100 years ago - a lot of people lost their savings accounts when their banks folded. Today, we have FDIC insurance. We used to have a separate FSLIC, which became insolvent in 1989, although not too many individual accountholders lost their shirt in that boondoggle.
We think FDIC is pretty bulletproof, but it may not be bulletproof 200 years from now. Investors like you in 2194 might see the handwriting on the wall and take their money out of FDIC-insured savings accounts. But you won't, you'll be dead. So when the banks collapse in 2198 no one will have taken your money out of the account and your distant relative who was to inherit in 2207 gets nothing.
FDIC also limits its coverage to $100,000 per institution. Assuming you are accruing at 4% annually, which historically is about average for savings accounts over the long, long term, your $1000 will be worth $100,000 in 117 years, well short of the 200 years. Who knows if the FDIC limit will still be $100,000 then, or if the FDIC, or the bank you put the moeny in, will still be around. Not you; you'll be dead. (And if you think that, for example, a 243-year-old bank couldn't go under in less than two years, due to the malfeasance of one trusted individual, think again.)
So you're accruing away merrily at 4%. You are earning dollars, more every year. (Some entity, presumably, is earning more than 4% and paying the taxes this interest incurs.) However, dollars are not a stable asset; they are subject to inflation and fluctuation in exchange rates. Look at Zimbabwe - 9000% inflation this year. Or 1930's Germany, which until recently had been a thriving nation, leader of the free world. Or 1980's Mexico. How many years of 9000%, or 90000% inflation would it take to wipe the value of your savings account to the point that the $1 million it contains would no longer buy a slice of bread? (Not very many.) Are you really sure that'll never happen in the U.S. in the next 200 years? I'm not.
In fact, if you accrue at a post-tax rate of 4%, and inflation kicks along merrily at its historical average of 3.6%, in 200 years the present-day-adjusted value of your $1000 will be $2222. If someone handed you $2222 today, would you say, "Oh, thank you, great-great-great-grandfather, your foresight and fiscal prudence have made me wealthy beyond my wildest dreams?" No, you probably would not. I mean it beats a kick in the head, but for 200 years it's not a very good real rate of return.
Finally, let's not forget sovereign risk. If the United States government stops existing, so do dollars. I think this is pretty unlikely, but not impossible. I can certainly foresee the possibility of geopolitical events that would cause your savings account either to be seized by a U.S. government or foreign power, or to simply be declared worthless.
Bottom line: high chance of losing the money completely; if not, inflation probably makes this idea a non-starter.
posted by ikkyu2 at 3:36 PM on July 12, 2007 [14 favorites]
I don't know, it seems to have worked out pretty well for Benjamin Franklin.
posted by synaesthetichaze at 6:17 PM on July 12, 2007 [1 favorite]
posted by synaesthetichaze at 6:17 PM on July 12, 2007 [1 favorite]
But according to the story you linked, Franklin didn't leave anything in a savings account - he asked that it 'be invested' (presumably by someone) and looked after. If you have somebody looking after the money, it is much more complicated than the OP's idea, but shielded from many of the risks ikkyu2 talks about.
posted by jacalata at 8:48 PM on July 12, 2007
posted by jacalata at 8:48 PM on July 12, 2007
Interesting article, synaesthetichaze. But Franklin's money wasn't put into a savings account; it was actively managed for the entire time. Which is certainly the right way to do this.
posted by ikkyu2 at 8:48 PM on July 12, 2007
posted by ikkyu2 at 8:48 PM on July 12, 2007
Wouldn't you also be wagering that your offspring will be-able-to/want-to have kids?
posted by Quarter Pincher at 12:11 AM on July 13, 2007
posted by Quarter Pincher at 12:11 AM on July 13, 2007
Bottom line: high chance of losing the money completely; if not, inflation probably makes this idea a non-starter.
posted by ikkyu2 at 6:36 PM on July 12
I know I'm late to the party, but this is extremely short-sighted logic. There are other countries and other currencies.
Furthermore, jacalata and synaesthetichaze have it right. You set up a trust or a foundation to do this.
And the vehicle you want is not a savings account, it's the S&P500 with dividends reinvested.
see my comment in a recent thread that referenced this one.
posted by Pastabagel at 8:04 PM on August 9, 2007
posted by ikkyu2 at 6:36 PM on July 12
I know I'm late to the party, but this is extremely short-sighted logic. There are other countries and other currencies.
Furthermore, jacalata and synaesthetichaze have it right. You set up a trust or a foundation to do this.
And the vehicle you want is not a savings account, it's the S&P500 with dividends reinvested.
see my comment in a recent thread that referenced this one.
posted by Pastabagel at 8:04 PM on August 9, 2007
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posted by sophist at 2:58 PM on July 12, 2007