Zakat (2.5% alms giving) and the 4% SWR
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Zakat (2.5% alms giving) and the 4% SWR
So not sure where to put this under but have been curious about this. I don't want it to turn into a religious debate...
In Islam, one is required to distribute 2.5% of one's total net wealth to the poor/needy/less fortunate - annually before the last night of Ramadan. That's not on income per year but total portfolio (RE, stocks, cash, etc.) There are certain rulings about what counts as assets as described by certain scholars/fiqh but that is not super relevant to the discussion right now. I'm aware of the Tzedakah in Judaism and Tithe in Christianity so hoping folks from all faiths can chime in.
I bring this question here because the 4% SWR is thrown out the window with the aforementioned. It would either have to be 6.5% or you'd have to go super lean and rely on 1.5% for your own needs - which would require different approaches. I tried searching the forums but came up short. 26 years old so long road ahead and trying to do this efficiently and effectively.
I'm blessed to be in the position I'm in and plan to continue to adhere to the above requirement in the religion (barring any calamities). I keep my expenses low and savings rate high and will plan to continue doing so. I am mainly wondering how to factor in retirement planning when accounting for the 2.5% draw every year. Right now, I am not hurting to give the amount as it is still small relatively speaking. I wonder, if in the future my balance approaches 1M and beyond and 25k is due to charity, I suspect I'll have to work much longer than anticipated. Which is fine by me as the money I am earning is benefiting those who need it more than me.
So bogleheads, what's your take on this? Have you run into this? How would you approach this? Plan to keep working? Am I overthinking this? Without getting religious, the more you give the more you receive and I should just keep my head down and not worry too much because I'm aware that I'm doing fine.
Thanks in advance.
In Islam, one is required to distribute 2.5% of one's total net wealth to the poor/needy/less fortunate - annually before the last night of Ramadan. That's not on income per year but total portfolio (RE, stocks, cash, etc.) There are certain rulings about what counts as assets as described by certain scholars/fiqh but that is not super relevant to the discussion right now. I'm aware of the Tzedakah in Judaism and Tithe in Christianity so hoping folks from all faiths can chime in.
I bring this question here because the 4% SWR is thrown out the window with the aforementioned. It would either have to be 6.5% or you'd have to go super lean and rely on 1.5% for your own needs - which would require different approaches. I tried searching the forums but came up short. 26 years old so long road ahead and trying to do this efficiently and effectively.
I'm blessed to be in the position I'm in and plan to continue to adhere to the above requirement in the religion (barring any calamities). I keep my expenses low and savings rate high and will plan to continue doing so. I am mainly wondering how to factor in retirement planning when accounting for the 2.5% draw every year. Right now, I am not hurting to give the amount as it is still small relatively speaking. I wonder, if in the future my balance approaches 1M and beyond and 25k is due to charity, I suspect I'll have to work much longer than anticipated. Which is fine by me as the money I am earning is benefiting those who need it more than me.
So bogleheads, what's your take on this? Have you run into this? How would you approach this? Plan to keep working? Am I overthinking this? Without getting religious, the more you give the more you receive and I should just keep my head down and not worry too much because I'm aware that I'm doing fine.
Thanks in advance.
Last edited by ShakaWaka21 on Mon May 29, 2023 7:27 pm, edited 1 time in total.
Re: Zakat (2.5% alms giving) and the 4% SWR
I’ll be interested in the replies rang you receive. Although it’s not the question you asked, I would recommend that you look in to establishing a Donor Advised Fund (if you haven’t already) so that you can donate appreciated shares from your brokerage account each year in satisfaction of the 2.5%.
Re: Zakat (2.5% alms giving) and the 4% SWR
Avoiding religious talk:ShakaWaka21 wrote: ↑Mon May 29, 2023 7:09 pm So not sure where to put this under but have been curious about this. I don't want it to turn into a religious debate...
In Islam, one is required to distribute 2.5% of one's total net wealth to the poor/needy/less fortunate - annually before the last night of Ramadan. That's not on income per year but total portfolio (RE, stocks, cash, etc.) There are certain rulings about what counts as assets as described by certain scholars/fiqh but that is not super relevant to the discussion right now. I'm aware of the Tzedakah in Judaism and Tithe in Christianity so hoping folks from all faiths can chime in.
I bring this question here because the 4% SWR is thrown out the window with the aforementioned. It would either have to be 6.5% or you'd have to go super lean and rely on 1.5% for your own needs - which would require different approaches. I tried searching the forums but came up short.
For background, I'm 26 with a growing portfolio in the six-figures and six-figure income in a M/HCOL. Max out all accounts (401k, Roth IRA, HSA, and some to brokerage). Stable career with nothing but upward trajectory - talking 500k income in ~10 years if I pursue partner path at my firm. At that point, I'd hope my lifestyle would remain simple but time will tell - I'd have more money than I'd know what to do with and 2.5% would be a drop in the bucket.
I'm blessed to be in the position I'm in and plan to continue to adhere to the above requirement in the religion (barring any calamities). I keep my expenses low and savings rate high and will plan to continue doing so. I am mainly wondering how to factor in retirement planning when accounting for the 2.5% draw every year. Right now, I am not hurting to give the amount as it is still small relatively speaking. I wonder, if in the future my balance approaches 1M and beyond and 25k is due to charity, I suspect I'll have to work much longer than anticipated. Which is fine by me as the money I am earning is benefiting those who need it more than me.
It's been an interesting phase of growth for me because the more I give and plan on giving the less attached I am to my portfolio and growing balance/salary. It just means I can give more because my pleasures in life are thankfully cheap. And hope to keep it that way with my future partner who will have similar religious values with an emphasis on giving.
So bogleheads, what's your take on this? Have you run into this? How would you approach this? Plan to keep working? Am I overthinking this? Without getting religious, the more you give the more you receive and I should just keep my head down and not worry too much because I'm aware that I'm doing fine.
Thanks in advance.
If you are pulling 2.5% of your portfolio to donate then you have less to live on. If you are choosing a 4% withdrawal strategy that means you will need to live on 1.5% and your portfolio will need large enough to meet your spending needs when you retire. If you are in the US, you will also get Social Security at some point making things a bit easier.
A donor advisor fund is a good idea if you plan on donating such a large amount in retirement.
Last edited by EnjoyIt on Mon May 29, 2023 7:28 pm, edited 2 times in total.
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Re: Zakat (2.5% alms giving) and the 4% SWR
This is very interesting. I presume the 2.5% of your net worth for distribution would be variable based on your current net worth as of Ramadan, where as the 4% rule is not a variable withdrawal amount - in the classic iteration, as of the date of your retirement, you set your withdrawal rate based on 4%, then only updated it for inflation. So I would think they are two separate computations.
i.e. - I retire at 60 with a portfolio of 2 million USD. I take 80,000 of distributions that, in say May, then, presuming Ramadan occurs in November (understand that it varies), I run that computation and charitably give 2.5% (which based on market conditions, housing equity, etc. could be more or less than 2 million - 80K). The following May, I withdrawal 80K plus whatever inflation was running...
So I'm not sure they should be linked, but I'm interested to hear other's opinions.
i.e. - I retire at 60 with a portfolio of 2 million USD. I take 80,000 of distributions that, in say May, then, presuming Ramadan occurs in November (understand that it varies), I run that computation and charitably give 2.5% (which based on market conditions, housing equity, etc. could be more or less than 2 million - 80K). The following May, I withdrawal 80K plus whatever inflation was running...
So I'm not sure they should be linked, but I'm interested to hear other's opinions.
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Re: Zakat (2.5% alms giving) and the 4% SWR
That's a great idea. I'll look into it and any hurdles around that. Thanks.gclancer wrote: ↑Mon May 29, 2023 7:25 pm I’ll be interested in the replies rang you receive. Although it’s not the question you asked, I would recommend that you look in to establishing a Donor Advised Fund (if you haven’t already) so that you can donate appreciated shares from your brokerage account each year in satisfaction of the 2.5%.
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Re: Zakat (2.5% alms giving) and the 4% SWR
That makes sense. I wonder how SS or FV of a pension factors in to "wealth" under the guidelines. Questions for a religious scholar. Thanks for chiming in.EnjoyIt wrote: ↑Mon May 29, 2023 7:26 pmAvoiding religious talk:ShakaWaka21 wrote: ↑Mon May 29, 2023 7:09 pm So not sure where to put this under but have been curious about this. I don't want it to turn into a religious debate...
In Islam, one is required to distribute 2.5% of one's total net wealth to the poor/needy/less fortunate - annually before the last night of Ramadan. That's not on income per year but total portfolio (RE, stocks, cash, etc.) There are certain rulings about what counts as assets as described by certain scholars/fiqh but that is not super relevant to the discussion right now. I'm aware of the Tzedakah in Judaism and Tithe in Christianity so hoping folks from all faiths can chime in.
I bring this question here because the 4% SWR is thrown out the window with the aforementioned. It would either have to be 6.5% or you'd have to go super lean and rely on 1.5% for your own needs - which would require different approaches. I tried searching the forums but came up short.
For background, I'm 26 with a growing portfolio in the six-figures and six-figure income in a M/HCOL. Max out all accounts (401k, Roth IRA, HSA, and some to brokerage). Stable career with nothing but upward trajectory - talking 500k income in ~10 years if I pursue partner path at my firm. At that point, I'd hope my lifestyle would remain simple but time will tell - I'd have more money than I'd know what to do with and 2.5% would be a drop in the bucket.
I'm blessed to be in the position I'm in and plan to continue to adhere to the above requirement in the religion (barring any calamities). I keep my expenses low and savings rate high and will plan to continue doing so. I am mainly wondering how to factor in retirement planning when accounting for the 2.5% draw every year. Right now, I am not hurting to give the amount as it is still small relatively speaking. I wonder, if in the future my balance approaches 1M and beyond and 25k is due to charity, I suspect I'll have to work much longer than anticipated. Which is fine by me as the money I am earning is benefiting those who need it more than me.
It's been an interesting phase of growth for me because the more I give and plan on giving the less attached I am to my portfolio and growing balance/salary. It just means I can give more because my pleasures in life are thankfully cheap. And hope to keep it that way with my future partner who will have similar religious values with an emphasis on giving.
So bogleheads, what's your take on this? Have you run into this? How would you approach this? Plan to keep working? Am I overthinking this? Without getting religious, the more you give the more you receive and I should just keep my head down and not worry too much because I'm aware that I'm doing fine.
Thanks in advance.
If you are pulling 2.5% of your portfolio to donate then you have less to live on. If you are choosing a 4% withdrawal strategy that means you will need to live on 1.5% and your portfolio will need large enough to meet your spending needs when you retire. If you are in the US, you will also get Social Security at some point making things a bit easier.
A donor advisor fund is a good idea if you plan on donating such a large amount in retirement.
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Re: Zakat (2.5% alms giving) and the 4% SWR
That's right. I calculate it at the beginning of Ramadan and just plan to give that amount by end of month with cash flow coming in via paychecks.Damocles wrote: ↑Mon May 29, 2023 7:26 pm This is very interesting. I presume the 2.5% of your net worth for distribution would be variable based on your current net worth as of Ramadan, where as the 4% rule is not a variable withdrawal amount - in the classic iteration, as of the date of your retirement, you set your withdrawal rate based on 4%, then only updated it for inflation. So I would think they are two separate computations.
i.e. - I retire at 60 with a portfolio of 2 million USD. I take 80,000 of distributions that, in say May, then, presuming Ramadan occurs in November (understand that it varies), I run that computation and charitably give 2.5% (which based on market conditions, housing equity, etc. could be more or less than 2 million - 80K). The following May, I withdrawal 80K plus whatever inflation was running...
So I'm not sure they should be linked, but I'm interested to hear other's opinions.
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Re: Zakat (2.5% alms giving) and the 4% SWR
ShakaWaka21 wrote: ↑Mon May 29, 2023 7:28 pmThat's a great idea. I'll look into it and any hurdles around that. Thanks.gclancer wrote: ↑Mon May 29, 2023 7:25 pm I’ll be interested in the replies rang you receive. Although it’s not the question you asked, I would recommend that you look in to establishing a Donor Advised Fund (if you haven’t already) so that you can donate appreciated shares from your brokerage account each year in satisfaction of the 2.5%.
The key thing here is to arrange to give assets *before* any taxes have been paid.
The least advantageous way would be to pay taxes on money and then donate the after tax amount. If you are giving to an approved (for tax purposes) non-profit, then they won't pay taxes. So they do get, and keep, the full amount.
Note: I do not know if you are able to arrange it such that you are donating to approved organizations so that this tax advantage is available.
RM
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Re: Zakat (2.5% alms giving) and the 4% SWR
Does Islam also require some level of giving from income? As you mentioned in your initial post, many Christians focus on the tithe, which is an annual gift of 10% of income.
For folks early in their career, 2.5% of assets is well less than 10% of income. So, relative to Christianity, Islam seems to encourage more giving later in life, as personal assets grow.
Do I have that right?
For folks early in their career, 2.5% of assets is well less than 10% of income. So, relative to Christianity, Islam seems to encourage more giving later in life, as personal assets grow.
Do I have that right?
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Re: Zakat (2.5% alms giving) and the 4% SWR
I'm skeptical the DAF passes the religious sniff test as a "charity", unless you are talking about immediately distributing the money from the DAF in the case of charities that don't accept in-kind donations directly (most large charities do).gclancer wrote: ↑Mon May 29, 2023 7:25 pm I’ll be interested in the replies rang you receive. Although it’s not the question you asked, I would recommend that you look in to establishing a Donor Advised Fund (if you haven’t already) so that you can donate appreciated shares from your brokerage account each year in satisfaction of the 2.5%.
As far as SWR, I was curious how much of an effect the 2.5% flat donation would make every year as you draw down your portfolio in retirement. As in, the amount you withdraw to live on goes up with inflation every year, but your remaining balance slowly decreases.
For a 4% initial withdrawal, growing by 3%/year to account for inflation, your portfolio only needs to grow by a nominal 4.35% to last exactly 30 years. Adding in an additional flat 2.5% donation every year, your initial balance needs to be about 44% higher, allowing a SWR of 2.7%.
Re: Zakat (2.5% alms giving) and the 4% SWR
If you SPIA a few hundred thousand, would that amount no longer count toward your net worth while also yielding a cash income stream that could be set aside for giving each Ramadan to help meet the 2.5% target?
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Re: Zakat (2.5% alms giving) and the 4% SWR
SPIA as in Single Premium Immediate Annuity? Interest/usury/riba is forbidden. I don't hold bonds and have zero debt right now - dividends are my only passive income and not forbidden. Mortgage interest is unavoidable in the future assuming I don't get an islamic mortgage (large downpayment and interest effectively added to principal balance).
Re: Zakat (2.5% alms giving) and the 4% SWR
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Last edited by Raycpact on Mon May 29, 2023 8:21 pm, edited 1 time in total.
Re: Zakat (2.5% alms giving) and the 4% SWR
Interesting. So with 0% fixed income holdings, I'm not sure you should be looking at the 4% SWR as a basis for withdrawals. That's predicated on a 50/50 portfolio. Perhaps VPW might be better?ShakaWaka21 wrote: ↑Mon May 29, 2023 8:14 pmSPIA as in Single Premium Immediate Annuity? Interest/usury/riba is forbidden. I don't hold bonds and have zero debt right now - dividends are my only passive income and not forbidden. Mortgage interest is unavoidable in the future assuming I don't get an islamic mortgage (large downpayment and interest effectively added to principal balance).
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Re: Zakat (2.5% alms giving) and the 4% SWR
There is the concept of Sadaqa which is voluntary charity and there is no set time to give that. Not percentage based of wealth or income. There is no income requirement but rather a wealth requirement - the dollar equivalent amount of 88g of gold which is $5,500. At that point, you are required to start giving 2.5%.Stinky wrote: ↑Mon May 29, 2023 8:04 pm Does Islam also require some level of giving from income? As you mentioned in your initial post, many Christians focus on the tithe, which is an annual gift of 10% of income.
For folks early in their career, 2.5% of assets is well less than 10% of income. So, relative to Christianity, Islam seems to encourage more giving later in life, as personal assets grow.
Do I have that right?
I agree with your assessment in a way - Islam does not burden followers if they don't have the means. And it is encouraged to invest your wealth in order to prevent zakat from eating away at it. One of the companions, Omar said "“Trade with the property of orphans before it will be eaten away by zakat.” (Reported by Malik)
So yes, we backload the giving in a way as the small amount early on encourages one to get in the habit of giving and avoid attachment to wealth.
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Re: Zakat (2.5% alms giving) and the 4% SWR
Great point, just bookmarked the VPW wiki to read in a bit.Damocles wrote: ↑Mon May 29, 2023 8:20 pmInteresting. So with 0% fixed income holdings, I'm not sure you should be looking at the 4% SWR as a basis for withdrawals. That's predicated on a 50/50 portfolio. Perhaps VPW might be better?ShakaWaka21 wrote: ↑Mon May 29, 2023 8:14 pmSPIA as in Single Premium Immediate Annuity? Interest/usury/riba is forbidden. I don't hold bonds and have zero debt right now - dividends are my only passive income and not forbidden. Mortgage interest is unavoidable in the future assuming I don't get an islamic mortgage (large downpayment and interest effectively added to principal balance).
for anyone interested: https://www.bogleheads.org/wiki/Variabl ... withdrawal
Re: Zakat (2.5% alms giving) and the 4% SWR
You probably want to search the internet and educate yourself on what counts toward 2.5% calculation. If you are able to do that, you may be able to figure out that there are certain assets which you can exclude from calculation. Thus, 2.5% isn't much.
There are posts/articles available on internet saying that if you own stocks of a company you do not pay zakat on your stock holding. But, if this company holds cash, then divide this cash among all the outstanding stocks and then calculate your portion of cash holding. You'll pay zakat on this cash holding...If this argument holds true for you, you won't have to cash out 2.5% of your portfolio for zakat.
Otherwise, you'll need a large portfolio so that you can live on 1.5%. Only you can decide how large your portfolio needs to be so that you can live on 1.5%.
There are posts/articles available on internet saying that if you own stocks of a company you do not pay zakat on your stock holding. But, if this company holds cash, then divide this cash among all the outstanding stocks and then calculate your portion of cash holding. You'll pay zakat on this cash holding...If this argument holds true for you, you won't have to cash out 2.5% of your portfolio for zakat.
Otherwise, you'll need a large portfolio so that you can live on 1.5%. Only you can decide how large your portfolio needs to be so that you can live on 1.5%.
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Re: Zakat (2.5% alms giving) and the 4% SWR
Can Zakat be a tax write off? I know we have had standard deduction benefits before but now back to itemized.
Re: Zakat (2.5% alms giving) and the 4% SWR
It is important to realize that the academic studies that came up with the 4% safe withdrawal rate figure are looking at your portfolio starting when you are 65 and expecting a 30 year retirement. By the time you are 75 you might then be planning to have 20 years remaining in your retirement so the safe withdrawal rate then might be more like 6%(???) and at 85 it would be even higher.ShakaWaka21 wrote: ↑Mon May 29, 2023 7:09 pm I bring this question here because the 4% SWR is thrown out the window with the aforementioned. It would either have to be 6.5% or you'd have to go super lean and rely on 1.5% for your own needs - which would require different approaches.
Have you run into this? How would you approach this?
Basically the 2.5% alms would be the most challenging to give in the early years of your retirement and would be a lower percentage of your spendable income as you get older and your age adjusted safe withdrawal rate get higher.
Out of curiosity I did a quick Google and at first glance it looks like home equity is not counted as part of the Zakat calculation but I am not sure if that is correct or not. If so then having a paid off house when you retire could be important to reduce your retirement expenses and reduce your investments that count towards the Zakat calculations.
My situation is much different but I live in a medium to low cost of living area and having a paid off house helps me keep my core retirement expenses low enough that my US Social Security would cover most of my core expenses so I mainly will need my retirement investments to provide for discretionary expenses and the Zakat could be paid out of that.
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Re: Zakat (2.5% alms giving) and the 4% SWR
ShakaWaka21 wrote: ↑Mon May 29, 2023 8:21 pm it is encouraged to invest your wealth in order to prevent zakat from eating away at it.
How does the issue of "investing" affect this 2.5%?
If that 2.5% is only calculated on *some* of the wealth, then it's not going to affect "overall wealth" nearly as much, short or long term, depending upon how it's invested.
This could make a big difference in terms of what/how much you could accumulate, and also later, whether it's really only 1.5% that you could spend for yur own living expenses (assuming a 4% withdrawal).
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Re: Zakat (2.5% alms giving) and the 4% SWR
You do not need to live on 1.5%. it works out to more like 2.7%. If you are drawing down your portfolio during retirement, your annual withdrawal for living expenses grows as a percentage every year while your charitable contributions shrink.
Re: Zakat (2.5% alms giving) and the 4% SWR
How about mathematically modeling it as if it were a 2.5% expense ratio? (Might have to be even higher to account for taxes!)
For example: Rich/Broke/Dead with 90stock/0bond/10cash, 2.5% ER, 3.0% initial withdrawal shows 74% success.
For example: Rich/Broke/Dead with 90stock/0bond/10cash, 2.5% ER, 3.0% initial withdrawal shows 74% success.
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Re: Zakat (2.5% alms giving) and the 4% SWR
Don't use the SWR which no one follows anyway. Separate the two requirements of living expenses and Zakat.
Arrange to have enough retirement income from Social Security and pensions to cover your expenses.
Then use a broad stock index fund to hold most of your wealth to pay Zakat. A constant 2.5% of the annual balance is sustainable forever. You don't care if the amount varies year-to-year, you just take out 2.5%. It is less than the average growth of the index fund, so it even grows over a long time.
Arrange to have enough retirement income from Social Security and pensions to cover your expenses.
Then use a broad stock index fund to hold most of your wealth to pay Zakat. A constant 2.5% of the annual balance is sustainable forever. You don't care if the amount varies year-to-year, you just take out 2.5%. It is less than the average growth of the index fund, so it even grows over a long time.
Re: Zakat (2.5% alms giving) and the 4% SWR
Good morning! I am Jewish. As you mentioned, we have a requirement as well. 10% of income for an average person and the richest person should give 20%. That is based on income however. For us income counts as income. Unrealized capital gains are not money actually available so if that does not count. Realized capital gains would count. for the most part, people understand the general rules, but there are a lot of details. In your case, as I am not, of course, a follower of Islam, I would say speak to your imam or find a source for what counts, and what does not count. 2.5% of assets annually is an extraordinarily high number. If you assume 5% growth in your portfolio, that would consume 50% of your growth, and you would barely be able to keep up with inflation. There must be some guidelines in this situation. I’m curious to see how the discussion proceeds.
Re: Zakat (2.5% alms giving) and the 4% SWR
Bold above is my emphasis.TacoLover wrote: ↑Tue May 30, 2023 8:48 am Good morning! I am Jewish. As you mentioned, we have a requirement as well. 10% of income for an average person and the richest person should give 20%. That is based on income however. For us income counts as income. Unrealized capital gains are not money actually available so if that does not count. Realized capital gains would count. for the most part, people understand the general rules, but there are a lot of details. In your case, as I am not, of course, a follower of Islam, I would say speak to your imam or find a source for what counts, and what does not count. 2.5% of assets annually is an extraordinarily high number. If you assume 5% growth in your portfolio, that would consume 50% of your growth, and you would barely be able to keep up with inflation. There must be some guidelines in this situation. I’m curious to see how the discussion proceeds.
What counts as wealth? If you own a $500k house does that count as wealth? What about 2 cars? What about jewelry? All of that can easily eat up all your spending potential in retirement.
For example I found this zakat calculator. It includes all assets which would make me think one’s home, jewelry, and cars are included.
https://www.mausa.org/zakat-calculator/ ... AIQAvD_BwE
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Re: Zakat (2.5% alms giving) and the 4% SWR
I'm not aware of the Zakat itself. But I wonder if it would make sense if you paid to charity what your portfolio grew above the SWR?
If the only asset was a house, surely one would not be expected to release equity to give it to chairty?
Is there not a mechanism by which the 2.5% could be given on passing as part of the estate (perhaps adjusted for years missed)?
Perhaps part of what us non-religious folk are failing to grasp is. How much is the figure intended to lead to sacrifice?
If the only asset was a house, surely one would not be expected to release equity to give it to chairty?
Is there not a mechanism by which the 2.5% could be given on passing as part of the estate (perhaps adjusted for years missed)?
Perhaps part of what us non-religious folk are failing to grasp is. How much is the figure intended to lead to sacrifice?
Re: Zakat (2.5% alms giving) and the 4% SWR
I didn't understand your comment above. The way to use a DAF in the OP's situation would be to make the contribution, then at a later point in time (anywhere from the next day to years later ... the beauty of a DAF ...) contribute that money to an appropriate charity.toddthebod wrote: ↑Mon May 29, 2023 8:07 pmI'm skeptical the DAF passes the religious sniff test as a "charity", unless you are talking about immediately distributing the money from the DAF in the case of charities that don't accept in-kind donations directly (most large charities do).gclancer wrote: ↑Mon May 29, 2023 7:25 pm I’ll be interested in the replies rang you receive. Although it’s not the question you asked, I would recommend that you look in to establishing a Donor Advised Fund (if you haven’t already) so that you can donate appreciated shares from your brokerage account each year in satisfaction of the 2.5%.
stuff deleted ..
The OP could do the "bookkeeping" any way they wanted. For example, the 2.5% distribution for 2023 would be at the time the money was sent from the DAF to the charity, not when the money was placed in the DAF.
So you move a big chunk of money to the DAF in year X, then in years X + 1, X + 2, make the appropriate sized donations from the DAF of 2.5% for that year. It seems irrelevant whether the money is in the DAF or still in a brokerage account, etc. The key thing is that the correct amount of money is being given to appropriate recipients.
You would have to make sure ahead of time that the DAF selected considered your intended recipients as appropriate charitable organizations.
Am I missing the point of your question?
Re: Zakat (2.5% alms giving) and the 4% SWR
OP,
As per my understanding, some people in Islam believe that there should not be any inheritance. So, speaking from personal finance point of view, you will plan to end up with nothing after 30 years. Then, the SWR analysis does not apply to you.
KlangFool
As per my understanding, some people in Islam believe that there should not be any inheritance. So, speaking from personal finance point of view, you will plan to end up with nothing after 30 years. Then, the SWR analysis does not apply to you.
KlangFool
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Re: Zakat (2.5% alms giving) and the 4% SWR
The point is the religious definition of a charity is not "something that gives you a tax deduction." Transferring money to a DAF is not actually a charitable contribution in the literal sense, only in the US tax law sense. I don't know if the religious obligation to give money to charity every year includes setting aside money to give to charity at some indefinite time in the future, which is what a DAF really is.TN_Boy wrote: ↑Tue May 30, 2023 9:27 amI didn't understand your comment above. The way to use a DAF in the OP's situation would be to make the contribution, then at a later point in time (anywhere from the next day to years later ... the beauty of a DAF ...) contribute that money to an appropriate charity.toddthebod wrote: ↑Mon May 29, 2023 8:07 pmI'm skeptical the DAF passes the religious sniff test as a "charity", unless you are talking about immediately distributing the money from the DAF in the case of charities that don't accept in-kind donations directly (most large charities do).gclancer wrote: ↑Mon May 29, 2023 7:25 pm I’ll be interested in the replies rang you receive. Although it’s not the question you asked, I would recommend that you look in to establishing a Donor Advised Fund (if you haven’t already) so that you can donate appreciated shares from your brokerage account each year in satisfaction of the 2.5%.
stuff deleted ..
The OP could do the "bookkeeping" any way they wanted. For example, the 2.5% distribution for 2023 would be at the time the money was sent from the DAF to the charity, not when the money was placed in the DAF.
So you move a big chunk of money to the DAF in year X, then in years X + 1, X + 2, make the appropriate sized donations from the DAF of 2.5% for that year. It seems irrelevant whether the money is in the DAF or still in a brokerage account, etc. The key thing is that the correct amount of money is being given to appropriate recipients.
You would have to make sure ahead of time that the DAF selected considered your intended recipients as appropriate charitable organizations.
Am I missing the point of your question?
Re: Zakat (2.5% alms giving) and the 4% SWR
I'm still not following the problem. The contribution to the DAF is tax-deductible. If the organizations that the OP wishes to give to are not valid charitable organizations, then you can't use the DAF. The OP could clarify the type of organizations they are thinking about giving to.toddthebod wrote: ↑Tue May 30, 2023 9:34 amThe point is the religious definition of a charity is not "something that gives you a tax deduction." Transferring money to a DAF is not actually a charitable contribution in the literal sense, only in the US tax law sense. I don't know if the religious obligation to give money to charity every year includes setting aside money to give to charity at some indefinite time in the future, which is what a DAF really is.TN_Boy wrote: ↑Tue May 30, 2023 9:27 amI didn't understand your comment above. The way to use a DAF in the OP's situation would be to make the contribution, then at a later point in time (anywhere from the next day to years later ... the beauty of a DAF ...) contribute that money to an appropriate charity.toddthebod wrote: ↑Mon May 29, 2023 8:07 pmI'm skeptical the DAF passes the religious sniff test as a "charity", unless you are talking about immediately distributing the money from the DAF in the case of charities that don't accept in-kind donations directly (most large charities do).gclancer wrote: ↑Mon May 29, 2023 7:25 pm I’ll be interested in the replies rang you receive. Although it’s not the question you asked, I would recommend that you look in to establishing a Donor Advised Fund (if you haven’t already) so that you can donate appreciated shares from your brokerage account each year in satisfaction of the 2.5%.
stuff deleted ..
The OP could do the "bookkeeping" any way they wanted. For example, the 2.5% distribution for 2023 would be at the time the money was sent from the DAF to the charity, not when the money was placed in the DAF.
So you move a big chunk of money to the DAF in year X, then in years X + 1, X + 2, make the appropriate sized donations from the DAF of 2.5% for that year. It seems irrelevant whether the money is in the DAF or still in a brokerage account, etc. The key thing is that the correct amount of money is being given to appropriate recipients.
You would have to make sure ahead of time that the DAF selected considered your intended recipients as appropriate charitable organizations.
Am I missing the point of your question?
But there is nothing in the OP that implies the organizations given to must be religious. Here is what the OP said:
Giving to the poor/needy etc does not necessarily imply giving to a religious organization.In Islam, one is required to distribute 2.5% of one's total net wealth to the poor/needy/less fortunate
It may be that for brevity the OP didn't go into detail and distributions must go to religious organizations (which I'd also think are valid recipients of DAF grants anyway) but lacking that information from the OP I'd assume the DAF can be used to give to organizations appropriate for the OP's giving.
And yes, the contribution to a DAF is a us tax code event, but I don't see why that matters to the OP's situation. The giving is based upon net worth, not taxable income in a given year.
Example, I'm sitting there with a net worth of 1M (which in this case, I note would need to include any money's in the DAF). I have 100k in the DAF. I give 25k to charity from the DAF to satisfy my 2.5% giving. It seems to me like all is good. Why does it matter whether or not the money is in a DAF? The key thing is that the right amount of money goes to the right causes.
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Re: Zakat (2.5% alms giving) and the 4% SWR
The problem is you are ignoring the context. Here is the quote I responded to:TN_Boy wrote: ↑Tue May 30, 2023 10:30 amI'm still not following the problem. The contribution to the DAF is tax-deductible. If the organizations that the OP wishes to give to are not valid charitable organizations, then you can't use the DAF. The OP could clarify the type of organizations they are thinking about giving to.toddthebod wrote: ↑Tue May 30, 2023 9:34 amThe point is the religious definition of a charity is not "something that gives you a tax deduction." Transferring money to a DAF is not actually a charitable contribution in the literal sense, only in the US tax law sense. I don't know if the religious obligation to give money to charity every year includes setting aside money to give to charity at some indefinite time in the future, which is what a DAF really is.TN_Boy wrote: ↑Tue May 30, 2023 9:27 amI didn't understand your comment above. The way to use a DAF in the OP's situation would be to make the contribution, then at a later point in time (anywhere from the next day to years later ... the beauty of a DAF ...) contribute that money to an appropriate charity.toddthebod wrote: ↑Mon May 29, 2023 8:07 pmI'm skeptical the DAF passes the religious sniff test as a "charity", unless you are talking about immediately distributing the money from the DAF in the case of charities that don't accept in-kind donations directly (most large charities do).gclancer wrote: ↑Mon May 29, 2023 7:25 pm I’ll be interested in the replies rang you receive. Although it’s not the question you asked, I would recommend that you look in to establishing a Donor Advised Fund (if you haven’t already) so that you can donate appreciated shares from your brokerage account each year in satisfaction of the 2.5%.
stuff deleted ..
The OP could do the "bookkeeping" any way they wanted. For example, the 2.5% distribution for 2023 would be at the time the money was sent from the DAF to the charity, not when the money was placed in the DAF.
So you move a big chunk of money to the DAF in year X, then in years X + 1, X + 2, make the appropriate sized donations from the DAF of 2.5% for that year. It seems irrelevant whether the money is in the DAF or still in a brokerage account, etc. The key thing is that the correct amount of money is being given to appropriate recipients.
You would have to make sure ahead of time that the DAF selected considered your intended recipients as appropriate charitable organizations.
Am I missing the point of your question?
But there is nothing in the OP that implies the organizations given to must be religious. Here is what the OP said:
Giving to the poor/needy etc does not necessarily imply giving to a religious organization.In Islam, one is required to distribute 2.5% of one's total net wealth to the poor/needy/less fortunate
It may be that for brevity the OP didn't go into detail and distributions must go to religious organizations (which I'd also think are valid recipients of DAF grants anyway) but lacking that information from the OP I'd assume the DAF can be used to give to organizations appropriate for the OP's giving.
And yes, the contribution to a DAF is a us tax code event, but I don't see why that matters to the OP's situation. The giving is based upon net worth, not taxable income in a given year.
Example, I'm sitting there with a net worth of 1M (which in this case, I note would need to include any money's in the DAF). I have 100k in the DAF. I give 25k to charity from the DAF to satisfy my 2.5% giving. It seems to me like all is good. Why does it matter whether or not the money is in a DAF? The key thing is that the right amount of money goes to the right causes.
That certainly implies to me he considered donating shares to the DAF to be "in satisfaction of the 2.5%." I counter that donating to a DAF does not satisfy the religious obligation of giving to charity.gclancer wrote: ↑Mon May 29, 2023 7:25 pm I’ll be interested in the replies rang you receive. Although it’s not the question you asked, I would recommend that you look in to establishing a Donor Advised Fund (if you haven’t already) so that you can donate appreciated shares from your brokerage account each year in satisfaction of the 2.5%.
Re: Zakat (2.5% alms giving) and the 4% SWR
Ah you are right. Sorry about that. Though if the money goes brokerage -> DAF -> appropriate organization it doesn't matter that the actual DAF contribution does not satisfy the requirement.toddthebod wrote: ↑Tue May 30, 2023 10:35 am
Stuff deleted ..
The problem is you are ignoring the context. Here is the quote I responded to:That certainly implies to me he considered donating shares to the DAF to be "in satisfaction of the 2.5%." I counter that donating to a DAF does not satisfy the religious obligation of giving to charity.gclancer wrote: ↑Mon May 29, 2023 7:25 pm I’ll be interested in the replies rang you receive. Although it’s not the question you asked, I would recommend that you look in to establishing a Donor Advised Fund (if you haven’t already) so that you can donate appreciated shares from your brokerage account each year in satisfaction of the 2.5%.
But yes, the key is when the appropriate amount of money goes to the appropriate organization. I do not know if gclancer was being too concise or was actually thinking that the contribution to the DAF satisfied the requirement (I separate the tax deduction part from the "who gets what" part myself, as we batch donations to a DAF).
Re: Zakat (2.5% alms giving) and the 4% SWR
As other people have mentioned it isn't going to work quite like this. Market drops would reduce the amount taken out during the really bad times. If you treat this as an expense ratio, for a 50/50 portfolio firecalc gives a 3% SWR a 94% success rate. Note I am assuming you can invest in bonds.ShakaWaka21 wrote: ↑Mon May 29, 2023 7:09 pm I bring this question here because the 4% SWR is thrown out the window with the aforementioned. It would either have to be 6.5% or you'd have to go super lean and rely on 1.5% for your own needs - which would require different approaches. I tried searching the forums but came up short. 26 years old so long road ahead and trying to do this efficiently and effectively.
The real effect of this is not going to be as much in your SWR but making accumulating wealth much harder. You probably need to plan on saving a bit more every year.
Re: Zakat (2.5% alms giving) and the 4% SWR
This is so interesting, I just learned about the zakat a few months ago. In my tradition we give based on income, but overall the impact is basically the same: the giving means our household expenditures are higher and savings rate is lower. As a result, we expect to be able to retire about 5 years later than we would be able to if we were instead saving those donations.
(Coincidentally, our portfolio is all equities and does not include bonds. I consider our social security + one small pension to be the main fixed income portion of our portfolio, though we will probably add a smallish portion of bonds when closer to retirement.)
(Coincidentally, our portfolio is all equities and does not include bonds. I consider our social security + one small pension to be the main fixed income portion of our portfolio, though we will probably add a smallish portion of bonds when closer to retirement.)
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Re: Zakat (2.5% alms giving) and the 4% SWR
The 4% SWR is based on a portfolio of large-cap stocks and intermediate-term government bonds, bonds that might not be acceptable as an investment. Doing the calculations for a 100% large-cap stock portfolio, the initial withdrawal rate for which the portfolio always supported at least 30 years of inflation-adjusted withdrawals was 3.90%. Doing the calculations with a 2.5% reduction in the return each year, the initial withdrawal rate for which the portfolio always supported at least 30 years of inflation-adjusted withdrawals was 2.85%.
Those initial withdrawal rates were for annual withdrawals made at the end of December, not on the date of interest in this case.
Those initial withdrawal rates were for annual withdrawals made at the end of December, not on the date of interest in this case.
Re: Zakat (2.5% alms giving) and the 4% SWR
Along with the issue of illiquid assets like a house, there are also retirement accounts where you cannot withdraw while working for the employer or where there is a penalty if withdrawn before age 59.5. One can end up with an obligation that ends up being a significant fraction of yearly income and where it is more difficult/costly to withdraw from assets.
Re: Zakat (2.5% alms giving) and the 4% SWR
That is really interesting comment. I can easily see a family of 2 maxing out their 401k, HSA, Roth for 30 years from 22-52 years old. In todays dollars that is a savings of 2* (22,500 + 3850 + 6500) = $65,700. At a 4% return over those 30 years one will have $3.8 million.rkhusky wrote: ↑Tue May 30, 2023 12:41 pm Along with the issue of illiquid assets like a house, there are also retirement accounts where you cannot withdraw while working for the employer or where there is a penalty if withdrawn before age 59.5. One can end up with an obligation that ends up being a significant fraction of yearly income and where it is more difficult/costly to withdraw from assets.
A family making $250k/yr can accomplish the above over 30 years. What is interesting as the wealth grows, they will have less and less money to be able to save for themselves. At $1 million they will donate $25k which means they will either have to cut expenses or cut savings into pre-retirement accounts. At $2 million it is $50k/yr donated. At some point this hypothetical family will not be able to save anything for their retirement and will be donating instead. If the portfolio keeps growing the family will need to cut back on their own expenses since they can't pull from their tax protected accounts without penalty.
I am very curious how this works out over years of saving and investing? I figure this hypothetical family may need to forgo some tax protected space and invest in taxable so as to be able to sell equities to pay Zakat.
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Re: Zakat (2.5% alms giving) and the 4% SWR
First google hit. https://www.zakat.org/is-zakat-owed-on- ... counts-ira . People have figure out how to get most of these laws to more or less work in the modern world.rkhusky wrote: ↑Tue May 30, 2023 12:41 pm Along with the issue of illiquid assets like a house, there are also retirement accounts where you cannot withdraw while working for the employer or where there is a penalty if withdrawn before age 59.5. One can end up with an obligation that ends up being a significant fraction of yearly income and where it is more difficult/costly to withdraw from assets.
There are probably some interesting questions about how something like this should (or shouldn't) change your financial planning. And where you want to be in terms of letter of the law versus spirit of the law.
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Re: Zakat (2.5% alms giving) and the 4% SWR
The 4% SWR is 4% of the original portfolio adjusted upward for inflation each year. Zakat is 2.5% of current assets. It's entirely possible for Zakat to be MORE than your 4% with a good sequence of returns. Or significantly less with a bad sequence.ShakaWaka21 wrote: ↑Mon May 29, 2023 7:09 pm So not sure where to put this under but have been curious about this. I don't want it to turn into a religious debate...
In Islam, one is required to distribute 2.5% of one's total net wealth to the poor/needy/less fortunate - annually before the last night of Ramadan. That's not on income per year but total portfolio (RE, stocks, cash, etc.) There are certain rulings about what counts as assets as described by certain scholars/fiqh but that is not super relevant to the discussion right now. I'm aware of the Tzedakah in Judaism and Tithe in Christianity so hoping folks from all faiths can chime in.
I bring this question here because the 4% SWR is thrown out the window with the aforementioned. It would either have to be 6.5% or you'd have to go super lean and rely on 1.5% for your own needs - which would require different approaches. I tried searching the forums but came up short. 26 years old so long road ahead and trying to do this efficiently and effectively.
I'm blessed to be in the position I'm in and plan to continue to adhere to the above requirement in the religion (barring any calamities). I keep my expenses low and savings rate high and will plan to continue doing so. I am mainly wondering how to factor in retirement planning when accounting for the 2.5% draw every year. Right now, I am not hurting to give the amount as it is still small relatively speaking. I wonder, if in the future my balance approaches 1M and beyond and 25k is due to charity, I suspect I'll have to work much longer than anticipated. Which is fine by me as the money I am earning is benefiting those who need it more than me.
So bogleheads, what's your take on this? Have you run into this? How would you approach this? Plan to keep working? Am I overthinking this? Without getting religious, the more you give the more you receive and I should just keep my head down and not worry too much because I'm aware that I'm doing fine.
Thanks in advance.
But yea, just like an AUM fee and taxes, it has to come out of the withdrawal.
For the wealthy, a 2.5% Zakat is far more than a 10% tithe of income. A Christian selling shares wouldn't pay anything on principal and might even adjust it upward for inflation
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Re: Zakat (2.5% alms giving) and the 4% SWR
+1
If the requirement is based on assets but not income, it seems you could make it easier on yourself by leaning toward income, for example:
- Favoring jobs that offer a pension (there are not many, and it's probably not worth taking a large pay cut just for a pension, but if two jobs are roughly equal with one having a defined benefit pension and one with a defined contribution, take the defined benefit)
- Purchasing a SPIA. Normally these are purchased around retirement age, but in your case it might make sense to pull that date earlier, possibly around the time you turn 59.5 even if you're still working. I'd have to run the numbers to be sure but there would be a strong bias to converting assets to income as early as possible.
- Investing in assets that offer high yield-to-value ratios, like rental properties in LCOL areas
- Maximizing Social Security income, by getting as close as you can to the wage maximum in your top 35 earning years, not reducing your salary if you're running your own business, etc.
Edit: Are there any assets that are excluded from Zakat? For example, primary residence, personal automobiles? If so that could offer additional opportunities. If primary residence is excluded, you could buy a very expensive house with a long-term mortgage, even to the point of limiting traditional savings, and then borrow against it in retirement, or get a reverse mortgage. If personal automobiles are excluded, you could buy an expensive weekend car that might hold its value reasonably well (eg. Porsche), and take good care of it and keep the miles low. I'd want to run the numbers on any of these before pursuing, and normally these would be quite poor financial decisions, but a 2.5%/year cost on all assets is very large and you might come out ahead by doing some of these things.
There is also probably a preference for Roth savings vs. pre-tax, if Zakat is calculated without a tax adjustment. What I mean is, if you have $100,000 in a pre-tax retirement account, only something like $70-80,000 of that really belongs to you. The rest belongs to the government, and they just haven't taken it yet; you're investing it on their behalf. So if that triggers a $2,500/year Zakat payment, you're paying Zakat on money that's not yours. If you instead had $76,000 in a Roth account, that's only a $1,900 Zakat, but it's worth about the same to you in the future. If you tax-adjust your Zakat then probably no difference here.
Last edited by fyre4ce on Tue May 30, 2023 2:03 pm, edited 1 time in total.
Re: Zakat (2.5% alms giving) and the 4% SWR
I guess the rules are what they are. The question OP has to answer is what is important to follow the explicit letter of the law, or the best interpretation of the spirit of it.
What makes it difficult is wealth saved for retirement is a different type of wealth. OP could take a chunk of his wealth and buy a fixed annuity. Now his wealth is much less but is retirement cash flow would be much larger, and the giving much lower.
Or you could buy an annuity to get you to 70, and defer social security until 70.
Is all that *OK*? I have no idea. Food for thought though.
What makes it difficult is wealth saved for retirement is a different type of wealth. OP could take a chunk of his wealth and buy a fixed annuity. Now his wealth is much less but is retirement cash flow would be much larger, and the giving much lower.
Or you could buy an annuity to get you to 70, and defer social security until 70.
Is all that *OK*? I have no idea. Food for thought though.
Re: Zakat (2.5% alms giving) and the 4% SWR
How do you come up with 2.7%? Zakat is 2.5% of total portfolio value on the day zakat is calculated. The rate of zakat is constant. If the portfolio value goes up, the OP pays 2.5% of this new value. If the value goes down, the still pays the same 2.5%.toddthebod wrote: ↑Mon May 29, 2023 8:51 pmYou do not need to live on 1.5%. it works out to more like 2.7%. If you are drawing down your portfolio during retirement, your annual withdrawal for living expenses grows as a percentage every year while your charitable contributions shrink.
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Re: Zakat (2.5% alms giving) and the 4% SWR
What do you mean "pays the same 2.5%"? He calculates 2.5% of his net worth each year and donates it. If he is drawing down his portfolio in retirement, that number is getting lower every year in dollar terms. Meanwhile, his SWR is calculated as a percentage of the first year portfolio, and it goes up every year by inflation. Think about your last year before you die. You have 97.5% of your portfolio for living expenses and 2.5% for zakat. The year before, you have approximately 47.5% for living expenses and 2.5% for zakat. The year before that, you have approximately 31% for living expenses and 2.5% for zakat.Metsfan91 wrote: ↑Tue May 30, 2023 10:13 pmHow do you come up with 2.7%? Zakat is 2.5% of total portfolio value on the day zakat is calculated. The rate of zakat is constant. If the portfolio value goes up, the OP pays 2.5% of this new value. If the value goes down, the still pays the same 2.5%.toddthebod wrote: ↑Mon May 29, 2023 8:51 pmYou do not need to live on 1.5%. it works out to more like 2.7%. If you are drawing down your portfolio during retirement, your annual withdrawal for living expenses grows as a percentage every year while your charitable contributions shrink.
1.5% doesn't make any sense at all. The only way that would be the value is if he treated his zakat as a SWR, calculating 2.5% zakat based only on his first year portfolio value and then increasing by inflation every year even as his portfolio shrank, such that in his final year, he would be living on 37.5% of his portfolio and donating 62.5%.
Note that FactualFran came up with the same answer a different way:
FactualFran wrote: ↑Tue May 30, 2023 12:33 pm The 4% SWR is based on a portfolio of large-cap stocks and intermediate-term government bonds, bonds that might not be acceptable as an investment. Doing the calculations for a 100% large-cap stock portfolio, the initial withdrawal rate for which the portfolio always supported at least 30 years of inflation-adjusted withdrawals was 3.90%. Doing the calculations with a 2.5% reduction in the return each year, the initial withdrawal rate for which the portfolio always supported at least 30 years of inflation-adjusted withdrawals was 2.85%.
Those initial withdrawal rates were for annual withdrawals made at the end of December, not on the date of interest in this case.
Re: Zakat (2.5% alms giving) and the 4% SWR
It is common on this site to say that one should retire with 25 times of annual expenses. ( 25 X).
In your case you should consider retiring with 66.75 X.
Example: Lets say annual personal expenses in retirement (excluding Zakat) are 100k.
Retirement portfolio = 6,675,000
First year of retirement : 4% withdrawal = 6675000 x .04 = 267000
Zakat = 2.5% x 6675000 = 167,000
Personal expenses ......= 100,000
Added: 66.75 % is likely overkill as pointed downstream, but will likely make it bulletproof.
Considering the 2.5% as an expense ratio as pointed upstream likely makes more sense.
In your case you should consider retiring with 66.75 X.
Example: Lets say annual personal expenses in retirement (excluding Zakat) are 100k.
Retirement portfolio = 6,675,000
First year of retirement : 4% withdrawal = 6675000 x .04 = 267000
Zakat = 2.5% x 6675000 = 167,000
Personal expenses ......= 100,000
Added: 66.75 % is likely overkill as pointed downstream, but will likely make it bulletproof.
Considering the 2.5% as an expense ratio as pointed upstream likely makes more sense.
Last edited by ram on Tue May 30, 2023 11:57 pm, edited 1 time in total.
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Re: Zakat (2.5% alms giving) and the 4% SWR
That's absurd, and I and multiple other posters have pointed out the folly of that math. You are treating zakat as a SWR, which would imply the second year he would donate $170,000+ regardless of the value of his portfolio.ram wrote: ↑Tue May 30, 2023 10:56 pm It is common on this site to say that one should retire with 25 times of annual expenses. ( 25 X).
In your case you should consider retiring with 66.75 X.
Example: Lets say annual personal expenses in retirement (excluding Zakat) are 100k.
Retirement portfolio = 6,675,000
First year of retirement : 4% withdrawal = 6675000 x .04 = 267000
Zakat = 2.5% x 6675000 = 167,000
Personal expenses ......= 100,000
Re: Zakat (2.5% alms giving) and the 4% SWR
I think this might be the source of confusion. I'm (hopefully) many years from withdrawals and so haven't looked at this yet. I thought SWR was 4% per year, not a fixed value on the first day of retirement with that dollar amount adjusted for inflation. Of course, thinking about it now, I saw the correct explanation but did not absorb it.toddthebod wrote: ↑Tue May 30, 2023 10:45 pm ... Meanwhile, his SWR is calculated as a percentage of the first year portfolio, and it goes up every year by inflation. ...
Re: Zakat (2.5% alms giving) and the 4% SWR
Thanks for the explanation.toddthebod wrote: ↑Tue May 30, 2023 10:45 pmWhat do you mean "pays the same 2.5%"? He calculates 2.5% of his net worth each year and donates it. If he is drawing down his portfolio in retirement, that number is getting lower every year in dollar terms. Meanwhile, his SWR is calculated as a percentage of the first year portfolio, and it goes up every year by inflation. Think about your last year before you die. You have 97.5% of your portfolio for living expenses and 2.5% for zakat. The year before, you have approximately 47.5% for living expenses and 2.5% for zakat. The year before that, you have approximately 31% for living expenses and 2.5% for zakat.Metsfan91 wrote: ↑Tue May 30, 2023 10:13 pmHow do you come up with 2.7%? Zakat is 2.5% of total portfolio value on the day zakat is calculated. The rate of zakat is constant. If the portfolio value goes up, the OP pays 2.5% of this new value. If the value goes down, the still pays the same 2.5%.toddthebod wrote: ↑Mon May 29, 2023 8:51 pmYou do not need to live on 1.5%. it works out to more like 2.7%. If you are drawing down your portfolio during retirement, your annual withdrawal for living expenses grows as a percentage every year while your charitable contributions shrink.
1.5% doesn't make any sense at all. The only way that would be the value is if he treated his zakat as a SWR, calculating 2.5% zakat based only on his first year portfolio value and then increasing by inflation every year even as his portfolio shrank, such that in his final year, he would be living on 37.5% of his portfolio and donating 62.5%.
Note that FactualFran came up with the same answer a different way:FactualFran wrote: ↑Tue May 30, 2023 12:33 pm The 4% SWR is based on a portfolio of large-cap stocks and intermediate-term government bonds, bonds that might not be acceptable as an investment. Doing the calculations for a 100% large-cap stock portfolio, the initial withdrawal rate for which the portfolio always supported at least 30 years of inflation-adjusted withdrawals was 3.90%. Doing the calculations with a 2.5% reduction in the return each year, the initial withdrawal rate for which the portfolio always supported at least 30 years of inflation-adjusted withdrawals was 2.85%.
Those initial withdrawal rates were for annual withdrawals made at the end of December, not on the date of interest in this case.
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Re: Zakat (2.5% alms giving) and the 4% SWR
that calculator did in fact count home equity, but investopedia says:EnjoyIt wrote: ↑Tue May 30, 2023 8:55 amBold above is my emphasis.TacoLover wrote: ↑Tue May 30, 2023 8:48 am Good morning! I am Jewish. As you mentioned, we have a requirement as well. 10% of income for an average person and the richest person should give 20%. That is based on income however. For us income counts as income. Unrealized capital gains are not money actually available so if that does not count. Realized capital gains would count. for the most part, people understand the general rules, but there are a lot of details. In your case, as I am not, of course, a follower of Islam, I would say speak to your imam or find a source for what counts, and what does not count. 2.5% of assets annually is an extraordinarily high number. If you assume 5% growth in your portfolio, that would consume 50% of your growth, and you would barely be able to keep up with inflation. There must be some guidelines in this situation. I’m curious to see how the discussion proceeds.
What counts as wealth? If you own a $500k house does that count as wealth? What about 2 cars? What about jewelry? All of that can easily eat up all your spending potential in retirement.
For example I found this zakat calculator. It includes all assets which would make me think one’s home, jewelry, and cars are included.
https://www.mausa.org/zakat-calculator/ ... AIQAvD_BwE
not sure if they're right about that. would be interested to know.A personal residence doesn't count toward wealth and thus, doesn't count when calculating zakat. Property used to generate income, such as a rental or vacation home, does.
source: https://www.investopedia.com/terms/z/zakat.asp
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Re: Zakat (2.5% alms giving) and the 4% SWR
I learn something new everyday! I'm curious, how did the 2.5% come into being?ShakaWaka21 wrote: ↑Mon May 29, 2023 7:09 pm In Islam, one is required to distribute 2.5% of one's total net wealth to the poor/needy/less fortunate - annually before the last night of Ramadan.
Re: Zakat (2.5% alms giving) and the 4% SWR
This is such an interesting comment. The hypothetical scenario you provided seems to be consistent with the basic purpose of zakat, which as far as I know, is the distribution of wealth within a society, not accumulation.EnjoyIt wrote: ↑Tue May 30, 2023 1:00 pmThat is really interesting comment. I can easily see a family of 2 maxing out their 401k, HSA, Roth for 30 years from 22-52 years old. In todays dollars that is a savings of 2* (22,500 + 3850 + 6500) = $65,700. At a 4% return over those 30 years one will have $3.8 million.rkhusky wrote: ↑Tue May 30, 2023 12:41 pm Along with the issue of illiquid assets like a house, there are also retirement accounts where you cannot withdraw while working for the employer or where there is a penalty if withdrawn before age 59.5. One can end up with an obligation that ends up being a significant fraction of yearly income and where it is more difficult/costly to withdraw from assets.
A family making $250k/yr can accomplish the above over 30 years. What is interesting as the wealth grows, they will have less and less money to be able to save for themselves. At $1 million they will donate $25k which means they will either have to cut expenses or cut savings into pre-retirement accounts. At $2 million it is $50k/yr donated. At some point this hypothetical family will not be able to save anything for their retirement and will be donating instead. If the portfolio keeps growing the family will need to cut back on their own expenses since they can't pull from their tax protected accounts without penalty.
I am very curious how this works out over years of saving and investing? I figure this hypothetical family may need to forgo some tax protected space and invest in taxable so as to be able to sell equities to pay Zakat.
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