Q & A: How much should I be spending on charitable donations?
Q & A: How much should I be spending on charitable donations?
By: Stacey Nickens
My daughter’s birthday was this past week. Instead of asking for gifts, she asked each family member to make donations to a charitable organization in her name. I was immensely proud of her decision. I believe in the importance of giving back to your community and helping to make the world a better place.
So when clients ask me how much they should be spending on charitable donations, I often give a two-part answer. On one hand, I consider this a moral decision. How much do you feel morally obligated to give to charity? On the other hand, I encourage clients to consider their entire financial situation to ensure they’re only giving as much as they can afford to give. Just like with airplane masks, you must help yourself before you can help others.
To ensure you can afford a certain amount of charitable donations, review your monthly expenses and how you cover those expenses. If you’re retired, start by seeing how many expenses you can cover with stable income, such as your pension or Social Security. You will then cover the rest of your expenses from your retirement accounts. In an account of about $500,000 or more, I recommend clients remove no less than 4% of the account’s value each year. Higher withdrawals could mean you’re withdrawing more money than you’re accruing. You can thus take 4% of your retirement account’s value and divide that by 12 to see how much you can withdraw from your retirement account each month. Add your retirement account withdrawals to your stable income to see how much you can afford to be spending.
For those who’re not retired, simple add up your different income sources. Your income may include regular withdrawals from an investment account. If that’s the case, make sure your annual withdrawals do not exceed the income you earn from your investment accounts.
Once you have this spending number, you can see how much you need to spend on other expenses and how much you can afford to spend on charity. Spending carefully should allow you to build up an inheritance. You can thus change your will to stipulate that a portion of your inheritance goes towards charity. In this way, you can donate to charity without stretching your monthly spending capacity.
Also, keep in mind that charitable donations do not amount to a dollar-for-dollar tax deduction. For example, pretend you give about $9,000 to charity each year. You decide to increase your charitable donations by $5,000 annually. You’re now donating $14,000 to charity annually. This $5,000 increase will lower your taxable income by about $1,000. However, each situation is unique, and I encourage you to reach out for an appointment. We can discuss your sources of income and spending habits in order to determine the best past forward for you and your family.
