When talking about "trust fund children" or large savings it's common to hear the phrase "not touching the principal", which means that only the "earnings" from the money are spent, and the cash pile itself does not get smaller.

However I am not sure that this could possibly make sense: interest rates on bank account deposits are essentially zero, so it must mean earnings from the stock markets. There are stocks which pay dividends, but those are rather small, and it would take a stupendously large amount of money to live off dividends.

Another example is rise in stock market price - but that does not make sense either. If one owns 10 shares of company XXX, even if XXX stock price doubles every year, one would still have to sell shares to get anything - in this example any transaction would shrink the principal by 10%.

The only example where it does make sense is if the fund owns a number of properties and collects rent from them - in that case there should be very sizable earnings, but one does not hear about those examples often (I'm also quite curious why, it seems if one has $1 million or more, there's a lot of money to be made by investing in real estate, but with smaller funds, investment seems really hard).

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    Your premise that dividends are "rather small" is not historically true. Dividend yields for quality cash cow company stocks are often similar to interest rates, sometimes higher, sometimes lower, and often tax-advantaged compared to receiving interest income ... and dividends can grow. Consider also that preferred shares have decent, consistent yields. Commented Apr 17, 2021 at 21:16
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    It’s not historically true, and it’s not currently true! There are a fair number of good stocks paying a 5-7% dividend even today, such as AT&T. Commented Apr 17, 2021 at 22:08
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    People who are doing this have a lot more than 10 shares, and so have finer-grained control of their value than you are assuming in this question. Also keep in mind that "number of shares" may not stay constant even if you never buy or sell; it is typical that stocks split every so often, exactly so that consumers can have finer-grained control of their value. Commented Apr 18, 2021 at 20:14
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    If the price of a stock goes up 50% you can sell 1/3 of your shares and you'll be back where you started, so you haven't touched the principle.
    – Barmar
    Commented Apr 19, 2021 at 5:43
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    "interest rate in bank accounts is essentially zero" Sure, you or I may only earn a few pennies a year on our savings account balances, even if we have close to $100,000 tucked away. But these are people who have millions, or tens of millions of dollars, in that bank. Aside from that, they may be using money market accounts, IRAs, or other types of accounts that are higher risk (and thus, higher reward).
    – TylerH
    Commented Apr 19, 2021 at 19:09

6 Answers 6


"Not touching the principal" simply means that you leave the principal amount of the trust fund alone and only draw off the interest or dividends it accrues.

So, let's say you inherit $10 million that is invested and earns 7% annually. You can use the $700,000 in interest earnings to live on without dipping into the original $10 million.

If you can "manage" to live on $700k a year or less then the original money (plus any interest you DIDN'T take out) will remain intact going forward.


If you are a "high net worth" customer of just about any financial institution (meaning you have a LOT of money in their bank), I promise you that you can get a significantly higher rate of return using private banking services than what ordinary people such as myself would ever be offered on a standard savings account.

This means that people who inherit large fortunes COULD afford to live on the returns without choosing to touch the principal, but they may not want to.

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    It’s quite unclear what you mean by “reasonably safely”. Many people would say that anybody can earn upper single digits, the historical return of the S&P500, “reasonably safely”. As for these enormous bank account rates for large accounts, er...citation needed. Commented Apr 17, 2021 at 22:07
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    High net worth (HNW) clients get access to specialized private banking services that focus on wealth management and provide investment services to maximize returns. HNW clients are highly prized by the banks.
    – RiverNet
    Commented Apr 17, 2021 at 23:08
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    Yeah, I mean, "investment services to maximize returns" is a whole lot different than "preferred interest rate". Nobody is getting a guaranteed 7% interest rate in a savings account just because it has seven or eight digits. Commented Apr 17, 2021 at 23:49
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    I never said they use savings accounts.
    – RiverNet
    Commented Apr 18, 2021 at 0:49
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    @SRiverNet "preferred interest rate" implies a savings account. The equivalent term for investments is "annual return on investment".
    – thelem
    Commented Apr 18, 2021 at 16:23

There are four problems with your logic.

First, interest rates are low now but they haven't always been. And you get more interest with "locked in" savings like CDs. So what you see offered in your savings account may be low, but that's not the only option.

Second, when you have the kind of money that supports trust fund children, you have a wealth manager. Their job is to make 5-7% after taxes, inflation, and their fees. You can't get those returns, but the wealth manager can. That might be stocks and bonds, it might be real estate, it might be all kinds of things. I am getting about 7% after inflation in a tax-free account through dividends and capital gains on a pretty small portfolio. And this is not my job.

Third, whatever you think is a ridiculous amount of money, there are people who accumulated that. People with hundreds of millions of dollars piled up. If you have 100 million dollars, even 1% of that is a million a year.

Fourth, you seem to feel the fund can't benefit from prices going up because "if you have ten shares of X and sell one, your principal is down 10%". They have way more than ten shares (see third point) but also your wealth manager could sell all your X for a million dollars and then buy some Y that is poised to grow, buying 900K of it and releasing 100k as income.

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    Let's be honest, you can make those returns with index funds and roboadvisors, the wealth manager really serves to help with specific financial needs rather than provide high returns or low risk Commented Apr 19, 2021 at 5:55
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    The wealth manager does indeed provide services beyond getting returns. Whether most people could match the returns (given that there is a fee for the WM so you don't need to make as much as the WM does to be ahead) is debatable. Some people can, some either can't or don't consider it a good use of their time. The point was that the question looks at public interest rates offered on generic savings accounts and thinks that's what trust funds are earning; it's not. Whether a WM is worthwhile would be an entirely different question. Commented Apr 19, 2021 at 6:17
  • @KateGregory The OP does seem pretty clear that it's not bank account rates, though. From the OP: "interest rate in bank accounts is essentially zero, so it must mean earnings from the stock markets" ... The point of confusion seems to be the point you have last, which is that you can selling stock doesn't necessarily mean "touching the principal". Commented Apr 19, 2021 at 14:10
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    The OP dismisses anything other than the stock market based on what they see offered in savings accounts. There are interest bearing devices that pay better than what the public sees offered in a saving account. There are many points of confusion imo: the answer lists 4 of them. Commented Apr 19, 2021 at 14:23
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    I think the 4th point is the key -- principal is measured in dollars, not in number of stocks. Commented Apr 19, 2021 at 20:31

You are quite wrong in your stock market example. Let's say I have $1 million invested, and since I am not an active investor, the money is in mutual funds. So my principal is $1 million. In an average year, let's say I make 7% return* on that. So I can take out $70K, and still have my $1 million principal intact. It is the market value that matters, not the number of shares held.

But I won't always have average years. Sometimes I'll make a lot more than 7%, sometimes less. Sometimes I might have a really bad year, and the value actually goes down, in which case I can't take anything out until the market recovers. If I'm sensible, I won't have spent everything I earned in the good years, but will save it in my emergency fund, or in personal accounts outside the trust (or 401k/IRA, which more people are likely to have). So it's very unlikely that my principal will decrease below that $1 million and stay there for a long period.

*Dividends & market appreciation, and neglecting inflation for simplicity.


In such a situation, someone’s talking about not reducing the starting total value. If an investment appreciates, then you sell some of it, you may still maintain at least the same base value you started with. It is certainly false that trust funds don’t buy real estate.


Another example is rise in stock market price - but that does not make sense either. If one has 10 shares of company XXX, even if XXX stock price doubles every year one would still have to sell shares to get anything - in this example any transaction would shrink the principal by 10%.

The principle is the monetary value, not the number of shares. The fact that you would sell some stake or a certain number of shares does not mean that you've tapped into the principle.

e.g. you own 100 shares of $AAPL (originally $13,000). $AAPL goes up 10% ($14,300). You sell 9 shares of $AAPL. You spend the $1287 on daily needs. You still have $13,013 in the brokerage account, which is above the principle balance of $13,000. You have not touched your principle.


Note too that we are talking about planning so inflation can be balanced against returns and the "today's dollars" value amount still goes up enough to permit withdrawing the living expenses, whatever they are. The rule-of-thumb "you can retire when you have saved 25 times your expected yearly expenses" is based on exactly that sort of calculation, albeit in much simplified form.

My own retirement planning factors in exactly this goal. Using fairly conservative numbers, I should be able to earn enough passive income to live past my age expectancy in a reasonable amount of comfort and pay for a decade of assisted living/end-of-life care without having to sell the house (keeping that as emergency reserves). In my case, that worked out to wanting about US$1.88M in savings and investments before retiring; your number will probably be different.

(Rephrasing an old song, a million ain't a million any more. I don't like the attempts to redefine "millionaire" as "has income of $1M" -- I think we need a new term to signify that -- but that's a more realistic definition of "rich" these days; being only a millionaire now makes you well-off but not rich.)

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