How Should Endowment Proceeds be Used?

To set an appropriate spending policy, an endowed institution must balance two competing goals:

  • Preservation of Capital — the need to preserve the real value of the endowment’s assets, adjusted for inflation; and
  • Adequacy of Income — the ability to produce enough annual proceeds to meet a given amount of the grantee’s project or core operating costs.

Meeting both objectives is essential if the endowment is to be an enduring mechanism for long-term financial planning, organizational stability, and programmatic independence. If an endowed institution sets its spending at a level that exceeds the return on its portfolio, it will effectively erode its asset base over time by spending down its endowment. An endowed institution can also jeopardize the real value of its fund by failing to account for inflation or to anticipate the impact of fluctuating market conditions.

How Much Spending is Typical?

The spending policies of endowed institutions in the United States....generally fall within the range of 4.5 to 5.5 percent of the principal amount of their endowment. Considerable financial analysis and historical research show that these modest rates of spending help endowed institutions to:

  • avoid excessive risk or volatility with their investments,
  • weather declines in the value of their invested assets,
  • develop portfolios with an asset mix balanced for safety and growth,
  • realize sufficient returns for their core and project costs, and
  • reinvest a sensible amount of their earnings as a hedge against inflation.

Takeaways are critical, bite-sized resources either excerpted from our guides or written by Candid Learning for Funders using the guide's research data or themes post-publication. Attribution is given if the takeaway is a quotation.

This takeaway was derived from Providing for the Long Term.