August 1, 2019
Is your endowment at risk of being cannibalized by overspending?
The Spending Policy Dilemma
Chronic overspending from endowments is a common trap and the negative consequences are often underestimated.
Years ago, a rule of thumb was that organizations could safely spend 5% of their endowment annually to fund operations, but this is no longer the case. With historically low interest rates and lower expectations for global growth, endowments are finding that they can longer support the same level of spending.
Based on a recent study from the National Association of College and University Business Officers (NACUBO), the average endowment has a 10-year annualized nominal return of 5.8%, falling short of a targeted return (spending plus inflation) of 7.2%. Faced with this return deficit, institutions are being forced to reconsider both their spending and investment policies.