Endowment spending policy

Endowment funds need to maintain intergenerational equity and tend to have an unlimited life. Thus, these funds have a perpetual investment horizon. To guide the investment decisions, endowment funds have an official endowment spending policy. On this page, we discuss the endowment spending policy content. The goal is to ensure intergenerational equity while smoothing payouts to insulate the endowment’s beneficiary from market volatility. 

UPMIFA provides US companies guidance on setting up an endowment spending policy.

Endowment spending policy

On this page, we discuss different endowment spending policies as well as the formula that can be used to determine the amount of spending that is possible

Spending policy formula

The amount of spending each year can be stated as a weighted average of the previous year’s spending (adjusted for inflation) and a spending rate (usually between 4% and 6%) applied to a moving average of assets under management (AUM):

    $$\textrm{spending}_{t+1} = w \cdot \textrm{spending}_t \cdot [1+\textrm{inflation}] $$

    $$ + [(1-w) \cdot (\textrm{spending rate} \cdot \textrm{average AUM}] $$

where w is the weight of the prior year’s spending amount.

Spending policy types

Three different spending policies exist depending on the value of w:

  1. Constant growth rule (w=1). The endowment provides a fixed real annual payout to the university once adjusted for inflation. This method gives more certainty to the university but the percentage of the endowment paid out will fluctuate. Typically, there is a cap and floor to protect the endowments assets from becoming depleted.
  2. Market value rule (w=0). Annual payouts are a prespecified percentage (the spending rate) of the three- to five-year moving average of asset values. The consequence of this approach is that payouts are procyclical.
  3. Hybrid rule (0<w<1). under this approach, spending is a weighted average of the previous two rules.


We discussed the way in which an endowment determines the amount of funds to be distributed each year. In particular, we determined that three different types of policies exist, a constant growth rule, a market value rule, and a hybrid rule.

The above topic is related to the following set of topics: