This article originally appeared on the TIFF website.
Spend policy methodology often receives less attention than the spending rate itself, despite having an equally meaningful impact on the dollars flowing into an institution’s budget. While investment committees at independent schools focus on the rate carefully and annually approve it, they don’t often consider with the same rigor how the spend is calculated, even though the methodology has immense impact on the amount of dollars going into the budget on an annual basis.
The most recent Commonfund Study of Independent Schools indicates that the trailing average market value is the most popular spend methodology. However, a multitude of other methodologies, each with their own trade-offs, could be used. A methodology will perform differently depending on the current economic environment and generally falls along a spectrum of ensuring consistency/growth of spend and protecting the endowment corpus, especially in times of drawdown.
The objectives and needs of a school’s spending will indicate which methodology might best fit those needs.
The 3 Main Methodologies
Tiff’s “ Spend Policy 101” guidance gives an overview of the most commonly used and discussed methodologies:
- Endowment Market Value: A predetermined percent of endowment market value, often on a trailing multi-year average basis
- Inflation-Based: Last year’s spend value increased by inflation, sometimes within a band
- Hybrid: A combination of market value and inflation.
Other less common methodologies are used in some cases, but not enough to be worth discussing in this context.
Methodology Trade-offs
Understanding what is important to your institution will help determine the best-aligned spend methodology. These factors should be documented in an institution’s spend policy, to ensure future leaders and fiduciaries understand the choices made. Each organization should assess their organizational preferences and objectives to help determine the best spend policy.
At a high level, institutions must balance institutional needs for consistency of spend value and what best helps build endowment value for the long term. The graphic below shows where each methodology falls across these two considerations.
Source: TIFF internal analysis, representative view of consistency of spend.
A helpful starting point is assessing the institution’s sensitivity to changes in annual distributions.
- Organizations that rely heavily on endowment spending to fund their operating budget, or that have limited flexibility in other revenue sources, may prioritize policies that provide greater stability in spending levels.
- Institutions with more diversified or flexible funding sources may be better positioned to tolerate some variability in annual distributions to keep spending more closely aligned with investment performance.
Institutions should also consider their longer-term priorities for the endowment. Policies that prioritize consistency in spending can support budgeting and program stability but may require distributions during periods when the endowment is under pressure (e.g., taking out money during a market drawdown). Approaches that more closely track market performance may introduce short-term variability but can better protect the endowment’s ability to support future generations.
4 Questions for Aligning Methodology with Goals
To assess your school’s endowment needs and what spend methodology might be appropriate, answer the following questions:
- How dependent is the school’s operating budget on endowment spending, and how much variability in annual distributions can it realistically absorb?
- If endowment spending declined meaningfully in a given year (e.g., 10–30%), how would the institution adjust its budget or operations?
- How important is it for annual spending to grow consistently to keep pace with inflation and rising operating costs?
- To what extent should spending be aligned with investment performance to protect the endowment’s long-term purchasing power?
This will help institutions assess their financial flexibility, reliance on endowment funding, need for predictable growth, and priority placed on endowment growth over time.
Market Impacts
While it is difficult to predict future market and economic performance, it is important to recognize these factors, though out of any individual’s control, have an impact on the dollars in the institution’s pocket depending on the chosen methodology. While TIFF doesn’t support selecting a spend methodology based on market outlook, institutions should still be aware of the impact market factors have on their choice.
An institution can broadly anticipate each methodology to perform better in a different environment. While there are multiple inputs in the various spend methodologies, three key market factors impact all approaches:
- Inflation
- Market performance
- Market volatility
A moving average will provide the highest dollars in the withdrawal when market performance is high and inflation is low (e.g., during the 2010s). An inflation-based methodology will produce the highest spend in a stagflation environment, where the spend increases to match inflation as the markets are flat (if not down). Hybrid typically lands in the middle of outcomes between market- and inflation-based approaches.
Case Study of Market Factor Impact on Spending Value
2010s Low inflation, high market return, avg vol | Stagflation High inflation, low market performance | |
| Provides Highest $ in Spend | Trailing Avg | Inflation-based |
| Middle Ground (by design) | Hybrid | Hybrid |
| Provides Lowest $ in Spend | Inflation-based | Trailing Avg |
Source: TIFF Internal analysis, representative of average approach of each type.
Decision Time
Endowment spending policy is ultimately a reflection of an institution’s financial priorities, risk tolerance and long-term mission. By thoughtfully considering the trade-offs between spending stability and long-term endowment growth, and by aligning methodology with the institution’s financial structure and objectives, organizations can adopt a policy that supports both present needs and future generations. A well-documented approach ensures that these decisions remain intentional and well understood by future leaders and fiduciaries.
Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance. There is no guarantee that any particular asset allocation or mix of strategies will meet your investment objectives.
The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.
