Opinion on Endowed Funds Return..........

[FinanceDude]

So, the memorial fund I set up after my sister died is now endowed, (over $10,000), so it will go on in perpetuity..........

The investment guy told me their goal is to be able to distribute 4.5% a year of income to a lucky student, and not touch principal.

I know foundation assets are conservative, but 4.5% in today's environment?

Can't figure if it was CYA, but am looking forward to reading the annual report when it comes out............ :

 

[wabmester]

Why would the number be any different than the last-forever safe withdrawal rate of around 4%? 4.5% sounds a bit high to me since there should be good data on educational inflation (and I'm sure it's higher than the CPI-U).

Anyway, it's cool that she endowed a scholarship fund. I've been thinking about doing the same thing. Could you walk us through the mechanics? Did the school handle the management and reporting? If so, did they have a minimum amount they're willing to do that for?

 

[FinanceDude]

Why would the number be any different than the last-forever safe withdrawal rate of around 4%? 4.5% sounds a bit high to me since there should be good data on educational inflation (and I'm sure it's higher than the CPI-U).

Anyway, it's cool that she endowed a scholarship fund. I've been thinking about doing the same thing. Could you walk us through the mechanics? Did the school handle the management and reporting? If so, did they have a minimum amount they're willing to do that for?

The Foundation at UNL handled the whole thing. Since it is for a scholarship, I had the department head and co/director of the lab list the criteria for the scholarship. Then, I had to make a donation, and sign on as donor signatory. I had the Foundation's address as the contact point for all donations, since they handle the receipt and tax reporting for donations. They are a 501C3 so the donor gets a tax deduction, corporate or individual.

I met with one of Foundation coordinators. She was very nice and helpful, and I got instant feedback from her when needed. Overall, a very smooth process. The amount is over $20K, so some student to be determined will get around $1000 a year, and hopefully the endowment will grow, as my wife and I plan to re-allocate our annual gifts to charitable organizations to the fund...............

 

[Nords]

The investment guy told me their goal is to be able to distribute 4.5% a year of income to a lucky student, and not touch principal.

4.5% of income each year or 4.5% of the fund balance each year? 4.5% of the income on a $20K fund won't throw off $1000/year unless you find a very interesting investment.

I thought that IRS guidelines required charitable funds to disburse 5% of their assets each year. They might even require funds to eat into principal. This requirement might have changed or the fund's expenses/UNL's administrative costs may bring the total up to 5%. Of course in 1999 the IRS announced that they were considering raising their requirement to 6%, but that talk vaporized shortly after March 2000.

 

[FinanceDude]

4.5% of income each year or 4.5% of the fund balance each year? 4.5% of the income on a $20K fund won't throw off $1000/year unless you find a very interesting investment.

I thought that IRS guidelines required charitable funds to disburse 5% of their assets each year. They might even require funds to eat into principal. This requirement might have changed or the fund's expenses/UNL's administrative costs may bring the total up to 5%. Of course in 1999 the IRS announced that they were considering raising their requirement to 6%, but that talk vaporized shortly after March 2000.

I guess they have it set up to yield about 4.5-5% a year, mostly using bonds, treasuries, high dividend paying stocks. Isn't 5% a year on $20,000 about $1000 a year, or is my math wrong??

 

[justin]

Psst.... Vanguard Wellesley will just about get you there. 4.41% yield on the admiral shares (VWIAX) at a 0.14% expense ratio. If they have an institutional share class equivalent at 0.05% ER, you'd get your 4.5% in income.

Although it is rather conservative at ~40% stocks and 60% bonds.

They would have no problem spitting out 4.5% a year of the principal balance. The problem would be inflation, which may erode the real payout of the endowment over time.

Or maybe they have subcontracted with Yale's endowment manager and are shooting for 15+% returns.

 

[FinanceDude]

Psst.... Vanguard Wellesley will just about get you there. 4.41% yield on the admiral shares (VWIAX) at a 0.14% expense ratio. If they have an institutional share class equivalent at 0.05% ER, you'd get your 4.5% in income.

Although it is rather conservative at ~40% stocks and 60% bonds.

They would have no problem spitting out 4.5% a year of the principal balance. The problem would be inflation, which may erode the real payout of the endowment over time.

Or maybe they have subcontracted with Yale's endowment manager and are shooting for 15+% returns.

Just a point of clarification.......I have NO SAY in how and when and what they invest in........and it changes a little every year. I have requested a recent annual report of their endowment funds, may provide some clues.............

 

[justin]

Just a point of clarification.......I have NO SAY in how and when and what they invest in........and it changes a little every year. I have requested a recent annual report of their endowment funds, may provide some clues.............

I was responding to your comment: "I know foundation assets are conservative, but 4.5% in today's environment?".

What are you implying by saying "today's environment"? Are you saying 4.5% is too low? Or 4.5% is too high?

 

[FinanceDude]

I was responding to your comment: "I know foundation assets are conservative, but 4.5% in today's environment?".

What are you implying by saying "today's environment"? Are you saying 4.5% is too low? Or 4.5% is too high?

I worry over the longterm if 4.5% is too high.........

Wonder how they handled that from 2001-2004??

 

[justin]

I worry over the longterm if 4.5% is too high.........

Wonder how they handled that from 2001-2004??

A big slug of long term bonds bought a few years earlier still spitting out 5-6+% interest?

4.5% of the principal each year will be easy, as long as they don't mind eating into principal. The portfolio can never be depleted. The common wisdom here is that 4% of the starting portfolio value can be taken each year, with that amount being adjusted for inflation each year. To last forever, the number is probably closer to 3% than it is 4%.

 

[jazz4cash]

FD
Congratulations and thanks for sharing this info. I was thinking about doing something along these lines some day, but circumstances have changed, so I never looked into it. I hope you will keep us updated and others will contribute also. The SWR on the balance sounds like a reasonable strategy unless the expenses get unreasonable. My other concern was the perpetuity part since a grant of x dollars may be insignificant in 20 yrs.

 

[FinanceDude]

FD
Congratulations and thanks for sharing this info. I was thinking about doing something along these lines some day, but circumstances have changed, so I never looked into it. I hope you will keep us updated and others will contribute also. The SWR on the balance sounds like a reasonable strategy unless the expenses get unreasonable. My other concern was the perpetuity part since a grant of x dollars may be insignificant in 20 yrs.

Well, DW and I are committed to adding money each year, as it will go to a worthy cause, there is a tax deduction, and my sister was world renowned in her field........so I gotta keep the legacy alive........

Hope the other charitable folks I gave money to all these years understand I will be shifting money to this and away from them........