Harvard Rejects Withdrawal Premise of Firecalc

[haha]

"Harvard’s budget woes started last year, like many other schools across the country, with the deepest economic crisis since World War II. The university’s endowment, the biggest academic fund in the world at $36.9 billion June 30, lost 22 percent by Oct. 1 and is expected to fall by about a third by July of this year, Harvard said.
“We have to reshape and reset to being more like a $24 billion university than a $36 billion university,” Faust said in the forum with students."

Harvard’s ‘Quadlings’ Squawk as Sports, Bus Cuts Loom (Update1) - Bloomberg.com

So I guess what they are saying is that withdrawals must be guaged to current principle, not to some starting point which is assumed to give a perpetual rate of access.

Makes more sense to me than the constant inflation adjusted WR that was so popular in fiancial planning circles over the past years. Of course we haven't heard near so much about that recently. Goodness, I wonder why?

Ha

[Coach]

Harvard's enowment is so huge it defies comparison, but the way my alma mater has handled endowment payout for a number of years is to take a percentage of the average value of the endowment over the prior 12 quarters, with a 10% maximum change in payout year to year. Obviously they're anticipating significant payout reductions over the next three years.

Coach

[Ed_The_Gypsy]

Quote:

“We have to reshape and reset to being more like a $24 billion university than a $36 billion university,” Faust said in the forum with students."

It makes one wish to cry. The pain must be intolerable. Shall we take up a collection?

[chinaco]

The key word was Perpetual. That is a fundamental difference between Harvard's Funding needs and Retirees...

• Harvard intends to fund the school in perpetuity
• Most Retirees only have to worry about 30+ years

[haha]

Quote:

Originally Posted by chinaco The key word was Perpetual. That is a fundamental difference between Harvard's Funding needs and Retirees... Harvard intends to fund the school in perpetuity Most Retirees only have to worry about 30+ years

Depends on what you mean by 30+. I've been on these boards for 6 years, and I would say the large majority of ERs will will a joint planning period of more like 50 years. Which isn't infinity, but it isn't any 30 years either. And practically speaking, I am not so sure that it is very different from the infinite endowment, unless one is buying an annuity.

Ha

[Dawg52]

Quote:

Originally Posted by haha Depends on what you mean by 30+. I've been on these boards for 6 years, and I would say the large majority of ERs will will a joint planning period of more like 50 years. Which isn't infinity, but it isn't any 30 years either. And practically speaking, I am not so sure that it is very different from the infinite endowment, unless one is buying an annuity. Ha

Ha still up at 3:40am? Must have stayed out late dancing again.

[W2R]

Quote:

Originally Posted by Dawg54 Ha still up at 3:40am? Must have stayed out late dancing again.

Well what's your excuse for being up at 6:30 AM? You are RETIRED, remember? You can sleep in if you want to and go to the golf course late. Getting up early is for us po' working folks.

[utrecht]

Why is the endowment expected to "fall by about a third by July of this year"?

[Independent]

A lot of people have pointed out that the "standard" advice to retirees has an inherent conflict. Retirees want stable, inflation-adjusted incomes. But the standard advice is to invest in assets with very unstable prices. Lots of posts on this board discuss the various systems that we're using to try to reconcile that conflict.

Harvard has the same conflict. Apparantly, they want to get a stable contribution to their operating budget from the endowment. But, they appear to be investing to maximize long-term yield, without a plan to deal with the short term fluctuations. If that's true, maybe we should offer some ideas

This may have some direct financial implications to the younger people on this board. About a year ago Harvard dramatically increased its financial aid for "middle class" families. Some outsiders said they we concerned about the tax situation of an endowment that had grown too big to justify. This caused Harvard's competitors to revise their aid formulas. If you've got a kid who plausibly could go to an Ivy, you could have significant bucks riding on how this works out.

On a tangent -- I'm disturbed that Harvard even wants an endowment this big. I think a reasonable plan would be to have spent it faster in the past.

[ziggy29]

Quote:

Originally Posted by Independent A lot of people have pointed out that the "standard" advice to retirees has an inherent conflict. Retirees want stable, inflation-adjusted incomes. But the standard advice is to invest in assets with very unstable prices. Lots of posts on this board discuss the various systems that we're using to try to reconcile that conflict.

Well, sure -- and a lot of that is simply related to the fact that for most of us, if we want to have a large enough asset base to have a reasonably comfortable, inflation-protected retirement, we need to take equity risk.

If you're independently wealthy and have far more money than you'll ever need, or if you have a combination of SS and COLA'd pensions that more than meets your living expenses, you don't need to take that risk. But that's describing fewer and fewer people, I think, as time goes by. The rest of us, no matter how much we'd rather not, get on the roller coaster despite our "motion sickness."

It seems to me that if you are only eating a small percentage of an endowment each year, you can more adequately weather market cycles than if you're taking too much -- a lot like the SWR discussions we have here.

[haha]

Quote:

Originally Posted by Dawg54 Ha still up at 3:40am? Must have stayed out late dancing again.

No; I crashed on the couch at 8pm! At a little after 3am I woke up and had to stagger around and brush my teeth, etc- so I rang up my friends on ER.org. I just got up again. Don't know what is going on, maybe the weather getting cooler again is making me a sleepy-head.

Ha

[Culture]

Everyone is assuming that Harvard was spending at a sustainable rate to begin with. Maybe they were not. Perhaps they were spending 5%/year in the good years, so will have to cut back to 2.5-3%/year in the bad? Anyone know?

[ziggy29]

Quote:

Originally Posted by haha No; I crashed on the couch at 8pm! At a little after 3am I woke up and had to stagger around and brush my teeth, etc- so I rang up my friends on ER.org. I just got up again. Don't know what is going on, maybe the weather getting cooler again is making me a sleepy-head.

FIRE means not caring what time of day it is or what day of the week it is. Other than to remember when the weekends are, so you can stay home while all the working stiffs are out doing things and running errands.

[Culture]

Quote:

Originally Posted by Independent On a tangent -- I'm disturbed that Harvard even wants an endowment this big. I think a reasonable plan would be to have spent it faster in the past.

Interesting point. With a $36B endownment, an actual enrollment of 19,650 students and a conservative withdrawal rate of 3%, Harvard could supply $55,000/year to each student, i.e. Harvard should be free for all students who attend.

What gives? Any Harvard grads here know anything about how they operate?

[freebird5825]

Quote:

Originally Posted by Want2retire Well what's your excuse for being up at 6:30 AM? You are RETIRED, remember? You can sleep in if you want to and go to the golf course late. Getting up early is for us po' working folks.

Ha is a slacker by my standards. But he was only behind me by 1 hour, adjusting for relative time zones.
Nice try but no cigar, however I will issue an Honorable Mention.

I'm up at 530 AM Eastern time, 4 days a week. dh2b is going to the gym before w*rk. Miss Suzyhomemaker here likes to see him off to bolster his courage to face the sulphur mines.

Call me crazy, but I get treated to a gorgeous sunrise, a birdie symphony , very little internet traffic, and the gratification of getting up early because I CHOOSE to. You'll see what I mean in a few months.

[Independent]

Quote:

Originally Posted by Culture Interesting point. With a $36B endownment, an actual enrollment of 19,650 students and a conservative withdrawal rate of 3%, Harvard could supply $55,000/year to each student, i.e. Harvard should be free for all students who attend. What gives? Any Harvard grads here know anything about how they operate?

Exactly what I thought. So I went looking for their financial report. I found it here: Financial Administration - Annual Financial Report of Harvard University

Harvard's numbers are amazing. They did get $1.2 billion from the endowment for operations. However, that only covers 34% of their spending. Students cover 20%. So they could have wiped out the remaining student portion in 2008 by taking another 2% from the endowment.

[Independent]

Quote:

Originally Posted by Culture Everyone is assuming that Harvard was spending at a sustainable rate to begin with. Maybe they were not. Perhaps they were spending 5%/year in the good years, so will have to cut back to 2.5-3%/year in the bad? Anyone know?

To me, 5% should be sustainable if they are willing to stick to it in the down years. In fact, IIRC the gov't expects tax-exempt funds to distribute something in that neighborhood.

For more numbers, see the link in the post above.

[Dawg52]

Quote:

Originally Posted by Want2retire Well what's your excuse for being up at 6:30 AM? You are RETIRED, remember? You can sleep in if you want to and go to the golf course late. Getting up early is for us po' working folks.

I feel like I'm working again. Up early to stop by the nursing home to make sure my aunt is eating before heading to the golf course. Oh well, at least I got to play golf today. Now, time for the night shift.

[ERD50]

Quote:

Originally Posted by chinaco The key word was Perpetual. That is a fundamental difference between Harvard's Funding needs and Retirees... Harvard intends to fund the school in perpetuity Most Retirees only have to worry about 30+ years

Quote:

Originally Posted by haha Depends on what you mean by 30+. I've been on these boards for 6 years, and I would say the large majority of ERs will will a joint planning period of more like 50 years. Which isn't infinity, but it isn't any 30 years either. And practically speaking, I am not so sure that it is very different from the infinite endowment, unless one is buying an annuity. Ha

I know we've discussed this on earlier threads and I think I came to the conclusion that once you get conservative enough for a 50 year portfolio w/o deep downdraws, you essentially have a "perpetual" portfolio.

Quote:

Originally Posted by Independent To me, 5% should be sustainable if they are willing to stick to it in the down years. In fact, IIRC the gov't expects tax-exempt funds to distribute something in that neighborhood. For more numbers, see the link in the post above.

I've read that 5% number before for charities - it does seem at odds with the 4% for 30 year number - does adjusting to the current portfolio really make that big a diff?

-ERD50

[haha]

Quote:

Originally Posted by ERD50 I've read that 5% number before for charities - it does seem at odds with the 4% for 30 year number - does adjusting to the current portfolio really make that big a diff?-ERD50

I don't know the details but big schools like Harvard, Yale, Stanford, UTexas are constantly dunning alumni for more money. Some of which goes into ops, but a large amount gets added to the endowment.

Ha