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]

“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]

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]

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]

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]

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]

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]

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]

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]

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]

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]

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]

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]

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

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.

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]

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

 

[ziggy29]

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?

Keep in mind that charities typically also have new money coming in as well as the existing account balance. That could make a difference between, say, 4% and 5% in terms of sustainability.

 

[Independent]

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?

I think this goes back to the title of the thread. The 4% is a percent of the original fund, increased for inflation. The 4% is a lot less than the expected average return on the portfolio. The retiree gives up a lot of potential withdrawals to maintain a high probability of never decreasing because the retiree can't cover the basics on anything less. In most cases, the retiree dies with a lot more money than he had when he retired.

The 5% assumes the charity has some flexibility in what it funds. My impression is that the IRS is very flexible about "average of recent years' balances" and all that, but on the "high payouts vs. never drop below my minimum need payouts" spectrum it is pushing the fund a little in the direction of "high" and taking a little more risk on the minimum.

From a public policy perspective, I am uncomfortable with giving tax breaks to funds that simply get bigger and bigger, so I like the idea of some gov't requirements for withdrawals, even if that means the fund isn't immortal.

 

[ziggy29]

From a public policy perspective, I am uncomfortable with giving tax breaks to funds that simply get bigger and bigger, so I like the idea of some gov't requirements for withdrawals, even if that means the fund isn't immortal.

Agreed. Money given to tax-exempt charities and non-profits should be used for the mission of the organization, not simply hoarded. There's too much cash-hoarding going on today as it is.

 

[free4now]

Actually you can take any amount per year and never go broke as long as you adjust withdrawls to the current balance. E.g. If you decided on 30% per year withdrawals and found your balance down to $100, then the market declined by 50%, you would still have $35 left the next year

But seriously, it's become clear to me that most real investors do neither the strict 2.5-4% of original nor the strict 5% of current. Most do something in between, trying to keep the payouts relatively contant while letting them drift based on the current balance.

So I think people should keep track of how firecalc results turn out for both approaches, and anticipate that they will end up somewhere between.

 

[free4now]

Agreed. Money given to tax-exempt charities and non-profits should be used for the mission of the organization, not simply hoarded. There's too much cash-hoarding going on today as it is.

I don't understand the concern. As long as the money cannot be pulled out for non-mission uses, why should you care if there is an organization that has very long term goals. My vanguard charitable giving account no longer requires distributions every year, and I like the freedom to be able to give on my schedule not the IRS's.

Don't mean to pull this thread off topic though...