Fire and endowments

[Dd852]

I've lurked for a while, but still forgive me if I have missed earlier discussions on this twist to the "withdrawal in retirement" debate. I've not been clear why we don't simply copy the strategy of university and museum endowments - aren't our goals similar? Maintain a stable base while paying a steady, inflation-adjusted, return. Now of course we don't have wealthy donors topping us up. But we also don't have to think about a legacy 100 or 200 years hence. I'm very intrigued by the "Tobin" formula many universities use. It can take many forms but for example: This year's withdrawal is equal to 50% (inflation adjusted last year's total withdrawal ) plus 50%(5% of assets). This keeps the peaks and valleys from being too abrupt while still allowing the market to affect withdrawals and let them escape tight boundaries. Other universities also use a 5% multiplier but look at a rolling three years average of assets! which also mitigates for market swings.

 

[Hermit]

That would be pretty complex to me. I would tend to fudge my predetermined withdrawal rate a little one way or the other based on the market then re-plan every few years as needed. I don't need to be very formal because its my money and my retirement. Just need to make sure I won't run out prematurely.

 

[MooreBonds]

I've lurked for a while, but still forgive me if I have missed earlier discussions on this twist to the "withdrawal in retirement" debate. I've not been clear why we don't simply copy the strategy of university and museum endowments - aren't our goals similar? Maintain a stable base while paying a steady, inflation-adjusted, return. Now of course we don't have wealthy donors topping us up. But we also don't have to think about a legacy 100 or 200 years hence.

You also don't have a student body of 3,000-30,000 students to hit up an extra $100 or $500 for in tuition to make-up the shortfall.

You also don't have research departments that you can ask to try to get more grants or private company research contracts for.

You also don't have $1B in student aid to distribute that you can simply adjust a little bit and have incoming new freshman receive an average grant package that's just $500 less (to be made up with additional work hours or additional federal loans).

You also don't have countless capital expenditure programs that you can simply delay a few of to help reduce your cash flow needs for the next few years while the market recovers (well, ok, so you can sit at home for 2 years and not travel if your portfolio drops too much...but having zero dollars for ANY fun isn't quite the same as a university postponing a science lab upgrade by just 1 year, and a tennis court renovation by 2 years).

You also have to lie awake at night, each and every night, unable to sleep as the nagging question of "when will the market recover, and will my portfolio recover" rocks your brain...unlike the university dean who merely updates capital budget programs and doesn't have to worry about the shortfall coming out of their pocket.

 

[ERD50]

You also don't have ...

taxes.

Interesting idea though. But why not try to some real numbers to it? If you do, I think we might learn where it all falls apart (or succeeds).

So let's say a $1M portfolio, and a 40 year planned retirement. What would year #1 look like? And assuming the portfolio just kept up with inflation, what would year #20 look like?

-ERD50

 

[meierlde]

Actually for foundations the minimum allowed by tax law is 5% of assets. This does imply that foundations should terminate if not refreshed if the 4% rule is true. (note that the 5% is taken at the start of every year). We do know how well 5% adjusted yearly does.

 

[Gill]

Actually for foundations the minimum allowed by tax law is 5% of assets. This does imply that foundations should terminate if not refreshed if the 4% rule is true. (note that the 5% is taken at the start of every year). We do know how well 5% adjusted yearly does.

It's the minimum REQUIRED by the IRA.
Bruce

 

[Zorba]

I looked at this a few years ago. My thinking was that these guys can afford top talent so maybe their had advanced the state of the art in withdrawal rates. I came away unimpressed. They did not seem to have any optimum methods that have not already been discussed. Maybe I should look at it again. here is what I found out about the "Tobin formula" from a university web site...

"Emory uses a hybrid spending policy which is based on a modified Tobin spending rule. Named for James Tobin, recipient of the 1981 Nobel Prize in Economics, a Tobin spending rule sets the annual distribution for a budget year through a quantitative formula that has a “stability” factor and a “market” factor. Emory has defined its stability factor as the prior year’s spending adjusted by a growth rate which includes an inflation or deflation component. The market factor is defined as the long-term sustainable target rate/percentage distribution times a moving average of 12 months of market values of the endowment."

Sounds like a SWR + adjustment, sort of like the Guyton floor/ceiling method.


Endowment asset allocations are interesting. Yale's David Swenson wrote a book back in mid-2000 that showed how mere mortals could achieve these returns. It is Swenson who looks more like a mortal today.

There are some important differences . For example, University Endowments pay no taxes but they are required by law to withdrawal something 5% annually.

 

[pb4uski]

I've lurked for a while, but still forgive me if I have missed earlier discussions on this twist to the "withdrawal in retirement" debate. I've not been clear why we don't simply copy the strategy of university and museum endowments - aren't our goals similar? Maintain a stable base while paying a steady, inflation-adjusted, return. Now of course we don't have wealthy donors topping us up. But we also don't have to think about a legacy 100 or 200 years hence. I'm very intrigued by the "Tobin" formula many universities use. It can take many forms but for example: This year's withdrawal is equal to 50% (inflation adjusted last year's total withdrawal ) plus 50%(5% of assets). This keeps the peaks and valleys from being too abrupt while still allowing the market to affect withdrawals and let them escape tight boundaries. Other universities also use a 5% multiplier but look at a rolling three years average of assets! which also mitigates for market swings.

Wouldn't one of the most obvious differences be the time horizon? An endowment is essentially in perpetuity whereas my retirement is 40 years +/-. Also, as others have pointed out, if investment returns are adverse you simply reduce aid whereas a retiree can't stop eating so there is also somewhat of a difference in required and discretionary funding of expenses.

Nonetheless both the Tobin formula you describe and other real world applications of SWR both stress having a certain degree of flexibility in reducing costs if conditions are adverse and splurging a bit if conditions are favorable.

 

[haha]

I may have missed this in the discussion. My experience as an alumnus of a university with a very large endowment is that they don't ever let anyone get away, if guilting and constant mailings and entreaties from highly accomplished classmates might be able to shake loose a donation from time to time. So the endowment is constantly being replenished or augmented, beyond investment earnings and growth.

Also, I believe that unlike us, they pay no tax on their earnings or donations.

Ha

 

[Chuckanut]

I got away. They have totally ignored me. But technically I did not graduate. I 'only' got a professional certificate.

 

[Dd852]

Thanks for the comments. I agree that this strategy basically is like any one that puts a collar around volatile market gains and losses. I'm in my second year of ER (now I am 54), and I track a variety of measures, most of which have appeared on the forum:
Constant 4%, 4% of original inflated, Tobin (though I set the previous year weighting at 70%), dynamic @5% (where any loss years don't count towards inflating) and autopilot (50% rmd and 50% previous year inflated). Tobin comes in at the third most "generous" this year... but this year, with the good markets we have had, thankfully all the measures come in at higher than my actual spend rate! The real test will be in a series of down years....