Research

Effective Spending Policy: A ‘Ways and Means’ to Long-term Goals

By March 20, 2024No Comments

The concept of a spending policy is to provide guidance and guardrails when it comes to thoughtfully using and protecting investment resources. It has application among all investor types – both institutional and individuals – though, in practice, a spending policy often takes on more formality and nuance for institutions.

For individuals approaching retirement, this typically means establishing a reasonable and realistic dollar figure to draw from retirement assets/savings to cover one’s regular annual expenses. If expenses and investments are managed responsibly (and markets behave), it is expected that the retiree will be able to draw this same amount plus adjustments for inflation over the entirety of their retirement years. With any luck, some amount will be left over for heirs and/or philanthropy.

For perpetual institutions like nonprofit organizations with endowed assets, the spending policy process can become more complicated given the infinite time horizon. Most endowment investors are not expecting to completely spend down their assets over time but rather draw from and extend the value in perpetuity. Managing the regular spending amount is critical as it can cover both financial support to the organization’s operations (e.g., salaries) as well as direct grantmaking or other charitable programs. Thus, prudently evaluating long-term spending needs relative to projected resources (both revenue and investments) is crucial. Moreover, the methods for calculating the appropriate spending can take various forms and present various risks.

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