How Much Income Can We Spend From Our Endowment?

How Much Income Can We Spend
From Our Endowment?

By Rev. Dr. Wayne C. Barrett

At the United Methodist Foundation of Michigan, we receive inquiries regarding the appropriate rate of distributions from Endowment Funds. Many churches limit their distributions to "interest" and do not take any portion of the capital gains or market appreciation as a part of their earnings. Twenty years ago this may have been appropriate as interest rates averaged 6-8% and about half of all stock market returns were in the form of stock dividends.

Today, interest rates on bonds are in the 3-4% range and yields on stock dividends are less than 2%. An endowment invested in roughly equal allocations of stocks and bonds will receive little more than a quarter of its total investment return in the form of interest and dividends. Realizing these changes in the investment landscape, many thoughtful organizations are amending their endowment policies to provide for annual distributions as a percentage of fund value, not limited to interest or capital appreciation. Historically, the sustainable rate of endowment distributions has been in the 4-5% annual range.

To limit endowment income to interest only may not be good stewardship. This reduces funds available for ministry. If you would like to explore this concept more fully, why not schedule a consultation by a member of the United Methodist Foundation staff? You may also wish to receive a free copy of Dr. Barrett's useful booklet, The Thoughtful Christian's Guide to Investing Church Funds. Contact us for more information today.