By Jack Brooks
When working as an Investment Advisor I was frequently ask by pre-retirement clients for the magic number of dollars needed to assure a comfortable retirement. “If I retire, how long will the money last”? At the heart of this discussion are two similar but different objectives. First, establishment of a goal amount in dollars that needs to be reached in order to be in a position to retire. Second, agreeing on a percentage to be taken for retirement income that will supplement other retirement sources and meet projected annual living expenses during one’s retirement years without depleting the account. This withdrawal percentage is often called “Safemax,” or safe maximum annual withdrawal percentage. For years financial planners cited a withdrawal rate of 4% a year in the first year following retirement, with ongoing adjustments for future inflation and as living costs increase. The 4% figure is usually attributed to American certified financial planner William Bengen, as cited in his book Conserving Client Portfolios During Retirement.
Today with record-low interest rates well below 4% and volatile stock markets, more advisors are questioning if this figure is still truly safe. A recent paper in the Journal of Financial Planning suggests the 4% withdrawal rate will cause portfolios to run out of money or fail with an 18% probability. This probability is higher than previously believed. They suggest a safe annual withdrawal rate today may be as little as 2.5% based on building a conservative yet well diversified portfolio of equity, fixed income, and cash investments.
A similar discussion is being held when the Mid-Atlantic United Methodist Foundation is asked by a church “What should we budget to withdrawal from our Permanent Endowment Fund so we can supplement our ministry or mission budget but never deplete this valuable resource.” In this way a permanent endowment fund is similar to one’s retirement account.
Unfortunately for a church, the answer is not universal and perhaps far more complex than working through retirement withdrawal projections. The church has many additional variables to consider. These include the publicly stated purpose of the endowment, payment restrictions, donor gift restrictions, the established investment policies, and the long-term outlook of the church and its membership. Each item will have a direct impact on an endowment account’s withdrawal percentage.
The Foundation’s consulting approach with a church is to first guide a review of the formal endowment plan documents. Every church endowment should have a formal Endowment Plan document that outlines at a minimum the purpose of the endowment, a spending policy, the types of gifts that may be accepted, and history of the fund. Additionally the endowment should have a separate Investment Policy Statement that will affirm the Socially Responsible Investment Policies of the United Methodist Church, outline permitted investments, and identify investment allocation targets. How an endowment is permitted to invest clearly has the most direct impact on anticipated investment returns and therefore any annual income withdrawal.
I feel there is an additional calculation to consider that is too frequently overlooked, yet has more impact on the general financial health of a church and the mission of its permanent endowment fund than anything previously mentioned. This is far more important than investment returns or spending percentage to the long-term distributions. This calculation is what I call the church and endowment’s Legacy Growth Percentage. Simply stated, “What is the projected annual percentage rate the permanent endowment fund will grow from the current membership making planned legacy gifts into the endowment fund?
Historically many of our United Methodist Churches were not built on tithes, offerings, and capital campaigns but on planned gifts made as a Christian testimony in a will for perpetuating the United Methodist Church. Is your church actively promoting opportunities for legacy giving? Is the congregation well informed in the concepts of making Planned Gifts? The Mid-Atlantic United Methodist Foundation offers many valuable resources that can help you get started. One great way is to suggest naming the church as one additional beneficiary of a retirement account.
What percentage can you withdrawal from your endowment? Or – What is the future Legacy Growth Percentage of your endowment fund? I would argue the second question is the key to properly maintaining a church’s permanent endowment fund. How this question is addressed by the congregation today has far more impact on the future life of your church and funding ministry than annually reviewing investments and making projections for distributions.
Jack Brooks is Executive Director of the Mid-Atlantic United Methodist Foundation: firstname.lastname@example.org or 484-762-8247.