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Endowment (Rolling Average)

Spend a fixed percentage of your portfolio's rolling average value, smoothing out market swings the way university endowments do.

How It Works​

The Endowment method borrows directly from the approach used by large institutional investors like the Yale and Harvard endowments. Instead of basing your withdrawal on the current portfolio value (which can swing wildly), you base it on the average portfolio value over the last several years. This smooths your income stream considerably.

Each year, you look back at the last N years of portfolio values (typically 3 to 5 years), calculate their average, and then withdraw a fixed percentage of that smoothed value. In the early years before you have a full window of history, you average whatever years are available.

The result is spending that responds to market trends but resists short-term volatility. After a market crash, your spending decreases gradually rather than immediately. After a boom, your spending rises steadily rather than spiking. This is exactly how endowments maintain stable funding for university operations through market cycles.

The Formula​

Year 1:

smoothedPortfolio = currentPortfolio    (no history yet)
withdrawal = smoothedPortfolio × spendingRate

Year 2+:

smoothedPortfolio = average(portfolioValues for last N years)
withdrawal = smoothedPortfolio × spendingRate

Key parameters:

  • Spending rate: 4-6% (commonly 5%)
  • Smoothing window (N): 3-5 years (commonly 3)

Pros & Cons​

Advantages:

  • Smooths spending volatility significantly compared to percentage-of-portfolio methods
  • Proven over decades by major institutional endowments managing billions
  • Balances stability and responsiveness to market conditions
  • Naturally adapts to sustained market trends

Limitations:

  • Lags behind market changes — you may overspend after a crash or underspend after a rally
  • Requires tracking portfolio history over the smoothing window
  • May not fully capture upside in strong bull markets
  • The smoothing window length is somewhat arbitrary

Example​

Starting portfolio: $1,000,000 | Spending rate: 5% | Smoothing window: 3 years

YearPortfolio ValueSmoothed ValueWithdrawal
1$1,000,000$1,000,000$50,000
2$880,000$940,000$47,000
3$820,000$900,000$45,000
4$950,000$883,333$44,167
5$1,100,000$956,667$47,833

Notice how the withdrawal in Year 3 is $45,000 rather than the $41,000 you would get from 5% of the current portfolio. The rolling average cushions the blow. Similarly, by Year 5 the portfolio has recovered to $1,100,000, but the withdrawal is $47,833 rather than $55,000 — the smoothing prevents spending from spiking too quickly.

When to Use This Method​

The Endowment method works best for retirees who:

  • Prioritize stable, predictable income over maximizing withdrawals
  • Are comfortable with spending that adjusts gradually rather than immediately
  • Want a method with a strong institutional track record
  • Have a moderate to long time horizon (20+ years)
  • Can tolerate the lag between portfolio changes and spending changes
Try It Yourself

Compare the Endowment method against other strategies using your own numbers in the Scenario Builder.

References​