Does endowment-style investing make sense in retirement?

We describe endowment-style investing as a long-term approach, which raises a fair question: what if you’re closer to retirement than to the beginning of your career? If the whole premise rests on patience, does the strategy still apply when you’re about to start using your retirement savings?

We believe it does, and that there are strong parallels between how endowments & foundations and many retirees plan for their spending needs.

Endowments and foundations aren’t growing capital for its own sake. Every year, they pay out a meaningful share of it to support the organizations behind them. The portfolio has to fund that spending now and still be there decades from now. In other words, supporting ongoing spending is a central part of what these portfolios are designed to do, much like it is for most individuals’ retirement portfolios.

Most endowments and foundations operate with an annual spend rate: the portion of the portfolio paid out each year to support the institution. It often falls somewhere between 5% and 5.5%.¹

Of the two, foundations most resemble many individual investors in retirement. Here’s the difference: endowments are open pools of capital, meaning they can continue to receive donations. Foundations are generally closed pools. Once a foundation is established, there are no new inflows – there is only the portfolio and the spending that comes out of it.

That leaves a foundation’s investment office with a demanding job. The portfolio has to produce enough to cover this year’s spending, and it also has to keep growing enough to cover spending in 20 or more years, with no new money received.

Once a portfolio begins to support ongoing spending, a market decline stops being something you can simply wait out. You’re selling into market weakness in order to meet the annual spend, which leaves fewer dollars invested to recover with. One steep drawdown can reduce the spend that a portfolio is able to support for years afterward.

Endowments and foundations with a spend requirement therefore tend to hold two goals at once. They invest for long-term growth, because the portfolio has to support the spend, account for inflation, and ideally generate excess returns such that future spending may even increase. And they diversify deliberately, because a portfolio whose holdings all fall at the same time can be a serious problem when that portfolio needs to fund ongoing spending.

Here’s how that shapes the allocation. Equities (both public and private) represent the core of an endowment-style portfolio, since ownership in businesses has historically driven the highest long-term returns. Private credit, real estate, infrastructure, and other diversifying strategies are there because they have historically demonstrated lower correlation to public equities.²

Why does that matter? Public stocks tend to move together across market cap, sector, and geography, and that co-movement has tended to increase in major market drawdowns.³ That’s exactly when a portfolio funding ongoing spending can least afford it.

An individual planning for retirement likely has similar goals for their portfolio: at some point it stops receiving contributions and starts funding withdrawals, and it is expected to keep doing that for a long time.

That last part is easy to underestimate. Reaching retirement age doesn’t mean your portfolio gets spent down over the following decade. Someone retiring today may need those assets to support spending for decades, and many people also intend to leave something behind. A portfolio in retirement is often still a long-term portfolio.

Retirement assets are similar to endowment & foundation capital in another way, too. Money in an IRA or a 401(k) compounds without annual tax drag, which is part of what allows endowments and foundations, also tax-advantaged, to invest patiently and let time do the work. In other words, your retirement capital has a good deal in common with the capital the endowment-style approach was designed for.

There’s a common assumption that a portfolio meant to support spending should be built to generate that spending as income. Foundations and endowments with a spend requirement generally don’t work that way.

An endowment or foundation funding a 5% spend rate doesn’t try to assemble a portfolio that yields 5%. It invests for total return⁴ and funds the spending from the portfolio as a whole.

Why not simply build for yield? Because while yield oriented investments, like bonds, seek steady returns, these investments also carry risk. The safest investments (e.g., Treasuries) offer the lowest yields, but after accounting for inflation, these investments may not generate enough income to meet spending needs. Reaching for higher yields means taking on additional risk, including the risk of principal loss. But income investments offer only a contractual yield, with no opportunity for additional upside. That means individual underperforming fixed income investments can impair the total portfolio. More importantly, a portfolio focused on yield gives up the growth that can carry spending for decades ahead.

Like most endowments & foundations, our Institutional Investment Strategy Fund is managed to seek long term capital appreciation, not yield, and we believe that’s the right approach for long-term capital. The Fund may pay an annual dividend but that dividend isn’t designed to be a primary source of return.⁵ By seeking long term capital appreciation we aim to provide a portfolio that can both support spending and keep growing.

While the Fund is intended for patient capital, it does provide quarterly liquidity windows in which investors can sell shares. That’s critical for retirement assets: even if an individual doesn’t expect to need to draw on their retirement savings immediately, they may still be subject to required minimum distributions (RMDs), depending on the type of retirement accounts they hold. Click here to read more about how these quarterly liquidity windows work.

Our Fund is built on the same framework these institutions use: an equity-focused portfolio broadly invested across public and private markets, with active asset allocation and specialist institutional managers selected in each asset class.

It’s managed by a Chief Investment Officer who spent more than 17 years managing multi-billion dollar endowment portfolios where the annual spending obligation was an ever-present consideration.

This endowment-style approach has been practiced by institutions for decades, and we started Ivy Invest because we believe every individual deserves the opportunity to invest their long-term capital the same way.

Learn more about our Fund.