Revisiting spending policy in a higher-rate world.

For more than a decade, endowments and foundations set spending policy in an environment of near-zero yields, which pushed portfolios toward equities and illiquid assets to meet return targets. With high-quality bonds once again offering meaningful income, many boards are asking whether their policies still fit.

What has changed — and what hasn't

Higher yields improve the probability of sustaining a given spending rate with less portfolio risk. They do not change the core obligation: to support today's mission without diminishing the institution's capacity to support tomorrow's. Spending above the real return of the portfolio still erodes purchasing power over time.

Choosing a rule

• Rolling-average rules smooth volatility but can lag sharp declines.
• Inflation-linked rules protect budgets but can overspend after poor markets.
• Hybrid rules blend the two and, in our analysis, perform most consistently across scenarios.

Governance considerations

We recommend that boards review spending policy, asset allocation and liquidity reserves as a single framework, stress-tested together at least every three years. Decisions taken in isolation — a higher spending rate here, a larger private markets allocation there — are where unintended risk tends to accumulate.