# Building a Personal Endowment

Many academic institutions, charities, and foundations fund their operations with a financial endowment. In other words, they use a pool of assets to generate an ongoing income stream without touching the principal. If this approach works for them, why can’t it work for you?

## How much do you need?

Assuming a safe withdrawal rate (SWR) somewhere in the 3-4% range, you’ll need to amass an endowment of 25-33x the amount of income you’re hoping to generate. Note that the old 4% SWR is based on an academic study that has come to be known as “the Trinity study.”

According to the Trinity study, which relied on backtesting using historical investment performance data, a portfolio with a 75/25 stock/bond allocation has a 98% chance of surviving 30 years at an inflation adjusted 4% SWR. In this case, however, portfolio survival was defined as not running out of money.

If you want to avoid touching the principal, you may need to dial back that withdrawal rate to 3%. If, on the other hand, you have a relatively short time horizon and/or are okay with running down your investments, then you might opt to go higher. This part is entirely up to you.

As for that 25-33x range listed above, that calculated by simply diving your withdrawal rate (expressed as a fraction) into one. So for a SWR of 4%, you’ll need 1/0.04 = 25x your expenses, and for a 3% SWR, you’ll need 1/0.03 = 33.3x your expenses. Got it? Good.

## Breaking your goal into pieces

Wherever you settle with respect to withdrawal rates, you now have a target. And, in all likelihood, it’s a massive, imposing, and seemingly insurmountable target. Let’s assume, for example, that you have annual living expenses of \$50k, and that you’re young so you want to be conservative when it comes to withdrawal rates.

If you target a 3% SWR to produce that \$50k in living expenses, you’ll need to accumulate just shy of \$1.7M. Perhaps you could bump that SWR up a bit – after all, you can’t take it with you – but even then, you’re looking at a huge chunk of change.

So why not break the problem into pieces? Instead of trying to amass a fortune capable of covering your entire cost of living, why not shoot for incremental amounts that will cover specific aspects of your lifestyle?

Are you a self-avowed, lifelong renter? Assuming that’s the case, and that your rent is currently \$1k/month, you’ll need a portfolio of somewhere between \$300k-\$400k if you want to live “rent free” for the rest of your life. Still overwhelmed? Let’s break things down further.

Is your grocery bill in the neighborhood of \$250/month? You can “eat for free” with a food endowment of \$75k-\$100k. Do you love taking an annual vacation at the cost of \$1500/year? Then you’ll need a “vacation endowment” of somewhere between \$38k-\$50k to support that habit for the rest of your life.

Note that I’m not really suggesting that you create a separate investment portfolio for each and every expense. Rather, this is more of a thought exercise designed to help you achieve financial freedom one step at a time.

## Enforcing frugality

This is also a very powerful concept when it comes to valuing the things that you’re paying for on an ongoing basis. Do you pay \$200/month for lawn service? By choosing not to do it yourself, your required endowment goes up \$60k-\$80k. Your \$100/month cable bill? That “little” luxury raises the target another \$30-\$40k. The same goes for your daily \$3 cup of coffee.

Are these things worth it? That’s for you to decide. But your spending really looks different when you view it in these terms. Try it. You’ll like it. Or maybe you won’t. But hopefully this worldview will help you make better financial decisions.

### 10 Responses to “Building a Personal Endowment”

1. Yes, this accounts for inflation. The Trinity study assumes that you start withdrawing 4% and then adjust that amount annually for inflation, so future price increases should be tolerated – though this all depends on the accuracy of the other underlying assumptions (portfolio performance, etc.).

2. Does this take into account inflation for lifestyle purchases? As in, rent is \$1K now, but may be \$1.5K in the future, etc.

3. If you take the exercise in reverse it really shows how valuable multiple little streams of income are….

If this blog were to bring in \$250/month – there is your 75k – 100k grocery endowment

4. Doug: See comments #1 and #2, above. If you want to withdraw a smaller percentage then you need a larger balance in order to get the same number of dollars.

5. Ah, this is my personal philosophy: to endow my life so that I never **need** to work again. This endowment is the definition of financial freedom: set up your money to earn money, keep the principal intact, and live off those earnings. The most popular post I ever wrote, If I Had a Million Dollars I’d Go Into Debt, talked about this same idea: \$1 mil, if invested wisely, could get up an “endowment” that could spin off roughly \$30,000 a year in living expenses.

6. Ok, I get it now — I knew there was a piece of the puzzle I wasn’t seeing, but I couldn’t see where it went. Thanks!

7. As I try to tie my head around trying to identify how much money I really need for retirement, this is a really good approach. Ie, biting off bits of your expenses off one at a time and saving the \\\”luxury items\\\” for last. Like you said, perhaps it\\\’s not worth having to save another \$80K for the benefit of cable.

Great article.

8. I love the idea of “endowing” my future expenses so I have the option to work for motivations beyond money. The point about frugality is a really good one. Jacob at Early Retirement Extreme talks about this a lot.

9. The smaller withdrawal rate means that you can’t take as much out, so you’ll need more money invested.

Consider this:

\$100k x 4% = \$4k
\$100k x 3% = \$3k

But if you really need that \$4k, then at 3% you’ll need:

\$133,200 x 3% = \$4k

In other words, the withdrawal is smaller on a percentage basis, but you still need the same number of dollars to support your lifestyle, so you need to multiply that smaller % by a larger amount invested.

Does that make sense?

10. While I don’t fault your math or the concept, I wonder why you need more (33x vs 25x) to fund a smaller withdrawal (3% vs 4%). My mind cannot wrap itself around this concept.