Archived Story

How does an endowment fund work?

Published 10:00am Sunday, November 24, 2013

By Paul Overgaard

Unlike a contribution that is given and spent on an immediate need, a gift to an endowment (or permanent) fund will give many times its original value through time, making it “a gift that keeps giving.” Over years the value of an endowment fund will be significant, both in dollars granted and in fund value.

In an endowment fund, assets are invested to provide a consistent, annual distribution for charitable purposes while protecting the value of the principal against inflation. Assets are invested for “total return,” i.e. income (dividends and interest) plus growth (change in market value).

For example, a net total return of 9 percent provides:

• 5 percent for annual charitable distribution and fees.

• 4 percent reinvested to meet inflation.

An endowment fund is also referred to as a permanent fund because it will continue to grow and grant charitable dollars toward its defined purpose, forever. You’ll see in the example below that a single gift of $10,000, when invested as an endowment, will produce more than 14 times its original value over its first 50 years. It will have granted out more than $76,000 and will have a fund balance of over $71,000. That’s why an endowment fund is a wonderful vehicle for donors wishing to leave a legacy to a community, organization or field of interest they love.

 

It keeps on giving

A $10,000 investment into a permanent endowment fund provides the following return to the community:

Year Fund value       Annual distribution           Cumulative distribution

1        $10,000             $500                                       $500

10     $14,800             $710                                        $6,000

25     $26,650             $1,280                                    $20,820

50     $71,060            $3,410                                     $76,330

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