Written by Jennifer Turner, Vice President of Philanthropy, Central Indiana Community Foundation
For many of us, the word “endowment” can feel intimidating. It conjures up images of billion-dollar family foundations or Ivy League universities, entities that seem to exist in another dimension from our own.
In reality, an endowment is far more accessible – and versatile – than many realize.
For our purposes, an endowment is a financial asset invested by a not-for-profit and held like a long-term savings account (but with better investment returns). A percentage of the fund is available for withdrawal each year – usually 4-5%. It is the earnings from the investments that can provide revenue for the organization’s mission. The original (principal) investment remains intact to sustain the organization over the long term.
Let’s say a donor plans to leave your organization $100,000 in their estate plan. First off, congrats! But why might you want to use that gift to start an endowment rather than spend it? In a word: sustainability.
An endowment is a near-guaranteed source of yearly revenue. As long as it exists, you have flexible dollars to help fund your mission. Now, at 5%, that $100,000 is “only” going to yield $5,000 a year. But that amount can be held in reserve to cover unforeseen budget shortfalls; or wages for an intern; or maintenance costs for your aging facility. And that $5,000 will be there every year without any further fundraising. Any additional gifts to that endowment will add to the principal, increasing the 5% annual payout.
Another thing an endowment does for an organization is help cover emergencies. Organizations that had robust endowments came through the pandemic in better financial shape than their peers without endowments. That guaranteed source of income helped organizations better plan when their other revenues and giving became unpredictable.
Also, don’t forget the reasons an endowment might be attractive to your donors; as a regenerating source of income, a donor’s gift creates value in perpetuity. Say your donor makes a $250 gift every year. A single gift of $5,000 to the endowment would renew that gift automatically, its value extending far into the future.
But here’s the best part: as an investment, your endowment’s principal sum will grow and, consequently, produce higher annual payouts at that same 5%.
Let’s go back to the example of our donor’s one-time investment of $100,000. It distributes 5% every year. But over the course of, let’s say, twenty years, the market itself is going to grow in value; on average, it grows about 7% every year. That means that your endowment’s principal value is going to grow an average of 2% every year (7% market increase minus your 5% annual payout).
So after 20 years, your endowment has grown to $140,000 even as you continued receiving 5% annual payouts totaling about $112,000.
If all that gave you an SAT flashback, don’t worry! The basic concept is simple: your endowment’s principal amount grew more than it gave.
We should note that we’re using the example of $100,000 for simplicity’s sake. Endowments can start at lower values. CICF partners with not-for-profits organizations to establish endowments starting at $25,000. Alongside managing the fund, we offer services and support like planned-giving counsel, accepting complex gifts, professional development opportunities, and more.
And at CICF, your endowment – no matter its value – is pooled into a robust investment portfolio valued at $750 million. That allows us (and in turn, your organization) access to more sophisticated financial instruments that offer potentially higher yields and greater flexibility.
We should note that your principal amount isn’t necessarily off limits forever. Alongside permanent endowments, CICF offers board-designated or quasi-endowment funds that permit an organization to withdraw any amount of the principal (including the full amount) for special projects or in times of need.
Hopefully, this explanation was able to make these financial instruments sound more approachable. You don’t have to have a last name like Gates or manage a university in Cambridge to harness the power of the market for your organization and donors.
Plus, when donors and supporters see you utilize this powerful tool, it sends a message that you are planning for long-term sustainability and maximum positive impact for years to come.
FEEL FREE TO REACH OUT TO ME TO CONTINUE THIS CONVERSATION:
Jennifer Turner
Vice President of Philanthropy
Central Indiana Community Foundation
jennifert@cicf.org
317.634.2423 x513
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