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Targeting Portfolios and Medical Endowment Funds

[By Staff Reporters]

According to Wayne Firebaugh CPA, CFP® CMP™ recognizing the risk that market volatility represents to long-term portfolio portfolios or medical endowments utilize a variety of methods to calculate periodic payouts. These include the following:

• Investment Yield: A portfolio/endowment using this method spends only its dividends and interest and re-invests any unrealized and realized gains. There would appear to be two primary disadvantages of this method. First, the payout amount will be extremely volatile as yields on equity and fixed income investments fluctuate. Second, the endowment manager could be encouraged to adopt a short-term focus on yield to the detriment of purchasing power preservation.
• Percentage of the Prior Year’s Ending Market Value: An endowment/portfolio using this method would withdraw some fixed percentage of the prior year’s market value. As with the Investment Yield method, disbursements from the endowment can be somewhat volatile under this method.
• Moving Average: This approach, which is most common among educational institutions, generally involves taking a percentage of a moving average of the endowment market value. The percentage commonly approximates 5% over a 3-year period.
• Inflation Adjusted: This method simply adds some factor to the applicable rate of inflation for the institution/portfolio.
• Banded Inflation or Corridor: This method is similar to the Inflation Adjusted method except that it establishes a corridor or band of minimum and maximum increases in an attempt to limit the volatility of disbursement amounts for the portfolio/endowment.

Assessment

How does the above compare to the typical 4% withdrawal rate suggested by many FAs today … too much or too little?

Does a private MD “spend-down” or “conserve” principle like an endowment fund make sense?

Conclusion

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• FINANCE: Financial Planning for Physicians and Advisors
• INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors
• Dictionary of Health Economics and Finance
• Dictionary of Health Information Technology and Security
• Dictionary of Health Insurance and Managed Care

Filed under: Investing, Portfolio Management, Retirement and Benefits | Tagged: Investment Yield, medical endowment funds, moving averages, Portfolio Management, wihdrawal rates |