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Employee benefits and retirement plan solutions Trends and Insights Maintaining long-term purchasing power while supporting current spending needs

Maintaining long-term purchasing power while supporting current spending needs

Colleges and universities are facing challenges supporting current operations, while also preserving resources for future generations. Explore three options Boards can take to assess their ability to meet both short-term needs and long-term goals.

3 min read |

Quick takeaways

 The need for endowments to support current spending has continued to grow at a time when long-term capital market assumptions (CMAs) have typically decreased and higher inflation expectations persist.  Trustees are looking for ways to support the short-term spending needs while protecting the long-term value of the endowment’s assets.  Changing processes and conducting a variety of assessments can help provide regular insight into the viability and strength of the endowment long-term. 

When seeing the challenge presently faced by college and university endowments, it is hard not to think about the idiom “you can’t have your cake and eat it too.” That saying is simply about making a choice because the two options conflict and you can’t have both. The primary purpose of endowments has always been to support current operations while preserving resources for future generations. Historically, they typically didn’t conflict and a balance could be achieved by using annual investment returns to support current spending needs while maintaining the endowment’s corpus in perpetuity. Unfortunately, times have changed and that balance is becoming harder to achieve.
Spending needs and expected returns are not aligning

 

Two main factors are contributing to the challenges confronting endowment trustees. One is that there is an increased need for the endowment to support current spending. Operating costs for colleges and universities increased 3.6% in fiscal 2025, driven by greater spending on technology, student services, faculty compensation, facilities maintenance, and financial aid. At the same time, institutions are experiencing negative revenue pressures from funding cuts, declining enrollments, and changes to financial aid legislation. Many boards are turning to their endowments to help offset these financial challenges faced by their institutions.

The second factor is that lower long-term capital market assumptions (CMAs) and a higher inflationary environment could make it increasingly harder for endowment assets to meet traditional target return levels. An accepted target return level for endowments historically was set at 7.5%, by assuming 5% in spending requirements, 2% inflation expectations and .5% in fees and expenses. But many investment firms have steadily reduced long-term return forecasts for diversified portfolios, lowering return assumptions closer to 5-6% versus the historical 7-8%. Slower growth, demographic shifts, inflation uncertainty, and elevated equity valuations all contribute to this outlook. Equity valuations in many markets remain elevated relative to historical norms. Private markets, once seen as a reliable source of excess returns, now face greater competition and lower premiums.
Three suggestions for endowment trustees to consider

The biggest challenge for endowment trustees is that they can’t simply make the choice – it defies the purpose of the endowment. They need to find ways to have their cake and eat it too. What’s happening now is not necessarily new as higher education has faced similar challenges during times of crisis such as the Great Recession (2008-2009) and the impact of Covid-19 (2020-2021). However, markets quickly rebounded after those crises and the challenge subsided. Today’s challenge is around the expectation that markets don’t perform as well moving forward while operating costs grow. The good thing is Boards have practical tools and resources to help navigate rising pressures responsibly. Here are three suggestions for ways to begin the process:

  1. Review asset allocation regularly. Establish a formal process that incorporates a review of long-term return assumptions on an annual basis. Spending policies should be heavily influenced by updated CMAs and adjusted accordingly. Long-term return forecasts should provide the foundation for spending policies to help ensure the endowment’s corpus.
  2. Assess the long-term impact of today’s decisions. A scenario analysis that stress tests the portfolio can quantify whether current spending rates preserve purchasing power and guide necessary adjustments. If change is needed, options can include lowering the baseline rate, adopting hybrid rules tied to market value and inflation, or enhancing smoothing mechanisms to reduce volatility. No single model likely fits all, but thoughtful adjustments can improve resilience.
  3. Investment diversification matters. Global equity exposure, real assets, absolute return strategies and private capital are asset classes that can be more aligned with near-term liquidity needs and can help manage volatility. Diversification won’t close the spending gap, but it can strengthen the portfolio’s long-term stability.
Boards should consider taking action

Does your Board fully understand all long-term risks in your organization’s current approach to endowment management? The sooner boards confront the gap between capital market assumptions and spending policies; the more options they have that seek to protect endowment value. Thoughtful action today helps institutions fulfill their mission now- while preserving opportunities for generations to come.
How we can help you

Investment Solutions at Principal® offers several tools and resources to help evaluate whether your asset allocation can support your spending needs, along with benchmarking resources to assess whether your fees are aligned with broader market pricing. We can provide your organization with a complete assessment—which can also include a 30-minute presentation of the findings if you choose— to help identify ways to better align your institution’s spending needs with market realities long-term expectations.
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