In the three input boxes below, enter values that reflect the actual or potential situation of the foundation that you wish to evaluate. Click on "Show Results," and the output boxes will immediately populate accordingly. In addition, the “Cumulative Probability of Foundation Termination” chart will adjust in response to your inputs. (For detailed information on the methodology used to create this tool, see the notes at the bottom of this page.)
| Inputs | |
|---|---|
| Real return expectation |
%
|
| Volatility of real returns |
%
|
| Initial payout rate |
%
|
| Outputs | |
|---|---|
| Expected termination year | |
| Odds of running out of money by year | |
| 20 |
%
|
| 40 |
%
|
| 60 |
%
|
| 80 |
%
|
| 100 |
%
|
| Probability of perpetuity |
%
|
Methodology Notes
Initial payout rate
Users should set a payout rate that is a percentage of original capital. The tool assumes that the payout will be maintained in real dollars. For example, a $100 million foundation with a 5 percent payout rate would spend $5 million per year in real dollars, regardless of how much the underlying capital pool grew or declined in value. (If inflation were 3 percent, spending would increase to $5.15 million in nominal terms.)
Return and volatility
Users should input return expectations in real terms (net of inflation). For example, if nominal return expectations are 10 percent per year and inflation expectations are 3 percent per year, then the real return expectation should be 6.8 percent [(1+10%)/(1+3%)-1 = 6.8%]. (For the past century, the average real return in the U.S. stock market has been about 7 percent.) Users should input volatility as the standard deviation of real return expectations. (Average stock market return volatility, as reflected in S&P 500 returns from 1951 to 2016, has been about 15 percent.) Rates of return will differ by asset class, and historical rates of return will not necessarily predict future returns.
Expected termination year
The volatility of returns introduces risk and creates a distribution of possible outcomes. This simulation therefore defines the expected year of termination as the median (50th percentile) number of years that a foundation will last under a given set of input assumptions. In other words, in roughly half of all cases, the actual termination year will occur before the expected termination year, and in the remaining cases, it will occur after that year.
Probability of perpetuity
The probability of surviving to year 100 is very similar to the probability of surviving to year 1000 or more, so this simulation uses a 100-year probability as a proxy for the probability of perpetuity
Monte Carlo simulation
The tool uses Monte Carlo simulation, which is a method of accounting for uncertainty by modeling a defined range of values and then determining the probability of various outcomes. In this case, the simulation includes 500 paths, with each path representing 100 years of returns. The tool uses random numbers and user inputs to generate these paths. Results may vary slightly from a simulation that uses different random numbers or a different number of paths.