Spending Like You'll Live Forever

10 Pages Posted: 9 Apr 2021

Date Written: April 6, 2021

Abstract

A sound policy for spending wealth over time is as important as a sensible investment policy. It's a complex problem for taxable individuals with finite, uncertain longevity. A good start is thinking about the simpler problem of how one would spend if immortal. This is exactly the real problem faced by endowments, foundations and other long-lived pools of capital. In this article, we will explain and apply a framework first proposed by Robert C. Merton (1969) to this problem. We will also discuss the important and fascinating result that, under most reasonable sets of assumptions, it is optimal to spend substantially less than the expected real return of the endowment's investment portfolio. We will also give a summary description of some of the key extensions of this model since first introduced.

Keywords: endowment, spending, yale endowment, long-term investing, endowment spending, endowment investment

JEL Classification: B12, B16, B20, C00, C10, C11, C50, C57, C73, D03, D81, D83, E00, G00, G02, G11, G12, G14, G17, G23

Suggested Citation

White, James and Haghani, Victor, Spending Like You'll Live Forever (April 6, 2021). Available at SSRN: https://ssrn.com/abstract=3820939 or http://dx.doi.org/10.2139/ssrn.3820939

James White (Contact Author)

Elm Partners ( email )

1630 Willow View Drive
PO Box 1417
Wilson, WY 83014

Victor Haghani

Elm Partners ( email )

1630 Willow View Drive
PO Box 1417
Wilson, WY 83014

HOME PAGE: http://www.elmfunds.com

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