The targeted spending rate is important because it ensures that we do not hoard the income from strong financial years at the expense of investing in our current programs and people. The rate of 5.25% is based on our investments’ expected ability, averaged over time, to replenish the funds we spend and make up for inflation.
The smoothing rule is necessary to prevent market volatility from hurting our long-term ability to pursue Yale’s academic mission. Together, these components of our spending policy are designed to achieve “intergenerational neutrality”—that is, to spread the benefits of our investment returns equally over this and all future generations. The goal of our spending policy is to support the Yale of today AND the Yale of tomorrow.