To provide some structure in an unstable and unpredictable world, trustees of endowment and trust funds often adopt spending policies that define how much money the beneficiary may have for current use. The nucleus of each policy is an algorithm or rule that determines each year’s spendable income.

Some spending rules are based on portfolio market values. Also popular are rules based on past or predicted market returns, and “default” spending rules, where the spendable income is simply the cash income the account produces each year. A spending rule based on stock market dividends is superior to any of these.

This new spending rule is simple to understand and easy to apply. It produces smoother results than the most popular market-value rule. Furthermore, it lays bare some critical issues—including the importance of management costs and asset allocation decisions to income levels and growth—that other spending rules have distorted or hidden.