Endowment spending decisions are rarely about the number alone. Board members and nonprofit leaders are responsible for supporting today’s programs while safeguarding resources for the future, which means multiple factors must be considered when setting a withdrawal rate.
In practice, some organizations default to the “UPMIFA 7% spending rule” and assume it represents a clear, universally safe threshold for both compliance and sustainability. That assumption, however, can be misleading.
Some nonprofit boards believe the UPMIFA 7% rule is a legal cap on spending. Others assume that staying under 7% automatically means they are “in the clear.” Both interpretations can create problems, either by limiting mission impact unnecessarily or by exposing the organization to fiduciary risk.
UPMIFA does not set a fixed spending limit. Instead, it requires boards to apply judgment, document their reasoning, and evaluate multiple factors each year. This article explains where the 7% guideline came from, when it matters, and how nonprofit boards can create a spending policy that is both compliant and mission-aligned.
No. The UPMIFA 7% rule is not a legal spending limit written into the act.
UPMIFA does not mandate a specific percentage that nonprofits must, or must not, spend from an endowment each year. Instead, it establishes a standard of prudence and places responsibility on the board to make informed, well-documented decisions about spending.
That said, the 7% figure didn’t come out of nowhere. In many states, UPMIFA includes a provision that treats spending below a certain percentage, often around 7% of an endowment’s average market value over several years, as presumptively prudent. In other words, spending under that threshold may receive less scrutiny, but it is not automatically “approved,” nor is spending above it automatically prohibited. However, this presumption does not eliminate a board’s obligation to evaluate and document its decision-making process.
The real issue isn’t whether an organization spends 5%, 6%, or 7%. It’s whether the board can demonstrate that its spending decision was made thoughtfully, reviewed regularly, and grounded in the factors UPMIFA requires them to consider.
This is where many boards get tripped up, by focusing on the number instead of the process behind it.
The 7% guideline did not originate as a hard rule within UPMIFA. Instead, it developed as a practical reference point used by lawmakers, regulators, and advisors to help define what might be considered “prudent” spending.
Historically, UPMIFA replaced an older framework (UMIFA) that focused heavily on preserving the original dollar value of endowment gifts. UPMIFA shifted that thinking. Rather than protecting a fixed dollar amount, it emphasizes prudent decision-making based on the overall financial health of the fund and the organization.
As states adopted UPMIFA, many included a provision commonly referred to as a “safe harbor.” In those states, spending below a certain percentage, often around 7% of an endowment’s average market value over a multi-year period, is presumed to be prudent. This presumption does not mean the spending rate is automatically appropriate, nor does it mean higher spending is prohibited. It simply means spending below that level may face less regulatory scrutiny.
The use of multi-year averages is intentional. It helps smooth out market volatility and prevents short-term market swings from driving abrupt changes in spending. Over time, the 7% figure became widely referenced because it roughly accounted for a combination of:
However, market conditions, return expectations, and organizational needs vary widely. As a result, the 7% guideline was never intended to be a one-size-fits-all solution. It serves as a reference point, not a substitute for board judgment, documentation, and ongoing review.
When boards fixate on a single spending percentage, they can unintentionally create risk, even when that number falls below commonly referenced guidelines like 7%.
UPMIFA does not evaluate prudence based on outcomes alone. It evaluates whether decisions were made thoughtfully, consistently, and in alignment with the organization’s purpose and financial realities. A spending rate that appears “safe” on paper can still be problematic if it is applied without context or documentation.
One of the most common risks arises when boards treat a historical spending rate as automatic. Continuing to spend the same percentage year after year—without reassessing economic conditions, investment performance, or organizational needs—can signal a lack of active oversight. Over time, this approach can erode purchasing power, strain future budgets, or conflict with donor intent.
The opposite risk also exists. Boards that fear exceeding an informal benchmark may underspend during periods of strong performance or urgent mission need, limiting impact unnecessarily. In these cases, the number becomes a constraint rather than a tool.
From a fiduciary perspective, the greater risk is not spending 6%, 7%, or even slightly more in a given year. The real risk is failing to demonstrate that the board applied judgment, considered the relevant factors, and documented its reasoning. Without that process in place, even conservative spending decisions can raise compliance concerns.
UPMIFA’s intent is to ensure boards act deliberately, not mechanically. Focusing on the number alone shifts attention away from the responsibilities that actually protect the organization and its leadership.
UPMIFA requires nonprofit boards to evaluate multiple factors each year when setting or reviewing an endowment spending policy. These factors are intended to ensure decisions are prudent, mission-aligned, and responsive to changing conditions.
Importantly, boards are not required to weigh each factor equally, but they are expected to consider all of them and document how they influenced the final decision.
Below are the seven factors UPMIFA specifically calls out:
Boards must consider whether the endowment is intended to exist in perpetuity or over a defined time horizon. Spending decisions should reflect the long-term role the fund is meant to play in supporting the organization’s mission.
Spending must align with both the organization’s mission and any donor-imposed restrictions. Even well-intentioned spending can become problematic if it drifts from the fund’s original purpose.
3. General Economic Conditions
Boards should take into account the broader economic environment, including market volatility, interest rates, and economic uncertainty, and how those conditions may affect future sustainability.
4. The Possible Effect of Inflation or Deflation
Maintaining the endowment’s purchasing power over time is a core consideration. Spending policies should reflect how inflation, or deflation, may impact the fund’s real value.
5. The Expected Total Return from Income and the Appreciation of Investments
UPMIFA focuses on total return, not just income. Boards should consider both investment income and long-term growth when evaluating what level of spending is sustainable.
6. Other Resources of the Organization
Endowment spending should not be evaluated in isolation. Boards are expected to consider other revenue sources, such as fundraising, grants, and operating reserves, when determining how much support the endowment should provide.
7. The Investment Policy of the Organization
Spending decisions should align with the organization’s overall investment strategy, including asset allocation, risk tolerance, and liquidity needs. A disconnect between spending expectations and investment approach can create long-term strain.
Together, these factors shift the focus from “What number feels safe?” to “What decision is prudent given our specific circumstances?” Boards that thoughtfully apply and document these considerations are often better positioned to meet their fiduciary obligations, regardless of whether their spending rate falls above or below commonly referenced guidelines.
Under UPMIFA, a nonprofit’s spending policy and Investment Policy Statement (IPS) are closely connected and should be treated that way. Most of the time, the Spending Policy is a section within the IPS.
The spending policy defines how much the organization expects to withdraw from the endowment to support operations and programs. The IPS defines how the endowment is invested to support those withdrawals while managing risk over time. When these two policies are aligned, they provide a clear framework for prudent decision-making. When they are not, boards can unknowingly introduce risk.
A spending policy sets expectations. It influences how much liquidity is needed, how much volatility the organization can tolerate, and how aggressively or conservatively the portfolio should be invested. If a board adopts a spending rate without considering whether the investment strategy can reasonably support it, the portfolio may be forced to take on inappropriate risk, or struggle to meet spending needs during market downturns.
UPMIFA expects boards to think about these decisions together. A defensible spending policy is often one that:
The IPS plays a critical role in this process. It documents the assumptions behind the investment strategy, including time horizon, risk tolerance, liquidity needs, and performance expectations. When the spending policy is clearly referenced within the IPS, or reviewed alongside it, the board can more easily demonstrate that its decisions were thoughtful and prudent.
For nonprofit boards, this alignment is more than a best practice. It supports fiduciary responsibility, improves consistency in decision-making, and provides continuity as board members and leadership change over time.
Want help creating a Spending Policy or Investment Policy Statement that aligns with your long-term goals and board expectations? We have a few great resources for you!
The UPMIFA 7% guideline is often misunderstood because it feels simple. But UPMIFA was never intended to reduce endowment spending decisions to a single number.
What matters most is not whether a nonprofit spends 5%, 7%, or another rate in a given year. What matters is whether the board applied judgment, considered the required factors, documented its reasoning, and aligned its spending policy with the organization’s mission and long-term sustainability.
A thoughtful, well-documented Spending Policy, aligned with a clear Investment Policy Statement, helps boards fulfill their fiduciary responsibilities and steward donor funds with confidence.
If your board hasn’t reviewed its Spending Policy or Investment Policy Statement recently, or if you’re unsure whether it reflects UPMIFA’s requirements, this is a good time to take a closer look.
This article is part of our ongoing effort to help nonprofit leaders and boards navigate endowment governance with confidence. Explore additional educational resources, check out our Nonprofit Investment Management Blog.