How are fellowships typically funded? Recently a friend of mine who was a professor died and I am hoping to help create a post-doctoral fellowship at the university to carry on the work of his small laboratory in conjunction with others who knew him. I am hoping to understand better the typical way that fellowships are endowed.

According to my initial calculations, it would seem we need about $4 million to endow the fellowship, so that assuming a 4% return on bonds in the foundation, every year we could disburse 2.5% ($70,000 stipend to the fellow, $25,000 upkeep fee to the university, and $5,000 for lab expenses) and retain 1.5% to build the capital of the endowment to account for inflation.

Is this a typical setup for an endowed fellowship in the current academic environment?
My answer assumes the US university system, based on your stated location

Endowed funds (for positions or otherwise) are quite common at universities, so every University has an "Endowments Office" or "Office of Giving" or the like, which will most happily sit down with you to work out these sorts of details.

You will definitely need to sit down with that office to determine the details, however, because it will likely be different for every university. Factors influencing these details will likely include: public vs. private, overhead rates and structure, how the university manages its endowments, state and local tax laws, etc. 

In short: get the university's experts involved.  The sorts of sums that you are considering will certainly get their attention.