The 4% RT What Price?

Abstract:     
The 4% rule is the advice many retirees follow for managing spending and investing.We examine this rule’s inefficiencies - the price paid for funding its unspent surpluses and the overpayments made to purchase its spending policy. We show that a typical rule allocates 10-20% of a retiree’s initial wealth to surpluses and an additional 2-4% to overpayments. Further, we argue that even if retirees were to recoup these costs, the 4% rule’s spending plan remains wasteful, since many retirees actually prefer a different, cheaper spending plan.

Keywords: Retirement economics, expected utility, fixed withdrawals

JEL Classifications: G00

Working Paper Series