The 4% Rule - At What Price?

Journal Of Investment Management (JOIM), Third Quarter 2009

24 Pages Posted: 2 Apr 2008 Last revised: 10 Nov 2009

Jason S. Scott

Financial Engines, Inc.

William F. Sharpe

Stanford University - Graduate School of Business

John G. Watson

Financial Engines, Inc.; Stanford Graduate School of Business

Date Written: April 2008

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 Classification: D1, D91, G11, J26

Suggested Citation

Scott, Jason S. and Sharpe, William F. and Watson, John G., The 4% Rule - At What Price? (April 2008). Journal Of Investment Management (JOIM), Third Quarter 2009. Available at SSRN: https://ssrn.com/abstract=1115023

Jason S. Scott (Contact Author)

Financial Engines, Inc. ( email )

1050 Enterprise Way, 3rd Floor
Sunnyvale, CA 94089
United States

William F. Sharpe

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-725-4876 (Phone)
650-725-7979 (Fax)

HOME PAGE: http://www.wsharpe.com

John G. Watson

Financial Engines, Inc. ( email )

1050 Enterprise Way
Sunnyvale, CA 94089
United States

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305
United States

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