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
Date Written: April 2008
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: Suggested Citation