The 4% Rt What Price?

Journal Of Investment Management (JOIM), Third Quarter, 2009

Posted: 13 Oct 2009 Last revised: 2 Jun 2010

See all articles by Jason S. Scott

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: October 7, 2009

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

JEL Classification: G00

Suggested Citation

Scott, Jason S. and Sharpe, William F. and Watson, John G., The 4% Rt What Price? (October 7, 2009). Journal Of Investment Management (JOIM), Third Quarter, 2009. Available at SSRN: https://ssrn.com/abstract=1484943

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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