The 4% Rule At What Price?

Jason S. Scott, William F. Sharpe and John G. Watson

Volume 7, Number 3, Third Quarter 2009

The 4% rule is the advice many retirees follow for managing spending and investing. We examine this rules 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 retirees 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% rules spending plan remains wasteful, since many retirees actually prefer a different, cheaper spending plan.