The 4% Rule—At What Price?

The 4% rule is the advice most often given to retir ees for managing spending and investing. This rule and its variants finance a con stant, non-volatile spending plan using a risky, volatile investment strategy. As a result, r etirees accumulate unspent surpluses when markets outperform and face spending shortfalls when markets underperform. The previous work on this subject has focused on the pr obability of short falls and optimal portfolio mixes. We will focus on the rule's ineffi ciencies—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 often rema ins wasteful, since many retirees may actually prefer a different, cheaper spending plan.