The Four Percent Rule
POSTED Mon, 07/26/2010 - 08:26 | POSTED BY Anonymous
Does anyone have any thoughts or opinions on the effectiveness of the 4 percent rule to manage retirement spending / asset draw-downs?
tom wrote on Mon, 07/26/2010 - 08:32:
The 4 percent rule is sort of taken for granted as a legitimate rule of thumb for financial planning in retirement.
That said, there are clear cases to be made against this generalization.
The best and most objective analysis I have seen is from Jason Scott at Financial Engines. The paper can be found here: http://corp.financialengines.com/employer/FE-4Percent-JOIM-09.pdf
The criticism of the 4 percent rule basically boils down to the following: do not attempt to fund a fund a constant spending plan (i.e. retirement spending) with a volatile asset (equity exposure) -- it creates a big mismatch, quite a bit of risk, and is very inefficient.
As explained in the paper, the 4 percent rule also creates surpluses and over-payments.