Retirement Income Journal
The information forum of the decumulation industry.

Economists and financial planners often disagree, and one divisive issue involves the 4% rule for safe retirement withdrawals.

Every few months, an economist demonstrates that setting a retirement income strategy based on 4% inflation-adjusted withdrawals makes no sense.  He or she usually argues that lifetime spending patterns should maximize utility, and that such patterns might look very different from an inflation-adjusted withdrawals strategy. 

The financial planning community rarely comments on these arguments, perhaps because economists’ papers are too technical for most planners. But, in this article, I’ll attempt to do so. My goal is to explain the financial economists’ arguments in a non-technical but in-depth way, and to respond to their criticisms from the perspective of a financial planner. 

I’ve analyzed two financial economics papers on withdrawal strategies. The first paper, The 4% Rule—At What Price?, was published in three years ago by Jason Scott and Nobel laureate William Sharpe of Financial Engines, Inc., and John G. Watson of Stanford, but has recently received attention in the financial planning press.  

The second paper, Spending Retirement on Planet Vulcan: The Impact of Longevity Risk Aversion on Optimal Withdrawal Rates, was published in March 2010 by academics Moshe Milevsky and Huaxiong Huang of the Individual Finance and Insurance Decisions Centre in Toronto. Both papers challenge the 4% rule, but from quite different perspectives. With apologies to the co-authors, I'll refer to these papers as Sharpe and Milevsky.