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The 4% Retirement-Asset Spend-Down Rule Is Rubbish

Jun. 25, 2018 11:24 AM ET100 Comments
Laurence Kotlikoff profile picture
Laurence Kotlikoff


  • The 4 percent retirement-asset spend-down rule, like the replacement-rate rule, is a rule of dumb, not a useful rule of thumb.
  • Using it to set your retirement spending is dangerous. It can easily lead to serious over- or under-spending.
  • This is not 1950. We have math, algorithms, high speed computers. We don't need to guess what to spend in order to achieve a stable living standard.
  • We can calculate the right answer in seconds.

Conventional financial planning uses two rules of thumb. One is the 70 percent replacement-rate, retirement-spending rule. The other is the 4 percent retirement-asset, spend-down rule. The replacement-rate rule says you need to accumulate enough assets to be able to spend 70 percent of your pre-retirement income in retirement. The 4 percent rule says you should withdraw and spend an amount equal to 4 percent of the retirement account balances you held when you first retired. Whether these two rules, both of which tell you what to spend in retirement, are mutually compatible is a good, but apparently never posed question to which I'll return in a subsequent column.

Today's article rubbishes, as the Brits say, the 4 percent rule. This article from last week rubbished the replacement rate rule. As it pointed out, the right replacement rate is based on the spending level that provides the household with the same living standard post-retirement as it enjoyed pre-retirement. The desire to have a stable lifestyle, i.e., to preserve our living standard, is what economists call consumption smoothing. It's why we save in the first place.

Given a household's current and future resources and the time pattern of those resources, one can solve for the precise spending path in all future years - pre- and post-retirement, which delivers the smoothest stable living-standard path subject to the household's year-specific cash constraints, i.e., subject to keeping the household out of debt or out of more debt.

My company's Smarter Personal Financial and Retirement Planning Software | MaxiFi Planner makes this calculation. It's the only tool that does consumption smoothing subject to cash constraints. I developed it originally to do academic research, but saw early on that it could be used to provide households with personalized financial guidance. I and my colleagues have now spent a quarter century developing the tool. There

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Laurence Kotlikoff profile picture
Laurence J. Kotlikoff is a William Fairfield Warren Professor at Boston University, a Professor of Economics at Boston University, a Fellow of the American Academy of Arts and Sciences, a Fellow of the Econometric Society, a Research Associate of the National Bureau of Economic Research, Head of International Department for Fiscal Sustainability Studies, the Gaidar Institute, President of Economic Security Planning, Inc., a company specializing in financial planning software, and the Director of the Fiscal Analysis Center. Professor Kotlikoff is a NY Times Best Selling author and an active columnist. His columns and blogs have appeared in The New York Times, The Wall Street Journal, The Financial Times, the Boston Globe, Bloomberg, Forbes, Vox, The Economist, Yahoo.com, Huffington Post and other major publications. In addition, he is a frequent guest on major television and radio stations. In 2014, he was named by The Economist as one of the world's 25 most influential economists. In 2015 he was name one of the 50 most influential people in Aging by Next Avenue. Professor Kotlikoff received his B.A. in Economics from the University of Pennsylvania in 1973 and his Ph.D. in Economics from Harvard University in 1977. From 1977 through 1983 he served on the faculties of economics of the University of California, Los Angeles and Yale University. In 1981-82 Professor Kotlikoff was a Senior Economist with the President's Council of Economic Advisers. Professor Kotlikoff is author or co-author of 19 books and hundreds of professional journal articles. His most recent book, Get What's Yours -- the Secrets of Maxing Out Your Social Security Benefits (co-authored with Philip Moeller and Paul Solman, Simon & Schuster) is a runaway New York Times Best Seller. His other recent books are The Clash of Generations (co-authored with Scott Burns, MIT Press), The Economic Consequences of the Vickers Commission (Civitas), Jimmy Stewart Is Dead (John Wiley & Sons), Spend ‘Til the End, (co-authored with Scott Burns, Simon & Schuster), The Healthcare Fix (MIT Press), The Coming Generational Storm (co-authored with Scott Burns, MIT Press), and Generational Policy (MIT Press). Through his company, Professor Kotlikoff has designed the nation's top-ranked personal financial planning software and Social Security lifetime benefit maximization software. Professor Kotlikoff has served as a consultant to the International Monetary Fund, the World Bank, the Harvard Institute for International Development, the Organization for Economic Cooperation and Development, the Swedish Ministry of Finance, the Norwegian Ministry of Finance, the Bank of Italy, the Bank of Japan, the Bank of England, the Government of Russia, the Government of Ukraine, the Government of Bolivia, the Government of Bulgaria, the Treasury of New Zealand, the Office of Management and Budget, the U.S. Department of Education, the U.S. Department of Labor, the Joint Committee on Taxation, The Commonwealth of Massachusetts, The American Council of Life Insurance, Merrill Lynch, Fidelity Investments, AT&T, AON Corp., and other major U.S. corporations. He has provided expert testimony on numerous occasions to committees of Congress including the Senate Finance Committee, the House Ways and Means Committee, and the Joint Economic Committee.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Comments (100)

Larry, thanks for a good article (and your books which I have read). There's one assertion I did not understand re hypothetical couple the Sanders: " If they have zero regular assets and $275,000 each in retirement accounts, their spending rule is 10.5 percent." Are you saying they can spend $57,750 in year 1 of retirement (10.5% of combined $550,000 retirement accounts) and similar amounts (adjusting for inflation) annually thereafter? I would be freaking out if I did that, unless I were getting great annual returns on my remaining capital, or expected to die within a fairly brief timetable and not want to leave anything to heirs. Seems like they would run out of funds before actuarial end of life. Maybe I don't understand you correctly? Please advise.
KMR holder profile picture

I don't think that is what the author is proposing. I believe his whole idea is that he has a magic box, into which you can imput data and out will come the best retirement Rx.

There is only one problem with that. You won't ever be able to know if it is the best plan That would be a impossible to know since you can't know today what the results would be for each individual for all possible plans during all possible futures. The best you could expect to know is probabilities based on the inputs and historical results.

You know the investment industry mantra.....future results may be different!
FinancialDave profile picture

I question whether you really know what a "rule of thumb" is and how it should be used.

Your own comment:
"It can lead households to either run out of money, suffering a severe decline in their living standard, or leave far too much money on the table when they pass away," is in essence the definition of the rule of thumb ---- Something that on AVERAGE gives you a place to start with retirement planning - is neither always high or always low.

As KMR mentions, assuming a computer program can foretell the future of all the unknowns in retirement is really not to understand retirement planning at all.

Just to be clear, the 4% rule tells you nothing about the size of your budget, only about how much you can withdraw from your retirement savings.

IF you send a couple down the road of thinking they can spend 6% of their savings and then adjust it for inflation every year, they may be sadly surprised if they live beyond your programs projection and inflation is higher than expected.

So to summarize,.. Step 1 for a couple to have a secure retirement is to accumulate a $2.5M investment portfolio. There are many step 2's that will work at that point.
If you are interested is seeing Bengen's work taken to the next level, I just finished reading two very good books on "withdrawal rates" and "withdrawal strategy"; "Living Off Your Money" by Michael McClung, and "How Much Can I Spend In Retirement" by Wade Pfau. These guys go deep into developing a well thought out withdrawal rate/strategy and they back-test all of the strategies discussed. That said, I like Lawrence's software to provide a very detailed cash flow forecast and to test different spending, return, and inflation scenarios.
The 4% rule wasn't developed in 1950. Its origins can be found in the 1994 study by William Bengen which attempted to find what would be a sustainable rate of withdrawal in retirement without completely depleting your portfolio. Prior to that time, it was somewhat thought the withdrawal rate could be higher because people looked at average returns, instead of seeing the damage sequence of returns could do to a portfolio, especially early in retirement. (Edited)

It is unfortunate you mischaracterized the 4% rule, as it is sometimes called, by reading the first paragraph of a Google search, instead of looking more deeply into its origins and the actual conclusions,
I agree. The 4% rule and its developer, William Bengen, deserve a lot more respect. He gave the financial community something it did not have, a guiding light as to what a safe withdrawal rate might be over 30 year periods. He never claimed it was absolute.
Praveen_Chawla profile picture
Here is a good article on the 4% rule.
David Van Knapp profile picture
Totally agree. His work was an important addition to thinking about retirement spending.

He went beyond determining the safe withdrawal rate. For example, he advised owning more stocks than a 50-50 split, up to 75% stocks, assuming that the retiree could handle portfolio volatility without freaking out. That increased the safe withdrawal rate.


I enjoyed this article a lot and will take a look at the planning programs.

Can you elaborate on "If they have zero regular assets and $275,000 each in retirement accounts, their spending rule is 10.5 percent."?

I understand how a blanket 4% rule may be rubbish, but how can a 10.5% spending rule possibly be sustainable?

Varan profile picture
I think that there are two separate issues here.

First, given a specific portfolio of assets, what is the annual withdrawal rate indexed for inflation that the portfolio will be able to sustain without being depleted in the remaining lifetime of the retiree?

The second issue, entirely independent of the first, has to deal with the needs of the investor.

Clearly, the answer that takes into consideration both of these of aspects of the problem is definitely dependent upon what the investor needs. It takes no great insight to say that any such solution that purports to apply to all retirees is 'rubbish'.

Nevertheless, it is not an idle exercise to determine the sustainable withdrawal rate for a given portfolio without taking into consideration the needs of the investor, as it may be one of the key ingredients that guide the investor's investment decisions in order to meet his specific personal objectives.
caperdory profile picture
I've learned over the years that people who know everything.......I stay clear of.....it's sad but I have a brother like that......
Much of which may be BS. Here is my formula: Take your absolute spending needs sans vacations and fun. That's your must-have number. (For us in the Midwest, condo paid off, that's around $30K).

Now, take our $1M retirement kitty and assume a worst-case 2.5% return over time. That's $25K without touching principal.

Add our $47K in Social Security and we have a somewhat guaranteed cash flow of $72K on expenses of $30K. A lot of the rest is gravy.

And we haven't touched the principal. Our investment profile is heavy on high dividend Utes and REITS with a smattering of aggressive growth and dividend growth.

At 72, works for us. (And if the world ends, it ends. There is risk in EVERYTHING.)
I've actually used the ESPlannner software for about 10 years. As it happens, my ESP spend report has me spending about 4.5% of my initial fund value and increasing for inflation thereafter, leaving me with only the equity in my home left over (my choice, based on my inputs). If I were to plan to leave a moderate inheritance to my heirs (in addition to the house), my spend rate would indeed creep down towards the 4% rule of thumb. My plan assumes similar real return assumptions to what you've shown here, and a 30 horizon, pretty middle of the road assumptions. I've read a lot of very detailed and technical discussion about withdrawal rates (read Wade Pfau, Michael H. McClung) that engages decades of back-testing and Monte Carlo simulations, and the withdrawal rates with high probabilities of success generally land in the 3.5 to 4.5% range, depending on the fundamental assumptions and risk level choices an individual wants to make. 4% is simply the center of a ballpark around which to start the conversation. The choices made during said conversation will determine which side of 4% one ends up on. In my case, I'm fortunate enough to able to chose a withdrawal rate of around 3% because a)it's about what I need to maintain my current living standard and b)this conservative rate will provide me an added margin of safety.
kimboslice profile picture
My understanding is that the "4% rule" is not adjusted for inflation.

If you annuitize some of your assets, you can get a 6.5% return for your lifetime (varies by age, sex and single annuitant).

If you follow the 4% rule, you will experience a variable income but you should not deplete your principal assuming it's actually invested in something useful, e.g. Vanguard Wellington Fund.

The difficult prediction is what the public auction called the stock market will do in any given year.

The older I become, the higher my net worth will be, the higher payout rate from an immediate annuity, so I can easily create more guaranteed income as I get older and need to pay a nurse to change the umbrella in my pina colada at the beach.
wildpitcher profile picture
kimboslice, that is not how I understand the 4% rule. I believe it to be:

1. invest in a 50% stock and 50% bond portfolio

2. In year 1, remove 4% of the portfolio value.

3. For the next year, increase last year's amount by rate of inflation.

4. repeat for 30 years

David Van Knapp profile picture
The 4% "rule" isn't really a rule. It is the conclusion of a study in 1994 by Bill Bengen. He determined via backtesting what withdrawal rate over 30-year periods had never run out of money with a simple 50-50 portfolio. The rate was 4% per year + inflation.
Here's a cite to the original study: www.retailinvestor.org...

The comment above that the "rule" didn't account for inflation is wrong. The withdrawals were 4% the first year, then incremented each year for inflation.

In the past few years, based on further data, Bengen has stated that the "safe withdrawal rate" is now 4.5% + inflation.


PS: Why are so many people fixated on spending every last dollar you have before you die? That seems like a strange goal to me. I would think that everyone's personal situation is different, and that goals like not spending principal are very personal.
In Cog Neato profile picture
Dave Van Knapp, "Why are so many people fixated on spending every last dollar you have before you die? That seems like a strange goal to me. "
Indeed! My goal is a comfortable life. When I'm gone, I don't care what happens, after all how could I?
My heirs will be able to fight over the remnants, or accept what they get from my life insurance, and assets.
I've witnessed that the loss of a loved one brings out the worst in certain relatives, and so they are locked out of my inheritance! My father did the same when my mother passed away, blocking 2 of my siblings from any iheritance.
Laurence Kotlikoff profile picture
You can enter all types of future special expenses and levels of income. So the answer is yes. The point is that the tool gets the right answer for any set of assumptions rather than the wrong answer for all sets of assumptions. best, Larry
Buyandhold 2012 profile picture
"The 4% retirement asset spend down rule is rubbish."

Of course it is.

All I ever heard from my mother since the day at age 4 when I put a nickel in my piggybank was: Never spend the principal.

"Mom, can I go out and play?"

"What are the magic words?"

"Never spend the principal."

"Mom, do I have to kiss Aunt Sophie?"

"What are the magic words?"

"Never spend the principal."

"Mom, can Dave and I go and see "Curse of the Living Corpse" at the Palace Theater?"

"What are the magic words?"

"Never spend the principal."
427812 profile picture
Does your software account for the go-go, slow-go, and no-go years (i.e. different spending patterns over time) as well? Does your software have a solution for potential long-term care expenses at any time? Yes the 4% rule (actually just a % that actually worked since 1926) is better guesstimating your # to accumulate than to use after retirement.
In Cog Neato profile picture
427812, "Does your software account for the go-go, slow-go, and no-go years (i.e. different spending patterns over time) as well? Does your software have a solution for potential long-term care expenses at any time? "
Great comment! Alternative? Maintaining a substantial emergency fund (typically low interest though).
mykes2012 profile picture
I never understood this rule. Why not just insure your income from all sources exceed your expenses and call it a day. Let the nest egg just sit there and not draw down at all.

Should be heading into retirement with zero debt (except maybe house).
KMR holder profile picture

If you never touch your nest egg you would need much more money than you would if you invaded principle rationally over your retirement.

Having debt in retirement is an entirely different matter. Debt is leverage and at times such as having a mortgage can be a very profitable input to a retiree's budget. I took an 80% mortgage from WF after retiring as an alternative to selling assets to pay cash for the house. I save immediately on the capital gains taxes I would have paid. And the fixed income and equity investments have paid significantly more than the cost of the mortgage. A 3.125% fixed interest 30 year mortgage was impossible for me to turn down. I thank Wells Fargo every time I make a mortgage payment for that inexpensive loan which provides me with valuable source of liquidity for at least a decade to come. After that I'll probably pay it of because the value of money 15 years later will be very much less than when they loaned it to me.
mykes2012 profile picture
"If you never touch your nest egg you would need much more money than you would if you invaded principle rationally over your retirement..."

KMR, I do understand that, but it doesn't have to be the case if you can get your income above your expenses right? It seems to me you make major push to have no debt (except the house), live under your means and just use your income (SS, pension, RE, dividends, etc.)

There is another article going on now by Colorado about a couple living off $500K & SS. The comments are mixed (some don't think it can be done, so think it can) but I plan doing something similar, albeit abroad. What makes me sleep well would be to never count on tapping it, but know you could if needed. I mean that is the nest egg concept right. Planning on not using it but having the security it is there.
KMR holder profile picture
I probably accumulated too much over too long a working career, but I didn't want to retire until the big market crash occurred so I would know that I would have enough. I probably could have retired at 50 instead of 58, but waiting until 2009 allowed what I considered a risk free retirement situation going forward. At a market bottom that 4% rule is much more likely to be useful. At that time I was able to put much more risk on with little potential downside. If spending 2.5% of your investment portfolio annually after retiring at 58 provides you with all you need for comfort and enjoyment, you are miles ahead.

I have increased my spending by more than 5% annually since leaving the workforce with no pension income other the SS. 85% of my expenses are covered by my taxable investments, and I don't believe I will ever need to invade the 20% of my savings that are in my Roth account.

Yes, getting you inflow higher than the outflow means that you don't have to ever invade principle, but on the other hand, do we expect to live forever? What is that nest egg for? Simply to pass on when we do?
Praveen_Chawla profile picture
Rather than a 4% rule - just estimate your annual expenses and multiply by 25 i.e. if your annual expenses are $50 K - your nest egg should be X25 times i.e. 1.25 million. If your nest egg exceeds that - you have reached your number and you can give the finger to the "man". Invest your nest egg in a conservative balanced portfolio, with 3 years of expenses in a money market fund.

PS: Also delay your SS to age 70 (as it provides free longevity insurance).
Mathematical Investor profile picture
*** Rather than a 4% rule - just estimate your annual expenses and multiply by 25 i.e. if your annual expenses are $50 K - your nest egg should be X25 times i.e. 1.25 million. ***

That is the 4% rule expressed another way ..... 1/25 = 4%.
Praveen_Chawla profile picture
Correct - but you are estimating your expenses first, which is most important. Plus delaying your SS provides you with insurance. I just wanted to keep it simple.
Laurence Kotlikoff profile picture
This is yet another bad idea. You can't estimate your annual expenses. You need to calculate what you can spend such that you can keep spending it. You may be spending far too much now and estimate you'll be spending that in the future and then see that you can't save enough to hit that target and then spend the next year iterating between targeting future spending and seeing what that means for current spending and saving. It takes our software less than 20 seconds to get the right answer. Why would you want to guess here? Again, try it and I'll refund your payment. Not trying to make a sale. Trying to be of help. best, Larry
Here's a rule of thumb:
1. Before retiring, If you think you might spend time worrying about how much money you have
2. After retiring, you do spend time worrying about how much money you have

Then you might as well not retire, because the fact of the matter is - you aren't.
Laurence Kotlikoff profile picture
Gut gesagt!

Winning Formula profile picture
One of my favorite authors, Nick Murray, states in the book "Simple Wealth, Inevitable Wealth":

"Wealth is freedom. At the very least, wealth frees you from financial worry about what will happen to you, and perhaps to your children. No matter how much money you have, if your still worried, you are not wealthy."
Winning Formula profile picture
I'm a student of retirement distribution methods. I find the best distribution methods use your current wealth, a conservative expected return, and the number of years of expect life to calculate an annual distribution amount.

Let's use the professor's pretend couple "age 66, married, has $500,000 in regular assets and $1 million each in retirement accounts. Their house is paid off, but their annual property, insurance and maintenance costs total $14,000. Each spouse just filed to collect a $2,500 monthly Social Security retirement benefit and each spouse just initiated annual smooth retirement account withdrawals. The couple earns 1 percent real on their regular assets and 2.5 percent real on their retirement accounts."

Let's assume the couple could live another 50 years. (I always assume 50 more years at any reasonable retirement age to be conservative).

Let's do some calculations:
a) Let's calculate the payment on $500,000 @ 1% real for a 50 year term: This totals $1059 per month.
b) Let's calculate the payment on the wife's $1 million @ 2.5% real for a 50 year term: This totals $2921 per month.
c) Let's calculate the payment on the husband's $1 million @ 2.5% real for a 50 year term: This totals $2921 per month.
d) Let's add the couples combined Social Security of $5,000 per month.

OK, let's add up a + b + c + d. $1059 + $2921 + 2921 + $5000 = $11,901 per month. A conservative first-year retirement distribution for this couple is $11,901 per month or $142,812 per year. The portfolio is providing $82,812 of that annual spending or a 3.3% withdrawal rate (82812/2500000=3.3%). Here is the payment calculator I used for these calculations: www.calculator.net/...

I would recalculate the distribution amount each year and would use the portfolio's dividend yield as the interest rate in the payment calculation.
KMR holder profile picture
Rules of thumb in financial planning may be useful only for the thumb, if that. I have gone an entirely different route. Here is my rule #1. Wait for a total market melt down before removing yourself from the employment world. If at that point the 4% rule seems to make sense than you can probably retire with a high degree of confidence. Even then, if you can live comfortably on less than 4% in the first few years of retirement it doesn't hurt to start there. You shouldn't forget that the 4% spending rule assumes an average life expectancy of around 30 years as I've seen it applied, so if you retire before 70, maybe you need to account for that as well.

I retired at 58 with a portfolio large enough to cover a growing stream of cash. Even if the cash value was placed in my mattress with sufficient fire and theft insurance. It would have lasted more than 42 years. That isn't what I did however, and in the 9+ years since retiring and paying all my expenses the portfolio is now more than double. If I sold everything and put it in the mattress today, I would only need to cover 33 years of life until 100. So I could more than double my spending going forward. I will only be able to achieve that by gifting significant amounts each year, since I am not a wasteful spender.

The idea that any computer program can provide the answer to how much a retiree will need to retire comfortably or how much he can afford to spend is very probably a worse decision than relying on the 4% rule in my view. The best plan in my opinion is to over save and under spend over your lifetime, and as you approach your expiration date increase the rate at which you distribute your assets to others prudently.
Laurence Kotlikoff profile picture
Most of the public are not as financially savvy or lucky as you. Most Boomers are showing up in retirement having undersaved dramatically. You can't judge something unless you try it. Run our software and email me and I'll issue you a refund it you don't learn something from it. best, Larry
KMR holder profile picture
Larry, I appreciate the offer, but I really don't believe that I have the need. My full time job of managing my investments and those of some friends and family, keeps me quite busy.

By biggest gripe with many investors today, is that they plan as though they will live forever and refuse to consider spending any part of their savings. That may be a useful goal if one is planning to create a multi-generational financial dynasty, but it imposes a level of frugality which may not be justified building up such large piles of cash. Just the opinion of a retired plantsman who never receive a salary above the national average.
Very true, KMR. The often absurd level of frugality.

Even though I know I am reading an advertisement, I can't help but wonder:

Can this guy determine, that is, exactly predict, the financial future for every single person going into retirement?

Last time I checked, both the 4% rule and the replacement rule were developed as broad guidelines to help people save, with the latter rule specifically tied to average expected lifespan (and the former at one point being first a six, and then a five-percent rule before it became the four-percent rule we are assaulted with today). Yes, what if you live well beyond the average expected lifespan, but then again, WHAT IF YOU DON'T?

Seems to me like this is an exercise in futility. A more general rule, that apparently has worked for a lot of people (at least anecdotally), is to live well below your means, whether while in the workforce, or in retirement.
Laurence Kotlikoff profile picture
Hi Gregory,

I don't take money from my company, so I'm not referencing our software for personal gain. Yes, if we sell the company in the future, it may provide some payoff. But I've been working for 25 years to help folks like you, not to enrich myself.

If there were 10 other programs that remotely connected to economic science and finance, I'd recommend them. There aren't.

As for risk, the right approach to dealing with lifespan risk is to take your max age of life as the planning horizon. Ours are the only tools to do this.

As for investment risk, our www.maxifi.com tool will shortly have the Monte Carlo analysis in ESPlannerPLUS and ESPlannerPRO (our download tools), which lets users see how their spending and investing behavior jointly determine their future living standard risk.

best, Larry
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