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Posted by on November 28, 2007, 10:08 am
Here is a paper criticizing the often-cited "4% rule".
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1005652
Efficient Retirement Financial Strategies
William F. Sharpe, Jason S. Scott, and John G. Watson
July 2007
"Unfortunately, the 4% rule represents a fundamental mismatch between
a riskless
spending rule and a risky investment rule. This mismatch renders the
4% rule inconsistent
with expected utility maximization. Either the spending or the
investment rule can be a
part of an efficient strategy, but together they create either large
surpluses or result in a
failed spending plan.
,,,
Overall, our findings suggest that it is likely to be more fruitful to
clearly specify
one's assumptions about a retiree's utility function, then to
establish the optimal spending
and investment strategy directly. Of course, one should take into
account more aspects of
the problem than we have addressed in this chapter. Annuities should
be considered
explicitly, rather than ruled out ex cathedra. Separate utility
functions for different
personal states (such as "alive" and "dead") could be specified rather
than using a
weighted average using mortality probabilities, as we have assumed
here. Yet our
analysis suggests that rules of thumb are likely to be inferior to
approaches derived from
the first principles of financial economics."
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