By Anthony Webb

Literature REview Overview

Studies on the best ways to draw down wealth during retirement have claimed that households following the so-called 4 percent rule, which calls for consuming 4 percent a year of accumulated wealth during retirement, are at relatively low risk of outliving their wealth. This literature review investigates what, if anything, financial advisors can learn from the literature that models the relative merits of purchasing an annuity as opposed to following the 4 percent rule or other similar strategies. This review argues that the 4 percent rule and other similar rules of thumb are overly simplistic and that they fail to use household financial resources in the most effective way. In contrast, strategies that optimize the use of financial resources are too complex for most households or their advisors to implement. Annuities likely dominate the set of drawdown strategies that households could feasibly implement. This review argues that the 4 percent rule will be even less appropriate in a COVID-induced low-interestrate environment. At current and prospective interest rates, the 4 percent rule, if we retain such a rule at all, must become the 3 percent rule.