Is it prudent to set a withdrawal rate of 4% from a portfolio that is intended to support retirement income? For many years, 4% has been the “rule of thumb” in the financial planning community. But the 4% rule is controversial, and there are strong opinions on both sides. After all, there is always a risk that any schedule of regular portfolio withdrawals might interact viciously with adverse markets, causing the portfolio to crash and burn before the retirement is successfully completed.

Our latest Investment Quarterly reviews the discourse on the subject among academic economists and financial planning practitioners. We examine two sets of studies of the question, with two different ways of approaching it: empirical analysis, or modeling. Each has its strengths and weaknesses; their findings disagree.

As usual with our examinations of such questions, we find that the answer is a firm, “it depends; a considered, careful and informed judgment is called for.” Making a crucial financial decision according to a rule of thumb is one of those solutions that’s simple, easy to understand - and wrong. The 4% rule is at best a good point of departure for an analysis of what withdrawal rate is most likely to succeed.