October 21, 2011
For many readers, the phrase “utility maximization” may conjure up undesirable flashbacks to their principles of economics course in college. Any efforts to reconnect with those ideas would also be stymied by online searches that mostly turn up equation-heavy treatises with very little intuition. But when it comes to retirement planning, this concept is much more important and less boring than it sounds.
This is illustrated in the new research article, “Determining Optimal Withdrawal Rates: An Economic Approach,” by Duncan Williams and Michael Finke of Texas Tech University. The article appears in the Fall 2011 issue of the Retirement Management Journal, and it won the journal’s Academic Thought Leadership Award. Williams and Finke find that an aggressive retiree with a $1 million nest egg and a guaranteed Social Security income base of $20,000, could actually maximize their utility with a 7 percent withdrawal rate. So much for the 4 percent rule!