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The 4% rule: Does real estate make a difference?


  • Eli Beracha
  • David H. Downs
  • Greg MacKinnon


This paper examines the wealth maximisation and preservation effects of including commercial real estate in retirement-phase portfolio management. Prior research addresses the role of real estate during the wealth-accumulation phase of the investor lifecycle; however, little is known about the contribution of real estate during the invest-and-spend, or decumulation, phase. To address this issue, we estimate short-fall risk based on the widely known 4% Rule. We use pricing data for multiple asset classes and simulation techniques, combined with a robust correlation structure, to examine: short-fall risk sensitivity to alternative spending rules; the impact of public vs. private real estate allocations; wealth preservation as an investment objective; and the effect of real estate on upside, or wealth maximisation, potential. We find short-fall risk in a decumulation portfolio decreases with substantial allocations to real estate. This result holds for a portfolio including either public or private real estate. Additionally, and under most conditions, the best performing decumulation-phase portfolios include a real estate allocation with both public and private real estate exposure. These results have significant implications for investors, whether they be retirees, plan administrators or endowments, as well as financial economists studying the lifecycle of investment decisions.

Suggested Citation

  • Eli Beracha & David H. Downs & Greg MacKinnon, 2017. "The 4% rule: Does real estate make a difference?," Journal of Property Research, Taylor & Francis Journals, vol. 34(3), pages 181-210, July.
  • Handle: RePEc:taf:jpropr:v:34:y:2017:i:3:p:181-210
    DOI: 10.1080/09599916.2017.1293134

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    References listed on IDEAS

    1. Thomas Davidoff, 2015. "Can "High Costs" Justify Weak Demand for the Home Equity Conversion Mortgage?," Review of Financial Studies, Society for Financial Studies, vol. 28(8), pages 2364-2398.
    2. Christian Rehring & Steffen Sebastian, 2011. "Dynamics of commercial real estate asset markets, return volatility and the investment horizon," Journal of Property Research, Taylor & Francis Journals, vol. 28(4), pages 291-315, June.
    3. Carolina Fugazza & Massimo Guidolin & Giovanna Nicodano, 2007. "Investing for the Long-run in European Real Estate," The Journal of Real Estate Finance and Economics, Springer, vol. 34(1), pages 35-80, January.
    4. Jason Scott & John Watson, 2013. "The Floor-Leverage Rule for Retirement," Discussion Papers 13-013, Stanford Institute for Economic Policy Research.
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