Retirement income: Why a mix of investments, annuities may beat 4% rule

Today’s workers entering retirement face one big dilemma: What is the best way to turn their nest eggs into a steady stream of income?

One traditional approach — the 4% rule, whereby retirees can withdraw that portion of their portfolio in their first year of retirement and then adjust that rate for inflation thereafter — is not necessarily the best answer, according to new research by Mark Warshawsky, a senior fellow at the American Enterprise Institute, a conservative Washington think tank, and by Gaobo Pang, an independent researcher.

«There’s significant risk there in terms of outliving your assets,» Warshawsky said. «For people with typical risk aversion, that’s too risky.»

Another «all or nothing» strategy — putting all the assets into an annuity — may provide higher income, but requires retirees to give up control of their money, he said.

«The sweet spot is basically right smack in the middle,» Warshawsky said.

Buying a partial annuity — either putting half of savings into an annuity up front or by slowly converting assets to annuities over time — can provide a guaranteed stream of income while helping to provide for longevity, according to Warshawsky.

Today’s retirees face a variety of headwinds, including looming Social Security funding woes, rising inflation that is pushing up everyday costs and market volatility.

As a record number of baby boomers reach the milestone age of 65, when they become eligible for Medicare, they face a retirement income dilemma: how much of their nest egg they can realistically spend.

For a hypothetical retiree with $1 million in retirement savings who retires at age 65 and relies exclusively on the 4% rule, the initial withdrawal would be $40,000. But while this strategy provides the most liquidity and flexibility, it also risks failing to provide income in the future if a retiree lives a long life or the markets underperform, according to Warshawsky and Pang’s research.

Meanwhile, full annuitization offers the highest initial income but is illiquid and does not cover long-term care or other needs that may arise, according to the research.

It found that partial annuitization outperforms those strategies and balances three needs — steady income through annuities, liquidity and flexibility through invested portfolio assets and the potential for money to continue to grow in the markets.

The research is modeled after a single premium immediate annuity, which provides a stream of guaranteed income in exchange for a lump-sum payment. Other types of annuities could work as well, according to Warshawsky.

In his 2025 book, Bengen said some retirees may be able to safely withdraw more than 4%.

In December, investment research provider Morningstar said 3.9% is the highest starting safe withdrawal rate for retirees. However, with a more flexible approach, retirees can withdraw up to 5.7% of their starting portfolio, the firm said in its 2025 State of Retirement Income report.

«4% is a good back-of-the-envelope starting point,» said Christine Benz, director of personal finance and retirement planning at Morningstar.

The 4% guideline has been stress-tested across many different market environments, Benz said.

To be sure, retirees may want to pare back their withdrawals during years when markets are down or adjust for inflation, according to Benz. In good years, they may be able to withdraw a bit more, she said.

A 4% starting withdrawal rate with annual inflation adjustments has, over many periods in market history, been too weak and has left people with large leftover balances because it encouraged them to underspend, she said.

By working with a financial planner, retirees may get a «finer point» on their withdrawal strategies, Benz said. For example, those plans may accommodate higher portfolio withdrawals if a retiree decides to delay claiming Social Security benefits, she said. In addition, a professional can also create plans that maximize a retiree’s good years, Benz said.

«It doesn’t have to be an all-in, year-in, year-out relationship,» Benz said. «But get a second set of eyes on this, and the planner can help you with a spending plan.»

A financial advisor would also be a good place to start when it comes to considering whether or not to purchase an annuity, Warshawsky said.

Warshawsky and Pang’s research also highlights another strategy: delaying Social Security benefits to help boost retirement income. By bridging — or using savings to cover spending until the highest Social Security claiming age of 70 — retirees can increase their monthly checks, according to the research.

«Social Security in its essence is a life annuity,» said Warshawsky, who served as deputy commissioner for retirement and disability policy at the Social Security Administration from 2017 through 2021.

Social Security’s looming trust fund depletion dates — when benefits may be reduced across the board unless Congress enacts changes to the program — have prompted some to claim retirement benefits early, hoping they won’t be affected if benefits are cut, Warshawsky said. «But there’s no guarantee of that,» he said.

Retirees who want the highest level of lifetime income should consider delaying Social Security retirement benefits, according to Morningstar’s State of Retirement Income report. In addition, opting for a simple immediate or deferred annuity may also help amplify income, the report states.