4% retirement rule faces new test as annuity strategy gains support

The 4% retirement rule is getting a fresh challenge from research that says many retirees may get better results by mixing guaranteed income with invested savings. For everyday investors, the finding hits a practical question: how much can you spend from a portfolio without running short later?

Research by Mark Warshawsky, a senior fellow at the American Enterprise Institute, and Gaobo Pang, an independent researcher, compares several ways a 65-year-old retiree might turn savings into income. Their work was published and funded by the American Council of Life Insurers, a life insurance industry trade group, which said it did not shape the findings.

The study uses a hypothetical person retiring at 65 with $1 million saved and about $25,700 a year in Social Security benefits. It weighs four retirement income approaches while factoring in federal income taxes, Medicare premiums, Social Security claiming choices, market return projections and broader economic assumptions.

Does the 4% retirement rule still work?

The 4% rule means a retiree takes 4% of a portfolio in the first year, then generally raises that dollar amount each year for inflation. In the study’s $1 million example, that would mean a $40,000 first-year withdrawal.

Warshawsky and Pang found that the approach gives retirees the most control over their money, but also leaves them exposed if they live longer than expected or markets disappoint. Warshawsky said there is “significant risk” of outliving assets and said that level of risk may be too high for people with typical risk tolerance.

The opposite approach, putting all retirement savings into an annuity, also has trade-offs, according to the research. An annuity is an insurance contract that can turn a lump sum into guaranteed payments. Full annuitization can produce higher upfront income, Warshawsky said, but it requires retirees to give up access to much of the money they converted.

Why partial annuities may help retirement income

The research points to a middle path: using part of a portfolio to buy annuity income while keeping the rest invested. Warshawsky described that middle ground as the “sweet spot.”

Under that strategy, a retiree could put half of savings into an annuity at the start of retirement or gradually shift assets into annuities over time, according to the research. The goal is to pair a guaranteed income stream with liquidity, meaning money that remains accessible for spending needs, emergencies or long-term care costs.

The study modeled a single premium immediate annuity, which pays income in exchange for one upfront payment. Warshawsky said other annuity types could also fit the broader idea.

Morningstar has also examined withdrawal rates. In its 2025 State of Retirement Income report, the investment research firm said 3.9% was the highest starting safe withdrawal rate for retirees, while a more flexible plan could allow withdrawals as high as 5.7% of a starting portfolio.

Christine Benz, Morningstar’s director of personal finance and retirement planning, called 4% a useful starting estimate. She said retirees may reduce withdrawals after weak market years or skip some inflation adjustments, while stronger years could allow higher spending. Benz also said some retirees who follow a fixed 4% inflation-adjusted system may underspend and end up with large remaining balances.

How Social Security timing fits in

Warshawsky and Pang also examined delaying Social Security. Using savings to cover spending until age 70, often called a bridge strategy, can raise monthly Social Security checks, according to the research.

Warshawsky said Social Security functions like a life annuity because it pays for as long as the retiree lives. He also noted that worries over Social Security trust fund depletion have led some people to claim early, though he said there is no guarantee early claimers would avoid any future benefit cuts.

Morningstar’s report said retirees seeking the highest lifetime income should consider delaying Social Security benefits and may also benefit from a simple immediate or deferred annuity. Warshawsky and Benz both said a financial advisor can help retirees evaluate withdrawal plans and whether an annuity fits their situation.

This story draws on original reporting from CNBC.