Partial annuities beat 4% rule for retirement income, study finds

Partial annuitization outperforms both the 4% withdrawal rule and full annuity purchase for retirees, according to new research from the American Enterprise Institute and independent researcher Gaobo Pang.

"There's significant risk there in terms of outliving your assets," said Mark Warshawsky, senior fellow at the American Enterprise Institute and co-author of the study. "For people with typical risk aversion, that's too risky."

The research, published and funded by the American Council of Life Insurers, models a 65-year-old retiree with $1 million in savings and roughly $25,700 in annual Social Security benefits. It evaluates four income strategies while factoring in federal income taxes, Medicare premiums, Social Security claiming decisions, and investment return projections. The 4% rule — developed by financial planner William Bengen in the 1990s — would generate an initial $40,000 annual withdrawal but risks running dry for retirees who live long or face weak markets. Full annuitization offers the highest initial income but is illiquid and doesn't cover long-term care needs.

The findings arrive as a record number of baby boomers reach age 65, facing Social Security trust fund depletion projections, rising inflation, and market volatility. Morningstar's 2025 State of Retirement Income report independently sets the highest starting safe withdrawal rate at 3.9 percent, though flexible approaches allow up to 5.7 percent.

The sweet spot between liquidity and guaranteed income

Warshawsky and Pang's research finds that partial annuitization — either putting half of savings into an annuity up front or slowly converting assets to annuities over time — balances three needs: steady income through annuities, liquidity and flexibility through invested portfolio assets, and the potential for money to continue growing in the markets.

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

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

Christine Benz, director of personal finance and retirement planning at Morningstar, said the 4% guideline has been stress-tested across many market environments and remains "a good back-of-the-envelope starting point." However, she noted that a 4% starting withdrawal rate with annual inflation adjustments has historically been too weak in many periods, leaving retirees with large leftover balances because it encouraged underspending.

In his 2025 book, Bengen himself said some retirees may be able to safely withdraw more than 4 percent. Morningstar's report suggests that with a more flexible approach — paring back withdrawals during down markets and adjusting for inflation — retirees can withdraw up to 5.7 percent of their starting portfolio.

Delaying Social Security boosts lifetime income

The research also highlights a complementary strategy: delaying Social Security benefits to age 70. By using savings to bridge spending until the highest claiming age, retirees can increase their monthly checks significantly.

"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 — have prompted some to claim early, hoping to avoid potential cuts. "But there's no guarantee of that," Warshawsky said.

Morningstar's report similarly recommends delaying Social Security retirement benefits for retirees who want the highest level of lifetime income, and suggests that opting for a simple immediate or deferred annuity may also help amplify income.

For retirees weighing these strategies, Warshawsky said a financial advisor is a good starting point, particularly when considering whether to purchase an annuity. Benz echoed that a professional can help create a spending plan that accommodates higher portfolio withdrawals, especially for those who delay claiming Social Security. Figures cited reflect research published as of July 2026; readers should verify against the latest official announcements from the Social Security Administration and other relevant agencies.

This article is for informational purposes only and does not constitute investment advice.