4 percent retirement rule faces new test from annuity research

The 4 percent retirement rule is facing renewed scrutiny as new research argues that retirees may generate stronger and more durable income by combining partial annuities with invested assets and, in some cases, delayed Social Security. The study, by Mark Warshawsky of the American Enterprise Institute and independent researcher Gaobo Pang, says a middle course can reduce longevity risk without requiring retirees to surrender control of an entire portfolio.

The research was published and funded by the American Council of Life Insurers, a life insurance industry trade group. The group said it did not shape the researchers’ conclusions.

Warshawsky told CNBC that relying only on portfolio withdrawals carries a meaningful risk that retirees could exhaust their assets if they live longer than expected or markets disappoint. Putting all savings into an annuity can produce more immediate guaranteed income, he said, but leaves retirees with less access to cash for unexpected needs.

Does the 4 percent retirement rule still work?

The 4 percent rule, developed by financial planner William Bengen in the 1990s, holds that retirees can withdraw 4% of their portfolio in the first year of retirement and then raise that dollar amount with inflation. For a retiree with $1 million, the first-year withdrawal would be $40,000.

Warshawsky and Pang’s analysis says that approach offers flexibility and liquidity, but may not be the best fit for retirees seeking the highest sustainable income. Their modeled retiree is 65 years old, has $1 million in savings and receives about $25,700 a year from Social Security. The study also accounts for federal income taxes, Medicare premiums, Social Security claiming choices, projected investment returns and broader economic assumptions.

An annuity is an insurance contract that turns a lump sum into a stream of payments, often for life. The study focused on a single premium immediate annuity, which begins paying income after an upfront purchase, though Warshawsky said other annuity structures could also be relevant.

Under the partial annuity approach described in the research, a retiree could put half of savings into an annuity at the start of retirement or convert assets into annuities over time. The remaining assets would stay invested, preserving some liquidity and market exposure while the annuity supplies guaranteed income.

How Social Security timing changes retirement income

The study also highlights delaying Social Security as a way to raise lifetime income. Retirees can use savings as a bridge before claiming benefits as late as age 70, which increases monthly checks under program rules.

Warshawsky, who served as deputy commissioner for retirement and disability policy at the Social Security Administration from 2017 to 2021, described Social Security to CNBC as a form of life annuity. He also said some people claim early because they fear future benefit cuts tied to trust fund depletion, though he noted there is no assurance early claimants would avoid any eventual reductions.

Morningstar’s 2025 State of Retirement Income report reached a related conclusion, saying retirees seeking the highest lifetime income should consider delaying Social Security and that simple immediate or deferred annuities may increase income. Morningstar also said in December that 3.9% is the highest starting safe withdrawal rate, while a more flexible withdrawal method could allow up to 5.7% of the starting portfolio.

Christine Benz, Morningstar’s director of personal finance and retirement planning, told CNBC that 4% remains a useful rough starting point because it has been tested across many market environments. She said retirees may need to reduce withdrawals in weak markets, adjust spending for inflation differently, or take somewhat more in stronger years.

Benz also said rigid use of the 4% rule has sometimes led retirees to spend too little and leave large balances behind. Both Benz and Warshawsky pointed to financial planners as potential resources for retirees evaluating withdrawal plans, Social Security timing and annuity purchases.

This story draws on original reporting from CNBC.