Researchers at the American Enterprise Institute have published findings questioning whether the widely-used 4% retirement withdrawal rule remains optimal for today’s retirees. The study, conducted by Mark Warshawsky and Gaobo Pang and funded by the American Council of Life Insurers, examined various strategies for converting retirement savings into sustainable income streams.
The traditional 4% rule, established in the 1990s by financial planner William Bengen, allows retirees to withdraw 4% of their portfolio in the first year and adjust for inflation thereafter. However, according to Warshawsky and Pang’s research, this approach carries significant longevity risk for people with typical risk preferences. Conversely, converting all assets into an annuity provides the highest initial income but eliminates flexibility and liquidity. The researchers propose a middle-ground approach: partial annuitization, either placing half of savings into an annuity initially or gradually converting assets over time.
The research modeled a retiree aged 65 with $1 million in savings and $25,700 in annual Social Security income. Their analysis incorporated federal taxes, Medicare premiums, investment returns, and economic projections. Results indicated that partial annuitization balances three critical needs: guaranteed income through annuities, portfolio liquidity for flexibility, and continued market growth potential.
Other experts offer nuanced perspectives on withdrawal strategies. Morningstar’s analysis suggests a 3.9% starting withdrawal rate is safest, though flexible approaches could accommodate rates up to 5.7%. Christine Benz of Morningstar noted that the 4% guideline has been stress-tested across multiple market environments and that working with financial planners can help tailor strategies to individual circumstances. The research also highlights delaying Social Security benefits until age 70 as a strategy to increase lifetime income, effectively leveraging Social Security as a life annuity alongside other retirement income sources.
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