Recent research by Mark Warshawsky of the American Enterprise Institute and independent researcher Gaobo Pang challenges the long-standing 4% retirement rule as the optimal withdrawal strategy for retirees. The traditional approach, where retirees withdraw 4% of their portfolio in the first year and adjust for inflation thereafter, carries significant longevity risk for those concerned about outliving their assets, according to the researchers.
Their study examines retirement income strategies for a typical scenario: an individual retiring at age 65 with $1 million in savings and $25,700 in annual Social Security benefits. The analysis considers federal income taxes, Medicare premiums, investment returns and economic projections. While the 4% rule offers maximum liquidity and flexibility, it may fail to provide adequate income for longer-living retirees or during market downturns. Full annuitization provides the highest guaranteed income but sacrifices liquidity and flexibility, and may not address long-term care needs.
Warshawsky and Pang propose partial annuitization as the optimal middle ground. This approach involves placing a portion of retirement savings into an annuity—either immediately or gradually over time—while maintaining invested assets. This strategy provides guaranteed income through annuities while preserving liquidity, flexibility and growth potential through market investments. The research, published with funding from the American Council of Life Insurers, modeled immediate annuities that exchange lump-sum payments for guaranteed income streams.
Other retirement experts offer varying perspectives on withdrawal rates. Morningstar identifies 3.9% as the highest safe starting withdrawal rate, though more flexible approaches may permit withdrawals up to 5.7%. Christine Benz of Morningstar notes that 4% serves as a reasonable starting benchmark and has been stress-tested across historical market conditions. She recommends working with financial planners to customize withdrawal strategies and potentially increase spending in favorable market years.
The research also highlights delaying Social Security benefits to age 70 as a complementary strategy. By using savings to cover expenses until the maximum claiming age, retirees can significantly increase monthly benefits. This approach addresses concerns about the program’s long-term solvency while maximizing lifetime income potential.
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