A study by Mark Warshawsky of the American Enterprise Institute and independent researcher Gaobo Pang examines optimal strategies for converting retirement savings into sustainable income. The research, published by the American Council of Life Insurers, evaluates four retirement income approaches for a hypothetical individual retiring at age 65 with $1 million in savings and $25,700 in annual Social Security benefits.
The traditional 4% rule—withdrawing 4% of portfolio assets in the first year and adjusting for inflation thereafter—offers maximum flexibility and liquidity but carries significant longevity risk, according to the researchers. Under this approach, a retiree would initially withdraw $40,000 annually. Conversely, full annuitization guarantees the highest initial income by converting the entire nest egg into a guaranteed income stream but eliminates liquidity and flexibility for unexpected expenses.
The researchers propose partial annuitization as a middle-ground approach, whereby retirees commit approximately half their savings to an annuity while maintaining invested assets. This strategy aims to provide guaranteed baseline income while preserving portfolio growth potential and access to funds. The research considers multiple factors affecting retirement sustainability, including federal income taxes, Medicare premiums, Social Security claiming decisions, and market performance projections.
Other experts offer nuanced perspectives on withdrawal rates. Morningstar research indicates 3.9% represents the highest safe starting withdrawal rate, though more flexible approaches may support withdrawals of up to 5.7%. Financial planner William Bengen, who developed the 4% rule during the 1990s, acknowledged in recent publications that some retirees may safely withdraw higher amounts. Morningstar’s director of personal finance recommends consulting financial planners to customize withdrawal strategies based on individual circumstances.
The research also highlights delaying Social Security benefits as a complementary strategy. By using savings to cover expenses until age 70—when Social Security payments reach maximum levels—retirees can substantially increase lifetime income, effectively treating Social Security as a life annuity. This approach may prove particularly valuable given anticipated Social Security trust fund pressures, though early claiming decisions carry uncertain implications for future benefit reductions.
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