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 evaluates four basic retirement income approaches, considering variables such as federal taxes, Medicare premiums, Social Security decisions, and market projections. The analysis centers on a hypothetical retiree age 65 with $1 million in savings and approximately $25,700 in annual Social Security benefits.
The traditional 4% withdrawal rule, established by financial planner William Bengen in the 1990s, allows retirees to withdraw that percentage of their portfolio initially and adjust annually for inflation. However, Warshawsky notes this approach carries substantial risk of asset depletion for long-living individuals. Conversely, placing all assets into an annuity provides higher guaranteed income but eliminates financial flexibility and control.
Warshawsky and Pang’s research identifies partial annuitization as an optimal middle ground. This strategy involves allocating a portion of savings—either immediately or gradually—into annuities while maintaining invested assets. This approach combines guaranteed income streams with liquidity and market growth potential. The researchers base their analysis on single premium immediate annuities, though other annuity types may also be suitable.
Industry experts offer varying perspectives on withdrawal rates. Morningstar identified 3.9% as the highest safe starting withdrawal rate, though with flexible strategies, retirees may withdraw up to 5.7% initially. Christine Benz, director of personal finance at Morningstar, emphasizes that the 4% benchmark provides a useful reference point and has proven resilient across historical market conditions. She recommends working with financial planners to customize withdrawal strategies and potentially claim Social Security benefits later to increase monthly payments.
Warshawsky highlights the strategic value of delaying Social Security to age 70, describing the program as a life annuity. Recent concerns about Social Security’s long-term solvency have prompted some beneficiaries to claim early, though Warshawsky notes this approach offers no protection against potential future benefit reductions. The research was published and funded by the American Council of Life Insurers, which stated it did not influence the researchers’ conclusions.
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