What is the 4% Rule?
What Is the 4% Rule? The “4% Rule” is a traditional retirement guideline suggesting that retirees can safely withdraw 4% of their investment portfolio each year without running out of money over a 30-year period. For example, if you retired with a $1 million portfolio, this rule implies you could withdraw $40,000 annually—adjusted for inflation—to sustain your income throughout retirement.
However, while simple in theory, the 4% Rule assumes consistent market growth, steady interest rates, and no major downturns. In reality, retirees face inflation, longevity risk, and sequence-of-returns risk—meaning a market drop early in retirement can permanently reduce long-term income potential. That’s why many people are turning to lifetime income annuities for guaranteed, predictable retirement income that can’t be outlived, and many people in their 40’s and 50’s are considering annuities earlier in their careers.
Why the 4% Rule May Fall Short Today
The 4% Rule was created in the 1990s, when bond yields and stock returns were much higher. Today’s lower interest rates and increased life expectancies make that rule outdated. A 4% withdrawal strategy from a volatile portfolio could lead to running out of money earlier than expected—especially if major losses occur in the first few years of retirement.
Let’s consider an example using a $1 million retirement portfolio:
- Using the 4% Rule, you’d withdraw $40,000 per year.
- If markets underperform, your account may shrink faster than planned.
- There’s no income guarantee if you live beyond your 90s.
Compare that to a guaranteed lifetime income annuity, which can generate a higher, contractually guaranteed payout for life—regardless of market performance. For example, see how much a $1 million annuity pays today based on current rates.
How Lifetime Income Annuities Outperform the 4% Rule
Unlike the 4% Rule, a lifetime income annuity provides a consistent stream of income for as long as you live. Even if the account value reaches zero, your payments continue. This eliminates the risk of outliving your savings and offers peace of mind during market downturns.
Explore these examples to understand how guaranteed annuities compare across different investment levels:
- How Much Does a $500,000 Annuity Pay?
- How Much Does a $750,000 Annuity Pay?
- How Much Does a $1 Million Annuity Pay?
- How Much Does a $2 Million Annuity Pay?
Key Advantages of Annuities Over the 4% Rule
- Guaranteed Income for Life: Payments continue even if markets decline or your principal is depleted.
- No Market Risk: Income doesn’t depend on stock performance.
- Tax-Deferred Growth: Funds inside annuities grow tax-deferred until withdrawal.
- Spousal Options: Joint-life annuities ensure both spouses receive lifetime income.
Which Annuity Type Works Best?
Retirees looking for income security often choose between Fixed Indexed Annuities with Lifetime Income Riders or short-term MYGAs for guaranteed growth. The right choice depends on your timeline, risk tolerance, and need for liquidity.
Get a Personalized Income Plan
At Diversified Insurance Brokers, we compare annuity options from 75+ top-rated carriers to identify the highest lifetime income payouts for your retirement savings. Whether you’re evaluating the 4% Rule or seeking guaranteed income solutions, our advisors can help you create a plan that never runs out of money.
Request a Lifetime Income Quote
Compare real-time rates and guaranteed income options for your retirement savings.
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FAQs: The 4% Rule and Annuities
What is the 4% Rule?
The 4% Rule suggests withdrawing 4% of your retirement savings each year to make your funds last about 30 years. However, it doesn’t account for market volatility or longevity risk.
Why is the 4% Rule considered outdated?
It was developed when interest rates were higher and life expectancies shorter. Today’s retirees live longer and face lower returns, making the rule less reliable.
Can annuities replace the 4% Rule?
Yes. Lifetime income annuities provide guaranteed monthly payments that continue for life—solving the risk of outliving your savings.
How much income can a $1 million annuity generate?
At the time of publication, a $1 million annuity can provide significantly more than $40,000 annually, depending on age, product type, and payout option. See How Much Does a $1 Million Annuity Pay? for details.
What happens if markets drop after I retire?
With an annuity, your income remains stable regardless of market downturns. The 4% Rule offers no such protection.
Are annuities safe?
Yes. Annuities are backed by highly rated insurance companies, offering contractual guarantees for income and principal protection.
Can annuities grow over time?
Yes. Indexed annuities with income riders can provide both growth potential and lifetime income benefits.
