What is the 4% Rule?
What Is the 4% Rule?
The “4% Rule” is a retirement guideline that says you can withdraw 4% of your portfolio in the first year of retirement and then increase that dollar amount each year for inflation—aiming to make your money last ~30 years. For example, with a $1,000,000 portfolio, the rule suggests an initial $40,000 withdrawal, then inflation adjustments annually.
It’s simple, but it’s not guaranteed. Markets are volatile, inflation ebbs and flows, and people are living longer. A bad sequence of returns early in retirement can permanently damage long-term income. That’s why many households pair investments with guaranteed income from annuities to create a durable retirement paycheck.
Why the 4% Rule May Fall Short Today
- Sequence risk: A downturn early in retirement can force you to sell low, reducing future income potential.
- Longevity risk: Living into your 90s (or beyond) can stretch a portfolio past its plan horizon.
- Inflation risk: Higher inflation requires larger raises to your withdrawals, stressing the portfolio.
- Behavioral stress: Sticking to a rigid rule during bear markets is emotionally difficult.
By contrast, lifetime income annuities can turn a portion of your savings into a pension-like paycheck that you can’t outlive—freeing the rest of your portfolio to grow and cover discretionary needs. If you’re still accumulating, see why people in their 40s and 50s are considering annuities earlier.
4% Rule vs. Annuity Income: A $1,000,000 Example
- 4% Rule: Withdraw $40,000 in year one, then adjust for inflation—no guarantees, outcomes depend on markets.
- Lifetime Income Annuity: Convert part (or all) of your savings to a guaranteed income stream that continues for life (single or joint). Explore real payouts here:
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How Annuities Complement (or Replace) the 4% Rule
- Guaranteed income floor: Cover essentials (housing, food, healthcare) with annuity income; let your portfolio handle discretionary spending.
- Reduced sequence risk: With a protected paycheck, you can avoid selling investments in down markets.
- Longevity protection: Payments continue for life—even if your underlying account value hits zero.
- Spousal protection: Joint-life options pay as long as either spouse is alive.
Which Annuity Type Fits?
- Immediate Income Annuity (SPIA): Income begins right away for a simple monthly paycheck.
- Fixed Indexed Annuity (FIA) + Income Rider: Market-linked growth potential with downside protection and a guaranteed lifetime withdrawal benefit. See Best FIAs with Income Riders.
- MYGA (Multi-Year Guaranteed Annuity): Use for guaranteed accumulation, then convert to income or ladder maturities. See Best Short-Term MYGA Annuities and compare Current Annuity Rates.
Taxes, Beneficiaries, and Flexibility
- Tax-deferred growth: Non-qualified annuities grow tax-deferred; withdrawals are generally LIFO (gains first).
- Qualified rollovers: IRA/401(k) funds keep their tax status when moved properly.
- Beneficiary planning: Understand how payouts pass to heirs—see Annuity Beneficiary & Death Benefits.
- Liquidity: Many contracts offer penalty-free withdrawals (often up to 10%/yr). Replacing an older annuity mid-term? A Bonus Annuity may help offset surrender or market value adjustment (MVA) charges.
Get a Personalized Income Plan
At Diversified Insurance Brokers, we shop 75+ top-rated carriers to find the highest guaranteed lifetime income for your age, state, and timeline—so you’re not relying on a rule of thumb. Compare live options here: Current Annuity Rates.
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See which annuity structures deliver the strongest guaranteed paycheck for your plan.
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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.
