Instead of the popular 4% rule, a new study out today by economists argues that a combination of annuities and systematic withdrawals is crucial to achieving optimal retirement outcomes.
The research, supported by the American Council of Life Insurers (ACLI) and written by economists Mark Warshawsky, principal of ReLIA Strategies, former deputy commissioner for Retirement and Disability Policy at the Social Security Administration, and current senior fellow at the American Enterprise Institute, along with Gaobo Pang, principal of Zillore LLC, emphasizes the value of annuities in retirement income strategies.
It contends that a strategy of systematic withdrawals, including more liquid investments or cash savings, combined with annuities, could outperform other approaches for those retiring with $250,000 or more in savings. This could either occur through the purchase of an immediate annuity or a gradual, laddered process of annuitization.
Those retiring with less than $250,000 would see higher income by annuitizing higher portions of their savings, Warshawsky and Pang add in the findings.
The research disputes the idea of the popularized 4% rule, calling the strategy “problematic” with “significant failure rates.” It argues that withdrawing 4% of initial wealth—indexed to inflation each year—could result in some of the lowest levels of retirement income.
Instead, the authors note that annuities could serve as a lifeline for defined contribution (DC) and individual retirement account (IRA) participants who want to maximize on their savings.
“The retirement landscape has undergone significant transformations in recent years with the traditional reliance on defined benefit plans shifting towards defined contribution plans and individual retirement accounts. These plans lack built-in means for a retiree to know how to best structure their regular withdrawals to fund their lives in retirement, and annuities fill that gap,” said Warshawsky.
Looking forward, Warshawsky touches on the need for more research and communications emphasizing how annuitization can work alongside Social Security, investment options, and employer pension and retirement plans.
“The research in this paper has significant implications for policymakers and financial advisors, advocating for policies that support flexible, mixed-income strategies. It also underscores the importance of educating retirees about the benefits of diversifying their income sources in retirement,” Warshawsky said.
A full look of the whitepaper, “The Role of Life Annuities in Retirement Income Strategies,” can be found here.
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