Have you ever thought about how you can spend more of your retirement money without the fear of running out? The rule that says you can only spend 4% of your savings is still widely used today, but is it the best option for you?

Let’s dive into what this rule means and how you can make the most out of your retirement savings without worrying about running out of money.

Understanding the Origins of the 4% Rule

The 4% rule was created in the 1990s by financial planner William Benjen. His goal was to figure out how much his clients could take out of their portfolios without the risk of running out of money over a 30-year retirement period.

Through historical simulations using the S&P 500, Benjen discovered that people could withdraw 4% of their portfolio annually and still have a high chance of not depleting their savings within 30 years.

Debunking Myths Around Higher Withdrawal Rates

There are claims out there that say you can take 5%, or even 8%, per year. But this simply isn’t true. The success of your retirement portfolio is heavily influenced by the order in which you receive your investment returns, known as the “sequence of returns.”

- Early losses in retirement can impact your savings more than later losses.

- With a 4% withdrawal rate, your savings could last 30 years, even if you start retirement in a down market.

Why The 4% Rule May Not Be Enough

The 4% rule was created 30 years ago, and the world has changed a lot since then. With the exception of the last 18-24 months, interest rates have been low, and markets are more volatile. So, how much can you really take out each year?

No one knows for sure what the market or economy will look like in 20 years. This uncertainty is why it’s important to consider other strategies, like income annuities, that provide more predictable outcomes.

Let’s compare the 4% rule to an income annuity using a simple scenario: a 65-year-old couple with $500,000 in their retirement portfolio.

Investment Option	Annual Income	Money Required
4% Rule	$20,000	$500,000
Income Annuity	$20,000	$265,000

With an income annuity, the couple could guarantee $20,000 per year using just $265,000—88.5% more spendable income, using the same amount of money, than the 4% rule allows. Plus, the annuity guarantees this income for life.

Balancing Access to Your Money and Retirement Income

Some may argue that using an annuity ties up a large portion of their savings, but the question to ask is: “What is the purpose of your retirement money?”

If your goal is to provide income for life, the money in a managed portfolio is also locked up, as it’s needed to generate your yearly income. You can’t dip into the portfolio for big purchases, like helping your kids buy a house, without impacting your long-term income plan.

The annuity also includes a death benefit for a period of time, which can provide additional value to your family.

The Power of Deferred Roll-Ups

One of the best ways to maximize the benefits of income annuities is to take full advantage of deferred roll-ups. Let’s look at an example:

If the same couple had planned for their annuity five years earlier (at age 60), they could have guaranteed that same $20,000 per year starting at age 65 by using only $202,500 instead of $265,000.

Scenario	Money Required	Annual Income
Annuity Purchased at Age 65	$265,000	$20,000
Annuity Purchased at Age 60	$202,500	$20,000

This means they could have saved over $62,000 by planning earlier.

We can look at the numbers in many ways, but the main point is simple: Income annuities provide predictability and guarantees that no other financial product can offer.

While your portfolio might grow if the market performs well, history shows us that it could also shrink in a down market. If that happens, you could be left with much less income, and there’s no way to recover those losses quickly.

Income annuities are the only financial products guaranteeing a set income for the rest of your life. Stocks, bonds, nor real estate can offer the same level of security.

If you’d like to learn more about how an annuity strategy could work for your retirement, use the schedule button to book a short call with me, and we’ll analyze your specific situation together.

Episode 42: The 4% Rule vs Income Annuities