One of the most common retirement questions I hear is this:
“Should I just take 4% from my investment portfolio… or are annuities a better option?”
For decades, advisors have recommended the 4% rule as a “safe withdrawal rate” in retirement.
But today’s market conditions are very different than when that rule was created. And many retirees are discovering that 4% often doesn’t generate the income they actually need.
Let’s break down how the 4% rule works, and why annuities can sometimes produce significantly more retirement income.
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The Problem With the 4% Rule
The traditional advice goes something like this:
If you have $1 million saved, you withdraw 4% per year, or $40,000 annually, and your portfolio should theoretically last for 30 years.
But there are a few major problems with this strategy.
First, the rule assumes fairly consistent market returns. In reality, markets don’t behave that way.
If you experience several down years early in retirement, sequence of return risk can drastically reduce your portfolio.
In practical terms, this means:
- Your income may have to decrease
- Your portfolio could shrink faster than expected
- Your retirement plan becomes dependent on market performance
In fact, many experts now argue that the true safe withdrawal rate may be closer to 2-3% today, not 4%.
That means a $1 million portfolio might realistically produce only $20,000-$30,000 per year safely.
For most retirees, that’s not nearly enough.
👉 Want help figuring out how much income your savings can generate? Schedule a call with me and I’ll walk you through the numbers.
How Annuities Can Produce Higher Retirement Income
Now let’s look at the same $1 million scenario using an income annuity.
Instead of withdrawing a small percentage and hoping the market cooperates, an annuity converts a portion of your savings into contractual lifetime income.
In one example I often show clients:
- Age: 60
- Investment: $1,000,000
- Guaranteed annual income: about $71,000
That’s roughly 7.15% income, which is significantly higher than the traditional 4% withdrawal strategy.
And unlike a portfolio withdrawal strategy, that income is:
- Contractually guaranteed
- Not dependent on stock market performance
- Designed to provide stable retirement income
For many retirees, that stability can be extremely valuable.
Understanding the Trade-Off
Now, there’s an important caveat.
When you purchase an income annuity, the goal is income, not long-term account growth.
The account value is designed to gradually decline over time as it pays out income.
In other words:
You’re converting a lump sum into a pension-like paycheck for life.
That’s why I often explain it this way to clients:
You might spend $1 million to create the equivalent of a $2-3 million pension in guaranteed income over time.
For people whose primary goal is reliable retirement income, that trade-off can make a lot of sense.
If leaving a large legacy is your priority, we simply structure the plan differently.
👉 Want to see what kind of pension income your savings could create? Schedule a call and I’ll run the numbers for you.
What Happens If You Delay Income?
Another strategy many retirees use is delaying income for a few years.
For example, let’s say you’re 60 but don’t plan to retire until 65.
Instead of taking income immediately, you can allow the annuity’s benefit base to grow at a guaranteed rate.
Some annuities offer guaranteed growth around 7% per year, compounding during the deferral period.
After five years, your benefit base could grow to around $1.4 million.
When income begins, that larger base can generate dramatically higher payments.
In some cases, retirees can create over $100,000 per year in guaranteed lifetime income from a $1 million investment.
That’s more than double the traditional 4% withdrawal rate.
Why Many Retirees Combine Annuities With Investments
One of the biggest misconceptions is that choosing annuities means abandoning the stock market.
That’s not how I typically structure retirement plans.
Instead, many clients use a hybrid strategy.
For example:
- Use annuities to create guaranteed lifetime income
- Keep part of the portfolio invested for growth and legacy
- Combine with Social Security income
When you stack those income sources together, retirement can become much more predictable.
You might have:
- Social Security
- Annuity income
- Investment withdrawals
That combination can dramatically reduce stress during market downturns.
Because even when markets drop, your income keeps coming in.
Conclusion
The answer depends on your goals.
But for many retirees who want reliable income, annuities can generate significantly more cash flow than a traditional withdrawal strategy.
The key advantages include:
- Higher potential income
- Protection from sequence-of-returns risk
- Contractual lifetime payments
- Pension-style retirement security
Meanwhile, your investment portfolio can still focus on growth and flexibility.
That’s why I often say:
Annuities aren’t designed to replace your portfolio. They’re designed to replace your paycheck.
Need help with finding the best annuity for your retirement?
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On the call, I can help you:
- Determine what type of annuity is best for you
- Find the highest paying annuities for your unique situation
- Answer any other questions you may have