A hybrid approach outperforms the 4% Rule, researchers find
Many retirees believe they have two choices when it comes to withdrawing their retirement funds: either let the 4% Rule guide them and risk running out of money, or put the entire amount into an annuity.
Research rom Mark Warshawsky, PhD and Gaobo Pang, PhD, and commissioned by the American Council of Life Insurers, has challenged this with a new finding: The 4% Rule works, but is not optimal.
This research shows there’s a better third way.
Warshawsky and Pang found that a hybrid approach — combining partial annuitization with market exposure — outperforms pure withdrawal strategies and full annuitization across virtually every demographic scenario.
This hybrid approach to retirement strategy consistently delivers better outcomes than traditional withdrawal-only strategies, the researchers said.
“Combining both a life annuity distribution with withdrawals from a portfolio is the sweet spot,” Warshawsky told InsuranceNewsNet. “In other words, it’s the right mix, a balance between risk and income, and also the ability to keep assets for later in life and for legacy.”
What happens in each scenario
| Scenario A | Scenario B | Scenario C | Scenario D | |
| The 4% rule | Full Annuity | Hybrid Strategy (50/50) | Gradual Hybrid | |
| What it is | Withdraw $40,000 a year (4% of savings)
Keep all assets invested |
Convert 100% of savings into lifetime income
No investments, no withdrawals |
Put half of savings into an annuity
Keep the rest invested and withdraw from it |
Slowly convert assets into annuities over time
Keep the rest invested and withdraw from it |
| Results | Average income:
~$58,100/year
Average balance: ~$827,000 |
Average income:
~$65,700/year
Average balance: $0 in every scenario |
Average income:
~$64,700/year
Average balance: ~$537,000 |
Average income:
~$65,200/year
Average balance: ~$470,000 |
“I think that as we do more research on the 4% rule, we find that it’s pretty risky,” Warshawsky said. “There is a significant risk you’re going to run out of money later in life. We found a 24% probability of running out of assets by the time someone turns 95 and turning 95 is a totally possible outcome.”
Social Security bridging
In addition, the researchers are proponents of Social Security bridging, in which retirees postpone claiming Social Security until age 70 and use their assets to support them until Social Security kicks in. This bridging strategy, they said, “is generally found to improve retiree welfare, even with alternative retiree wealth profiles, institutional pricing, alternative health statuses, future benefit cuts, male gender, higher risk aversion, weaker bequest motive, and alternative asset allocations.”
The bridging strategy is especially helpful with the 4% Rule, as it adds some more guaranteed life annuity coverage to the retiree’s portfolio. But the exceptions to this strategy apply for those at older retirement ages, those who are strongly motivated to leave a legacy and those with lower risk aversion.
When to claim Social Security is a question that is open to debate, Warshawsky said.
“It depends on when you retire, what your situation is and what your preferences are – really, what’s your goal in your retirement?
“We’re in the camp that believes delaying claiming is a good thing,” he continued. “Because you do get more inflation-indexed income when you delay the claim. And then, in the interim, you do spend down your assets to support yourself in retirement. But that’s not a universal finding.”
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