Annuities Outperform Withdrawal Strategies. The Research Is Clear.

The debate over how to draw down retirement savings has persisted for decades. Should retirees follow the 4% rule and withdraw systematically from a portfolio? Convert everything to an annuity and guarantee income for life? Some combination of both? A new study by economists Gaobo Pang and Mark Warshawsky puts those strategies to a rigorous test — and the results are not close.

The study, published through the American Council of Life Insurers and building on the researchers’ 2024 analysis, stress-tests four distinct retirement income strategies across varying wealth levels, health statuses, risk preferences, and market conditions. The conclusion: partial annuitization outperforms in nearly every scenario examined.

The Four Strategies Tested

The research examines retirement income through four distinct lenses, each representing a real approach that retirees use or consider.

Pure systematic withdrawals — the approach most commonly associated with the 4% rule — involve drawing a set percentage from an investment portfolio each year, adjusting for inflation. The portfolio stays fully invested, providing flexibility and potential for growth, but income is never guaranteed. A bad sequence of returns early in retirement, or a retirement that runs longer than expected, can deplete the portfolio before the retiree runs out of life.

Full annuitization involves converting all retirement savings into a guaranteed lifetime income stream. Income is maximized and completely predictable, with no exposure to market performance or longevity risk. But the trade-off is significant: liquidity disappears, and nothing passes to heirs at death.

Partial annuitization via one-time purchase converts a meaningful portion of savings into a guaranteed annuity at the point of retirement, with the remainder kept in an invested portfolio from which withdrawals are taken as needed. This approach creates a guaranteed income floor while preserving flexibility on the remaining assets.

Partial annuitization via gradual purchase takes a phased approach — converting assets into annuity income incrementally over the first decade of retirement rather than all at once. This reduces the risk of locking in annuity rates at an unfavorable moment and allows the guaranteed income base to build over time.

What the Research Found

Across almost every scenario tested, both forms of partial annuitization produced better outcomes than the alternatives. The finding held regardless of the retiree’s wealth level, health status, risk preference, or the market conditions assumed in the model.

The pure withdrawal strategy — the 4% rule and its variants — consistently left retirees more exposed to the two risks that most threaten retirement security: longevity risk and sequence-of-returns risk. A retiree who withdraws from a portfolio can run out of money if markets decline early in retirement or if they live significantly longer than average. The portfolio provides no floor — only the hope that returns will cooperate and the math will work out.

Full annuitization performed well on income stability — it is the only strategy that completely eliminates longevity risk — but its elimination of liquidity and bequest potential made it the right choice only in specific circumstances. For most retirees, the loss of access to remaining assets is a genuine and rational concern, and full annuitization does not address it.

Partial annuitization captured the core advantages of both approaches: a guaranteed income floor that covers essential expenses regardless of market performance, combined with an invested portfolio that provides liquidity, growth potential, and the ability to leave assets to heirs. The research describes this as “splitting the difference” — and the data shows that this split consistently produces better outcomes than choosing one extreme or the other.

Why Withdrawal Strategies Fall Short

The 4% rule was developed in the 1990s as a guideline for sustainable portfolio withdrawals over a 30-year retirement. At the time, it was a reasonable framework — and it remains a useful starting point for conversations about retirement income. But it has significant limitations that the Pang-Warshawsky research makes explicit.

First, the 4% rule provides no guarantee. A withdrawal rate that is sustainable under average market conditions may not be sustainable under poor conditions — and the sequence in which returns occur matters as much as the average. A 20% market decline in the first year of retirement has a disproportionately negative impact on a portfolio from which withdrawals are being made, because assets are depleted at depressed prices before they have a chance to recover.

Second, the 4% rule was calibrated for a 30-year retirement. As life expectancies extend, a retirement that runs 35 or 40 years faces a meaningfully higher risk of portfolio depletion even under the original assumptions. The math that worked for a 65-year-old in 1994 does not automatically work for a 65-year-old in 2026.

Third, the 4% rule provides no protection against the behavioral risk of withdrawing too much during market downturns. When portfolio values fall, the temptation — or necessity — to continue taking withdrawals means selling at depressed prices, which accelerates depletion and makes recovery harder. An annuity income stream does not face this problem. It pays the same amount regardless of what markets do.

SECURE 2.0 Changes the Tax Calculus

One of the more practical findings in the study involves tax treatment. Prior to SECURE 2.0, the minimum distribution rules created a tax disadvantage for partial annuitization strategies — total distributions from a partially annuitized account were taxed more heavily than distributions from a pure withdrawal strategy. This extra tax burden was a meaningful friction that reduced the net benefit of partial annuitization for many retirees.

SECURE 2.0 eliminated that disadvantage. The legislation removed the extra layer of taxation on annuity distributions from qualified retirement accounts, making partial annuitization strategies tax-equivalent to pure withdrawal strategies in most cases. This change does not apply retroactively, but for retirees and near-retirees evaluating their options today, the tax argument against partial annuitization has been substantially weakened.

Delaying Social Security Improves Every Strategy

The study also examined the interaction between retirement income strategies and Social Security claiming decisions — and found a consistent pattern: using retirement savings as a bridge to delay Social Security claiming until age 70 improved outcomes across every income strategy tested.

Social Security provides a guaranteed, inflation-indexed income stream for life — the closest thing the U.S. retirement system has to a universal annuity. By delaying claiming to age 70, retirees lock in the maximum possible benefit, which is approximately 77% higher than the benefit available at age 62. That higher benefit reduces dependence on portfolio withdrawals, provides stronger inflation protection, and mitigates the risk of outliving assets.

When combined with partial annuitization, delayed Social Security claiming creates a powerful two-layer guaranteed income structure: Social Security provides an inflation-indexed floor, and the annuity provides additional guaranteed income on top of it. Together, they can cover essential expenses without relying on portfolio performance — which is precisely what the research shows produces the best long-term outcomes.

Strategy	Income Guarantee	Liquidity	Longevity Protection	Overall Outcome
Pure withdrawal (4% rule)	None	Full	Weak	Underperforms in most scenarios
Full annuitization	Complete	None	Complete	Best income, no flexibility
Partial annuitization — one-time	Partial (essential expenses)	Partial	Strong	Outperforms in nearly all scenarios
Partial annuitization — gradual	Partial (builds over time)	Partial	Strong	Outperforms in nearly all scenarios

What This Means for Retirees Without a Pension

The Pang-Warshawsky research is framed explicitly around the reality that most Americans retiring today do not have a traditional pension. For prior generations, pensions provided the guaranteed income floor that the research shows is so valuable — a predictable monthly payment that arrived regardless of market conditions and lasted as long as the retiree lived. That floor is gone for most private-sector workers.

Partial annuitization, combined with delayed Social Security claiming, can reconstruct that floor. The combination creates a guaranteed income base — Social Security plus annuity income — that covers essential expenses and does not depend on portfolio performance. The remaining savings stay invested, available for discretionary spending, unexpected costs, healthcare, and legacy goals.

This is not a one-size-fits-all solution. The research acknowledges that optimal strategies vary by wealth level, health status, retirement age, and personal preferences. A retiree with significant health concerns may reasonably weigh the trade-offs differently than one in excellent health. A retiree with strong bequest goals may want to limit the proportion of assets converted to annuity income. These are real considerations — and they argue for partial annuitization’s flexibility, not against it.

What the research does not support is the default assumption that a withdrawal strategy alone is sufficient. The evidence, tested across scenarios, says otherwise. For retirees navigating retirement without a pension, guaranteed income is not a luxury add-on. It is the missing piece that makes the rest of the plan work.

Source: ACLI Impact, covering research by economists Gaobo Pang and Mark Warshawsky. Read the original article.