Partial Annuitization Can Outperform the 4% Withdrawal Rule

The 4% rule has been a widely used benchmark in retirement income planning for decades. The concept is straightforward: withdraw 4% of your portfolio in the first year of retirement, then adjust for inflation each year going forward. The rule was designed to provide a sustainable income over a 30-year retirement without depleting savings.

But a new report from TIAA raises an important question: what if a different approach could generate more income from day one — and provide greater stability throughout retirement? The answer, according to the report, involves partial annuitization.

What Partial Annuitization Means

Partial annuitization refers to converting a portion of retirement savings into a guaranteed lifetime income stream, while keeping the remainder invested for continued growth and flexible withdrawals. It is not an all-or-nothing decision.

This approach differs from full annuitization, where an individual converts all savings into an annuity. Partial annuitization allows retirees to maintain liquidity and flexibility on a portion of their assets while creating a reliable income floor on the rest — combining the predictability of guaranteed income with the optionality of a traditional portfolio.

The Numbers Behind the Argument

TIAA illustrates the concept with a concrete example. Consider a 67-year-old retiree with $1 million in retirement savings.

Under a standard 4% withdrawal strategy applied to the full balance, that retiree would receive $40,000 in income in the first year of retirement. Now consider an alternative: annuitize one-third of the savings — $333,333 — into a guaranteed lifetime income product, and apply the 4% rule only to the remaining two-thirds. According to TIAA’s analysis, this approach would result in approximately $51,867 in first-year income.

That is a difference of nearly $12,000 in the first year alone — roughly a 30% increase in income — while still maintaining a significant portion of savings in a flexible account.

Strategy	Assets Annuitized	First-Year Income (Age 67, $1M)
4% rule only	None	$40,000
Partial annuitization + 4% withdrawal	One-third ($333,333)	$51,867

The Volatility Argument

Beyond the income comparison, TIAA makes a second case for annuities as a tool for managing market volatility during the drawdown phase of retirement. This is a period that receives less attention than accumulation, but carries its own distinct risks.

When a retiree is drawing down a portfolio, poor market returns early in retirement can have a compounding negative effect — depleting assets faster and reducing the base from which future returns are generated. This is known as sequence-of-returns risk, and it is one of the more significant and underappreciated challenges in retirement income planning.

An annuity income stream is not subject to sequence-of-returns risk. Because the income is guaranteed regardless of market performance, it provides a stable foundation that does not fluctuate with market conditions. Retirees who have a guaranteed income floor are less dependent on portfolio withdrawals during market downturns, giving their invested assets more time to recover.

As TIAA notes, retirees with guaranteed income can depend on that stream regardless of what is happening in markets — geopolitical events, interest rate movements, or broader economic conditions do not affect the income that the annuity delivers.

What the Urban Institute Research Adds

The report draws on research from the Urban Institute to reinforce the case for partial annuitization. The Urban Institute describes annuities as financial insurance — offering a guaranteed stream of income for life. It also acknowledges that annuities are not a universal fit: liquidity needs, fees, inflation sensitivity, and personal risk tolerance all factor into whether and how an annuity makes sense for a given individual.

But the Urban Institute’s framing aligns with TIAA’s core argument: even partial annuitization — converting a modest portion of savings into guaranteed income — can provide meaningfully greater stability than a pure withdrawal strategy. The key is not choosing between a portfolio and an annuity, but thinking carefully about how much of each a retiree needs to meet their goals.

How Annuities Fit Into a Broader Income Plan

Target-date funds also play a supporting role in the picture TIAA presents. The Urban Institute notes that these funds help reduce volatility exposure as investors approach retirement by gradually shifting allocations toward less volatile assets. They serve a risk-management function during accumulation and the early stages of drawdown.

But target-date funds do not solve the income problem on their own. They reduce volatility exposure but do not create a guaranteed income stream. Partial annuitization addresses that gap directly — providing the income floor that a portfolio, no matter how well managed, cannot guarantee on its own.

Thinking About Income, Not Just Assets

The broader implication of TIAA’s report is a shift in how retirement success should be measured. A large account balance is not the same as a reliable retirement income. What matters at retirement — and throughout it — is whether there is enough predictable income to cover essential expenses without depending entirely on market performance.

Partial annuitization is one way to bridge that gap. It does not require giving up flexibility or converting everything to an annuity. It requires identifying what portion of savings needs to generate guaranteed income, and structuring the rest of the plan around that foundation. For many retirees, that combination may produce both more income and more confidence than a withdrawal strategy alone.

Source: TIAA, via NAPA-Net. Read the original release.