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July 13, 2022
What Is the 4% Rule for Retirement and How Can Annuities Help Me Prepare for the Future?

What Is the 4% Rule for Retirement and How Can Annuities Help Me Prepare for the Future?

When it comes to retirement, you may hear a lot of different ideas for how to make your retirement funds last longer. And since the average retirement can last 20-30 years, it’s important to have a plan in place to address this.

One popular strategy you may have heard about is the 4% rule. But what does that mean?

Today, we’re exploring the 4% rule. What it is, how it works, where it may fall short, and how annuities may help fill a gap in your retirement income.

As we get going, please bear in mind that this is not meant as individual financial advice. The information we’re sharing is intended to help educate. Your situation is unique. You should always receive a personalized approach that takes your circumstances into account before making financial or retirement decisions. For that, we invite you to contact us for a free consultation.

What Is the 4% Rule?

The 4% rule is a practice used by some retirees to determine how much money they should withdraw from their retirement funds each year. The idea is that by using an approach like the 4% rule, you may have a steady income stream each year and a good likelihood of not outliving your money during your retirement.

Historically, a 401k or other Individual Retirement Account (IRA) earns an average of 6% per year, assuming the investment portfolio contains about 60% equities (or stocks) and 40% fixed income products (or bonds).

Using the 4% rule, you should be able to take a 4% distribution of your investment capital the first year of your retirement, adjust that amount for inflation each subsequent year, and not deplete your savings.

Now, that doesn’t mean that 6% is guaranteed. But for the sake of this example, we’re going to stick with it.  

How the 4% Rule Works

When looking at how the 4% rule works, we should first look at retirement needs. One rule of thumb for figuring out your retirement needs is to multiply your annual salary x 25. Another approach is to create a budget based on what you anticipate your monthly or annual needs to be, remembering to factor in unexpected expenses like a new car or roof replacement.

Now, let’s look at the 4% rule with the assumption that you have $500,000 in your retirement accounts. $500,000 x .04 = $20,000  

According to the 4% rule, $20k is the amount you can take out the first year. Because, theoretically, your diversified investment portfolio provides a return of 6%, you’re gaining back the 4% through your investments, and adding 2%. This is the annual process that helps ensure your funds will last through retirement.  

How Much Money Do You Need to Amass Before Retirement?

So, how much money do you need before retirement? This is a question only you can answer.

The 4% rule is a helpful tool for recognizing how to stretch your savings. However, other factors — such as where you live, the lifestyle you want to enjoy, and how much debt you have — all play an important role in determining how much you should have saved prior to retirement.  

The Problem With the 4% Rule

There is one major problem with the 4% rule: it does not account for high inflation or extreme market changes.

When the idea was popularized in the 1990s, $20,000 went a lot farther than it does today. You also may want to enjoy a retirement lifestyle that comes with a bigger budget.

Additionally, as people get farther into their retirement years, some may change their investment mix to be more conservative, meaning their actual return on their investments may no longer average 6%.  

Economists are also divided on this rule and the amount you may actually need to take, especially amid modern inflation concerns.

Even the man who invented the 4% rule, William Bengen, says that adjustments to the 4% rule may need to be made to keep up with our modern economy.

Despite conflicting opinions, one thing is clear: if you haven’t accumulated enough savings in your traditional retirement accounts to live off 4%, you may need more.

That’s where additional income sources come into play, with annuities being one of the choices available. Annuity accounts can help fill the gap between other sources of guaranteed retirement income — like Social Security or pensions — and provide a reliable income stream in retirement.

Need an annuity refresher? Check out this Medicare Allies article that explains how they work in more depth.

How Can Annuities Help With the 4% Retirement Rule?

Annuities can help diversify your income and balance the risk of your overall investment portfolio. Diversification is a great approach to helping prevent income erosion in your later years. It can also be sustained for longer, which is great because most people live on their retirement income for 20+ years.

For those looking at ways to maximize their income throughout their retirement years, a Fixed Index Annuity (FIA) with lifetime income perks can be a good solution.

Purchasing an annuity gives you additional earnings to supplement your income. And by choosing a lifetime plan, you would be ensuring that income stream continues well into the future.


The 4% rule is a good approach for calculating how to draw down your retirement funds, but you have to ensure you have enough funds saved to meet your retirement needs.

With inflation and unforeseen variables out there, it’s a good idea to review your financial status and retirement plans regularly so you are prepared for the years ahead. Our annuity offerings can help you prepare for the future and sustain your standard of living well into your golden years.

Contact us for a free consultation to learn how adding annuity income to your retirement planning might be right for you. We are happy to provide an illustration of an annuity that can provide both accumulation and lifetime income.


This information is provided only as a general source of information and is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the particular needs of an individual investor. Some annuity products are subject to investment risks, including possible loss of principal invested. Past performance is not indicative of future results and there can be no assurance that the future performance of any specific investment, investment strategy, or product will be profitable, equal to any corresponding indicated historical performance level(s), or suitable for your portfolio or individual situation. Please contact your financial advisor or investment professional before making any investment decisions or if there are changes in your personal or financial situation or investment objectives for the purpose of reviewing previous recommendations or services.

Luke Hockaday
Luke Hockaday
Luke Hockaday is a Customer Success Rep here at Senior Allies. Luke has been helping Medicare-eligible clients with their insurance and retirement-planning needs since 2011. Luke is passionate about 3 things, and 3 things only: senior insurance, football, and food!

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