New Research Shows Full or Partial Annuitization Leads to Better Retirement Income Outcomes than 4% Rule

Retirement Experts Mark Warshawsky and Gaobo Pang find value of annuities applies widely in retirement income strategies

WASHINGTON, Oct. 29, 2024 /PRNewswire/ -- A strategic balance of annuities and systematic withdrawals, tailored to individual needs, preferences and market conditions, is the key to optimal retirement outcomes according to new research from economists Mark Warshawsky, Principal of ReLIA Strategies, former Deputy Commissioner for Retirement and Disability Policy at the Social Security Administration (2017-2021), and current Senior Fellow at the American Enterprise Institute, along with Gaobo Pang, Principal of Zillore LLC. This research was supported by the American Council of Life Insurers (ACLI).

The research models realistically the many uncertainties retirees face – investment returns, inflation, lifespan, and other individual circumstances, as well as the pricing of investment and annuity products, purchased at retail or institutionally. The findings unveil crucial insights for the future of retirement security for Americans:

• A strategy of systematic withdrawals from more liquid investments or cash savings combined with annuities outperforms other strategies for anyone retiring with $250,000 and more in savings – be that via a one-time purchase of an immediate annuity or a gradual, laddered process of annuitization.
• The popular 4% rule is problematic; while offering flexibility, this rule – withdrawing 4 percent of initial wealth, subsequently indexed to inflation each year – has significant failure rates at older ages and provides the lowest level of income. Conversely, annuities offer guaranteed lifetime income, safeguarding against market volatility and longevity risk.
• Those retiring with less than $250,000 most benefit by annuitizing higher portions of their savings, if not all.
• Overall, annuities maximize a steady flow of income, can reduce the strain on the remaining un-annuitized wealth, and accommodate wealth growth.

"The retirement landscape has undergone significant transformations in recent years with the traditional reliance on defined benefit plans shifting towards defined contribution plans and individual retirement accounts. These plans lack built-in means for a retiree to know how to best structure their regular withdrawals to fund their lives in retirement, and annuities fill that gap," said white paper co-author Mark Warshawsky. "There's more research to be done to explore the right mix for those who are partially retired, as well as into how annuitization can overlay with Social Security, other investment options, and different kinds of employer pension and retirement plans."

"The research in this paper has significant implications for policymakers and financial advisors, advocating for policies that support flexible, mixed-income strategies. It also underscores the importance of educating retirees about the benefits of diversifying their income sources in retirement," Warshawsky said.

ACLI supported the Warshawsky-Pang research. The paper is solely the responsibility of the authors.

As the retirement landscape continues to evolve, ACLI remains at the forefront, committed to supporting strategies that not only meet the financial needs of retirees but also enhance their quality of life.

To learn more about the Role of Life Annuities in Retirement Income Strategies you can find the White Paper HERE. Additional information on the study and other ACLI research projects can be found on the ACLI Research Hub.

Mark J. Warshawsky is a senior fellow at the American Enterprise Institute (AEI), where he focuses on Social Security and retirement issues, pensions, long-term care, disability insurance, and the federal budget. Before joining AEI, Dr. Warshawsky served as deputy commissioner for retirement and disability policy at the Social Security Administration. Earlier he served as a member of the Social Security Advisory Board, vice chairman of the federal Commission on Long-Term Care, and assistant secretary for economic policy at the US Department of the Treasury, where he had a key role in the development of the Pension Protection Act of 2006. He is the inventor of the life care annuity, a product integrating the immediate life annuity and long-term care insurance benefits. A popular speaker, Dr. Warshawsky has testified often before Congress. He is the author, coauthor, or coeditor of eight books, including Retirement Income: Risks and Strategies (MIT Press, 2011) and the ninth edition of Fundamentals of Private Pensions (Oxford University Press, 2010). He has a PhD in economics from Harvard University and a BA in economics from Northwestern University.

Gaobo Pang is an accomplished financial services executive who leads and enhances organizational capability in research, analytics, algorithm, optimization, and prototyping, in the collaborative pursuit of innovation to develop expert-guided yet technology-enabled planning and investment solutions. Prior, he served as the head of quantitative strategy of Smart USA where he supervised quantitative ideation and strategies in the technology-enabled solutions for lifelong financial planning and investment management, lead methodologies and algorithms for optimization, and build prototypes for software and platform innovations. Gaobo received the Best Article Award for his piece "Risk Management and Insurance Review" and was a finalist for the TIAA Paul A. Samuelson Award for Outstanding Scholarly Writing on Lifelong Financial Security.

The American Council of Life Insurers (ACLI) is the leading trade association driving public policy and advocacy on behalf of the life insurance industry. 90 million American families rely on the life insurance industry for financial protection and retirement security. ACLI's member companies are dedicated to protecting consumers' financial wellbeing through life insurance, annuities, retirement plans, long-term care insurance, disability income insurance, reinsurance, and dental, vision and other supplemental benefits. ACLI's 275 member companies represent 93 percent of industry assets in the United States.

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