The 4% Rule vs a Paycheck for Life: Two Ways to Not Run Out of Money

The 4 percent rule is a research-based estimate of how much you can withdraw from your own portfolio each year without running out over a 30-year retirement. A lifetime annuity payout is a contractual payment that continues as long as you live. One keeps your money and your risk. The other trades both away for certainty.

There are two ways to make sure a jar of money lasts. You can ration it yourself, taking a measured amount each month and adjusting when the jar looks low. Or you can hand the jar to someone who agrees to send you a check every month for the rest of your life, whatever happens to the contents.

The first approach is the 4 percent rule and its descendants. The jar stays yours, the leftovers go to your heirs, and you carry every risk: markets, inflation, and the possibility of living longer than the plan assumed. The second approach is a lifetime income annuity. The check arrives regardless, and the jar is no longer yours.

Neither one is the right answer for everyone, and the industry does both sides a disservice by pretending otherwise. What follows is the honest comparison, including the one distinction that causes more confusion than anything else in retirement income: a withdrawal rate and a payout rate are not the same kind of number, and comparing them directly will mislead you.

What is the 4 percent rule?

The 4 percent rule says you can withdraw 4 percent of your portfolio in the first year of retirement, adjust that dollar amount for inflation each year after, and have a high likelihood of the money lasting 30 years. It comes from a specific piece of research, not from an industry convention.

That last point is why the figure has moved around ever since. It is an output of assumptions, and the assumptions are the argument.

Is the 4 percent rule dead?

No, but the number is not fixed, and current research from independent firms puts the starting figure below 4 percent for someone retiring today. These are third-party research findings about historical and modeled outcomes. They are not AnnuaLife projections and not a forecast of what will happen to your money.

Morningstar’s research series “The State of Retirement Income: 2025” put the base-case safe starting withdrawal rate at 3.9 percent for someone retiring in 2026, up from 3.7 percent in the prior year’s edition. That base case assumes a 30-year horizon, a 90 percent probability of ending the period with money left, and a portfolio holding roughly 30 to 50 percent in equities with the rest in bonds and cash. Morningstar also found that flexible approaches, such as adjusting spending with market performance, delaying Social Security, or using Treasury inflation-protected securities, could support starting rates as high as 5.7 percent.

So the rule is not dead. It has become what it always should have been: a starting estimate that you revisit, rather than a setting you choose once.

What is the difference between a withdrawal rate and a payout rate?

A withdrawal rate is the percentage of your own money you spend each year. A payout rate is the percentage of your premium an insurer pays you each year, and a large part of that payment is your own principal coming back to you. They are not comparable numbers, and treating them as if they are is the single most common error in this comparison.

How do the two approaches compare?

They differ on almost every dimension that matters, and the differences are trade-offs rather than advantages. Here is the honest side-by-side.

What does the math look like on $500,000?

The two produce very different first-year incomes, and understanding why is more useful than the comparison itself. Here is the arithmetic with current, dated inputs.

The annuity’s first-year income is roughly double, and that gap is not evidence that one approach wins. It is the visible price of the trade. The higher payment exists because you gave up the principal, gave up the upside, gave up access, and gave up the inheritance. The portfolio’s lower withdrawal exists because you kept all four.

The comparison also shifts with time. Payout rates rise with age, since the insurer expects to make fewer payments. On the same July 29, 2026 board, a 70-year-old man saw roughly $754 per month per $100,000 and a 75-year-old about $882. A withdrawal rate, meanwhile, can also rise with a shorter horizon, since a 20-year plan supports more than a 30-year plan. Both approaches get cheaper the later you start them.

Do I have to pick one?

No, and most people should not. The common professional approach is partial: cover essential expenses with lifetime income and run a withdrawal strategy on the rest.

• Cover the floor, invest the rest. Use lifetime income only for the essential spending that Social Security does not already cover, then apply a withdrawal strategy to the remaining portfolio. This is the income floor approach, and it is the most common way the two tools coexist.
• Delay Social Security first. Social Security is inflation-adjusted lifetime income already, and increasing it by delaying is usually the cheapest lifetime income available.
• Ladder purchases across years. Buying income in tranches rather than all at once spreads out your exposure to the payout rates available on any single day.
• Consider a deferred structure. An income rider on a deferred contract, or income starting later in life, targets the tail risk specifically. Our page on lifetime income riders covers how those work and what they cost, and the income rates board publishes dated illustration figures for them.

The useful question is never “which one.” It is “how much of my spending needs to be immune to markets and to how long I live.” That is an answer you can size.

What are the honest downsides of each?

Both approaches have real costs, and the failure modes are different in kind, not just in degree.

• The withdrawal approach can fail. A 90 percent success rate means the modeled plan ran out roughly one time in ten. The failure mode is the worst one available: running short late in life, when you have the fewest options.
• The withdrawal approach requires you to keep deciding. Adjusting spending in a downturn takes discipline that is easy to have in a spreadsheet and hard to have in a bad year.
• Sequence risk is concentrated at the start. A poor market in the first years of withdrawals does lasting damage. Our guide to sequence of returns risk explains why two retirees with identical average returns can end up in different places.
• The annuity approach gives up access permanently. Once income begins, the premium is generally not available as a lump sum, and there is no undoing the decision after the free-look period.
• A level annuity payment loses purchasing power. Twenty years of inflation is a real erosion of a fixed payment. Increasing options exist and lower the starting amount.
• The annuity depends on one company. Payments rest on the claims-paying ability of the issuing insurer. These contracts are not FDIC insured and carry no bank or government backing, which makes carrier financial strength part of the decision.
• Early death is a poor outcome on a life-only contract. Refund and period-certain features address this and reduce the monthly payment.

Moving forward

Rationing the jar yourself keeps every option open and hands you every risk. Handing the jar over buys certainty and closes the lid. Most retirees do best when they stop treating that as an either-or and start asking which of their expenses genuinely cannot flex.

The arithmetic is a good place to start. Our annuity payout calculator shows what a given amount of premium produces in monthly income at your age, so you can compare it against your own spending rather than against a headline percentage. Our page on income annuities explains the contract types, our guide to what $100,000 actually pays works a smaller example in detail, and if you want to understand the risk you would be insuring against, start with our guide to longevity risk.

Frequently asked questions