Annuities vs. the 4% Withdrawal Rule: Which Strategy is Best for Retirement?
Dre Griggs
Retirement Sage | Tax-Efficient Strategies & Legacy Building | Using Wisdom to Simplify Decisions | Wealthy Retirement Creator
Today, we discuss annuities versus the 4% withdrawal rule to determine which is a better retirement strategy. For this, we'll use a case study featuring Arnold. We'll walk through his situation to see which option makes the most sense for him.
Arnold’s Financial Situation
Arnold has $100,000 in cash, $3,300 in monthly expenses, $2,700 from Social Security, and $2,300 in disability income until he retires at 65. Arnold’s dilemma is deciding what to do with his money—specifically, whether he should withdraw $174,000 from his 401(k). One option is placing it into a seven-year annuity with a 4.8% return. Arnold wants to know if this is the best use of his funds.
Evaluating the Annuity Option
If Arnold chooses the annuity, his $174,000 would grow to $241,600 by the end of the seven years. At that point, Arnold can decide to annuitize, which means converting the funds into a stream of lifetime income.
Deferred vs. Immediate Annuities
A deferred annuity offers flexibility—Arnold can choose when to convert it, whether after seven years, three years, or even another year. However, most deferred annuities require a two-year waiting period before payouts begin. An immediate annuity starts payouts the next month after funding.
Comparing Annuities and the 4% Withdrawal Rule
Using the 4% withdrawal rule with the same $174,000 invested in the stock market and assuming an 8% return, Arnold's investment would grow to $298,000 over seven years. That’s $50,000 more than the annuity.
The 4% rule offers more flexibility than an annuity, allowing Arnold to withdraw additional funds when needed, unlike the restricted access typical of annuities.
Pros and Cons of Annuities
Pros
Cons
The Three-Bucket Strategy for Retirement
Bucket 1: Short-Term Cash Reserve
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Arnold can move $80,000 of his $100,000 cash to this bucket, using the remaining $20,000 for other investments.
Bucket 2: Moderate-Risk Investments
Arnold could allocate $120,000 from the annuity to generate $6,000 annually. Combined with Social Security, this brings Arnold’s total income to around $39,000-$40,000 annually—enough to cover his $3,300 monthly expenses.
Bucket 3: Long-Term Growth
With two years of expenses secured in Bucket 1 and stable income from Bucket 2, Arnold can invest more aggressively in Bucket 3 without worrying about market downturns.
Benefits of a Blended Approach
The three-bucket strategy offers both security and growth:
Arnold can focus on growth without fear of market fluctuations disrupting his monthly cash flow. If markets perform well, Arnold can transfer profits from Bucket 3 to replenish the other buckets.
Annuities vs. 4% Rule: Which is Right for You?
The 4% rule provides flexibility and growth potential but comes with market risk and requires management. Annuities offer peace of mind through guaranteed income but lack inflation protection and limit access to funds.
A blended strategy—combining both options—can offer the best of both worlds, providing security with the potential for growth.
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Until next time,
Stay safe and enjoy life.
Dre Griggs
Financial Advisor @ Bancnotes Wealth Management
1 个月Dre Griggs great work. As a financial advisor myself there are not many that I would choose to advise me, but Dre Griggs would be my first call. Keep putting this great education and information out there.