Annuity or the 4 Percent Rule: Which Gives More Secure Retirement Income? (2026)

Annuity or the 4% rule: which gives more secure retirement income?

Key numbers

Annuity figures are closed-form arithmetic at illustrative payout rates — not quotes from any insurer. Survival figures are read from the SSA period life table already embedded behind this site’s Social Security claiming research. Every 4%-rule figure is quoted from the linked study and not re-simulated here.

Run the $1M / $40,000 / 30-year plan in the free planner →

Opens the Monte Carlo planner prefilled with the plan the quoted stress test simulates — retire at 65, plan to 95, $1,000,000, $40,000 a year, 45/15/40 US equity/international/bonds — so you can change the numbers and see the 4%-rule side for your own plan.

Two different contracts

The question is usually asked as if an annuity and the 4% rule were two settings of the same dial. They are not. A single-premium immediate annuity is a contract: capital is handed to an insurer, which pays a level amount for as long as the annuitant lives. The insurer pools many lives, so those who die early fund those who live long; that pooling is what lets the payout rate sit above what the same capital could safely produce on its own. In exchange the premium is gone — it cannot be spent, sold, or left to anyone — and in the life-only, level form studied here the payment never rises, so every year of inflation takes a slice of what it buys.

The 4% rule keeps the whole portfolio invested and draws 4% of the starting balance, raised for inflation each year. The income target is the same $40,000 on $1,000,000, but it is a plan, not a contract: whether the portfolio lasts depends on the sequence of returns it meets and on how long the retiree lives, and whatever is left belongs to the retiree or the estate. The annuity removes longevity risk and sequence risk and takes on inflation, liquidity and bequest; the 4% rule keeps inflation protection, liquidity and bequest and takes on longevity and sequence. The numbers below keep the four exposures visible side by side.

The annuity, at three illustrative payout rates

A life-only immediate annuity bought at 65 pays rate × premium at the start of each year the annuitant is alive. Three payout rates — 6.0%, 6.5%, 7.0% of the premium per year — bracket a plausible range for a 65-year-old; they are stated as assumptions, not quoted from any insurer, and the arithmetic reproduces from the rate alone. Actual rates vary by insurer, age, sex, prevailing interest rates and contract features. The real-value columns deflate each year’s payment by the inflation accumulated since year 1 (year 1 is paid in full; year t is divided by (1 + inflation)^{t − 1}).

Illustrative payout rates; life-only, level nominal payment; no fees beyond those embedded in the rate, no taxes, no survivor benefit or guaranteed period (each of which would lower the rate). Real values assume a constant 2.5% (or 3.5%) a year.

Two things stand out. First, the payout rate sits well above 4% at every case — $60,000 to $70,000 per $1M against the 4% rule’s $40,000 — because the annuity spends the principal and pools mortality, where the 4% rule tries to keep the principal intact on most paths. Second, the level payment is a shrinking one in real terms: at 2.5% the 6.5% case’s $65,000 buys $40,659 of today’s goods in year 20 and $31,763 in year 30, a 51.1% loss of purchasing power; at 3.5% the year-30 figure is $23,969. From year 21 the 6.5% annuity’s real income is below the $40,000 the 4% rule plans to keep paying (year 18 at 6.0%, year 24 at 7.0%), and the premium that covered $40,000 in year 1 ($615,385) covers $25,021 of real spending by year 20.

How long the payments last

A life annuity’s value is inseparable from how long the annuitant lives, so the second input is a mortality table. This site’s Social Security claiming research already runs on the SSA 2022 period life table (Social Security Administration, Office of the Chief Actuary; public domain), and this study reads survival from the same table: the chance that a 65-year-old is still alive at each later age is the table’s number of survivors at that age divided by the number at 65.

Source: SSA 2022 period life table, as embedded behind When to claim Social Security if the 2033 reduction happens; expected number of annual payments from 65: 18.0 (men), 20.6 (women), 19.3 (blend), with the table truncated at 100 (0.9% of men and 2.6% of women are still alive there). Median age at death from 65: 83 (men), 85 (women).

The same distribution appears in Social Security at 70 beats 62 only 42% of the time, if you invest, which samples the SSA 2021 table from age 62 across 400,000 lifetimes and publishes a median age at death of 82 for men and 85 for women, with the middle half of lifetimes ending between 75 and 88 (men) and 78 and 90 (women). Read from the 2022 table used here, the same percentiles from 62 are 74 / 82 / 88 for men and 78 / 85 / 91 for women — the generator refuses to publish if any of the six differs by more than a year. That study’s remark that roughly a third of 62-year-olds never reach 80 reads as 35.6% on the blended 2022 table (41.2% of men, 30.0% of women).

Break-even: when the payments have returned the premium

Counting payments as they arrive, the annuity has paid back its premium in nominal dollars after 1 ÷ rate payments. Counting them in today’s dollars, each later payment is worth less, so the real break-even comes later. Both are shown with the age at which the decisive payment lands (the first payment is at 65) and the chance a 65-year-old is alive to collect it. The last column is the survival-weighted real income collected per $1 of premium at a 0% real discount rate — a mechanical property of the rate and the table, not a verdict on any contract’s pricing.

Break-even counts the smallest number of payments whose cumulative value reaches the premium; the age shown is 65 plus that count minus one. Expected income is truncated at age 100.

At 6.5% the annuity returns its premium in nominal terms by age 80 and in real terms by age 84; 45.9% of 65-year-old men and 58.1% of women get there. The spread across payout rates is 82 to 86 for the real break-even — one percentage point of payout rate is worth about 4 years of break-even. The chance of dying before the real break-even, 54.1% for men at 6.5%, is the annuity’s counterpart to the 4% rule’s chance of running out: it is not a loss of income while alive, but it is the outcome in which the estate would have been better off with the portfolio.

The 4% rule, as we measured it

None of the figures in this section are new. They are quoted from three QuantCalc studies that simulate the identical plan — $1,000,000, 60/40, $40,000 a year raised for inflation, 30 years from 65, no other income — and are linked so the full method and the open data can be read at the source.

Forward-looking forecasts: Does the 4% rule survive forward-looking forecasts? Six CMEs stress-tested

That study runs the plan 10,000 times under each of six published capital-market forecasts, holding volatility and correlations constant so that only the return assumption varies. Its 30-year results:

Quoted from the published dataset beside the stress test; nominal dollars at year 30 as published there. The five mainstream forecasts span 9.2%–21.5% of paths running out (Charles Schwab to Vanguard) and a median terminal balance of $339,503–$766,828 (Vanguard to J.P. Morgan); the 10th percentile is $0 under 5 of the six.

Timing luck: Retiring into a bear market: same plan, 46% failure vs 0%

That study resamples the 1928–2024 record in 5-year blocks, 50,000 times, and sorts the paths by what the first decade looked like. Pooled across all paths the plan fails 6.0% of the time with a median $1,823,819 left in real terms; when the first decade lands in the worst tenth of markets the failure rate is 45.6% and the median remainder $49,522; in the best tenth it is 0.0% with a median $5,355,467. The number to carry into the comparison is that the 4% rule’s risk is concentrated in the opening decade — the decade an annuity’s payment does not depend on.

What actually happened: The 4% rule across 123 historical retirement cohorts

Across 123 real 30-year start years (1871–1993) on a 60/40 portfolio, a constant 4% real withdrawal lasted the full 30 years in 95.9% of cohorts; the median cohort could have sustained 6.15%, and the hardest (1966) only 3.69%. History was kinder to 4% than the forward-looking forecasts are, and the gap between 4.1% historical shortfalls and 9.2%–21.5% forecast shortfalls is itself part of the answer: the safety of the 4% rule is an estimate that moves with the return assumption, while the annuity’s payment does not move with returns at all — only its purchasing power does.

Annuitise the essentials: the hybrid

A common middle course covers only essential spending with the annuity and runs the rest as a portfolio. Here the floor is $30,000 of the $40,000 target. The premium is the floor divided by the payout rate; the residual stays at market and must supply the other $10,000 in year 1 — a far lower withdrawal rate than 4%. But the floor is nominal and the target is real, so the portfolio’s share of the job grows every year; the last three columns show what it must supply in today’s dollars in years 10, 20 and 30 at 2.5%, and that amount as a share of the original residual before any growth of it.

The residual is not simulated here; the shares are the real top-up divided by the residual’s starting value, and say nothing about whether the residual grows enough to carry them.

At 6.5% the hybrid starts with a 1.86% draw on $538,462 — the kind of rate that survives every cohort and every forecast in the quoted studies — but by year 20 the portfolio must produce $21,234 of today’s dollars, 3.9% of its starting value, and by year 30 $25,340, 4.7%. The hybrid moves the sequence and longevity risk off the floor and onto the top-up, and moves the inflation risk onto the portfolio in a form that arrives late rather than early.

Side by side

Each row is one way to deploy the same $1,000,000 toward the same $40,000-a-year target. The annuity rows and the hybrid rows are this study’s arithmetic; the 4%-rule row is quoted.

Green rows carry no market or longevity shortfall on their stated nominal income; the red row is the quoted 4%-rule result. The hybrid’s residual is not simulated here.

The two failure modes, in plain words

How the annuity falls short

It does not stop while the annuitant is alive — that holds on every market path and every lifespan, and it is the whole point. It falls short in three other ways. It shrinks: the payment is level in nominal dollars, so at 2.5% the 6.5% case’s $65,000 is worth $40,659 in year 20 and $31,763 in year 30, and at 3.5% only $23,969; a retiree who annuitised exactly $40,000 of first-year spending is short $14,979 of real income by year 20. It is illiquid: the premium cannot be redeployed for a medical bill, a house, or a better rate later. And it ends at death: a 65-year-old man who dies before the age-84 real break-even, which 54.1% of them do at 6.5%, has collected less in today’s dollars than he paid, and the estate receives nothing from the contract. The payment is also a promise from an insurer rather than a Treasury obligation, backed by that insurer’s reserves and by state guaranty associations within their limits.

How the 4% rule falls short

It can run out before year 30 — in 9.2%–21.5% of paths under the five mainstream forecasts quoted above, 97.5% under the mean-reverting one, 6.0% pooled across resampled history and 45.6% when the first decade is in the worst tenth. And a 30-year horizon is itself a bet on longevity: 9.6% of 65-year-olds on the blended table are still alive at 95, when the quoted plan ends. When it does not fail, it usually leaves a good deal behind: a median $339,503–$766,828 at year 30 under the five forecasts, and a median $1,823,819 in real terms across the pooled historical resamples. It keeps the upside, it keeps the capital liquid, it keeps a bequest in most paths, and its income keeps pace with inflation by construction. Its risk is a slope inside the horizon, steepest in the first ten years, plus a wall at the end for anyone who outlives the plan.

What it means

• The annuity converts capital into a lifetime payment at a rate above 4%. $60,000 to $70,000 per $1M at the three illustrative rates, on every market path and for every lifespan; the trade is the premium itself — gone, illiquid, and returned only through payments.
• The payment is level; its value is not. At 2.5% the 6.5% annuity’s income is worth $40,659 by year 20 and $31,763 by year 30; the premium that covered $40,000 in year 1 covers $19,546 of real spending in year 30.
• Longevity decides the annuity’s value and the 4% rule’s exposure alike. 41.8% of 65-year-old men and 54.1% of women reach 85; 6.5% and 12.7% reach 95. The annuity pays through all of it; a 30-year plan stops at 95.
• The 4% rule is a bet with a quoted price. 9.2%–21.5% of paths run out under five mainstream forecasts and 97.5% under the outlier, against a median $339,503–$766,828 left at year 30 when it works and an income that keeps pace with inflation throughout.
• The hybrid relocates the risks rather than removing them. Annuitising a $30,000 floor at 6.5% leaves $538,462 at a 1.86% year-1 draw; by year 30 the portfolio must supply $25,340 real, because the floor it sits on has shrunk. Whether the residual grows into that is a Monte Carlo question this page does not answer.

CC-BY-4.0 — free for any use including republication and journalism, with attribution to QuantCalc Research.

Methodology

Assumptions and limitations

• Illustrative payout rates, not quotes. 6.0%, 6.5%, 7.0% are assumptions chosen to bracket a plausible range for a 65-year-old buying a life-only contract. Actual rates differ by insurer, by age and sex, with prevailing interest rates, and with every added feature (a guaranteed period, a survivor benefit, an inflation rider) — each lowers the rate. Re-run the arithmetic with the rate you are actually offered.
• Level nominal payout. The contract studied never increases. Contracts with a stated annual increase or a CPI link exist and start from a lower payment; they are outside this page.
• Constant inflation. 2.5% and 3.5% a year, every year. Realised inflation varies, and a retiree’s own basket may not track CPI-U.
• Period life table, single lives. The SSA period table describes mortality at each age in one calendar year; annuity buyers as a group live longer than the population (insurers price on annuitant tables), which makes the survival figures here conservative for an actual purchaser. Joint-life contracts, spousal needs and health are not modeled.
• Truncation at 100. The embedded table ends at 100; expected payments and expected income omit the small tail beyond it (0.9% of men, 2.6% of women still alive).
• Two SSA tables. The survival figures use the 2022 period table embedded behind the 2032 claiming study; the claiming Monte Carlo quoted for its percentiles used the 2021 table. The generator checks the two agree within a year at p25, median and p75 for both sexes, and the values are shown side by side above.
• Taxes and fees. Neither side of this page is after tax; annuity payments from non-qualified funds are partly taxable under the exclusion ratio, and the quoted 4%-rule studies are pre-tax. No fee is modeled beyond what an illustrative payout rate implicitly embeds.
• Insurer credit. “No shortfall while alive” is a statement about the contract’s mechanics, not about the issuing insurer’s solvency, which state guaranty associations back only within their per-person limits.
• The 4%-rule figures are model outputs. They depend on the forecast source, the sampling method and the 60/40 allocation stated in each quoted study, and they are nominal or real as each study reports them (nominal in the stress test, real in the sequence-of-returns study). They are not a prediction.
• The hybrid’s residual is not simulated. This page states what the residual would need to supply each year; it makes no claim about how likely that is.
• Not advice. Educational research comparing the mechanics of two ways to draw retirement income; not financial, tax, insurance or legal advice, and not a recommendation for or against any contract or product.

Frequently asked questions

Which gives more secure retirement income, an annuity or the 4% rule?

They are secure against different things. A life-only immediate annuity removes longevity risk and sequence-of-returns risk from the money it covers: at an illustrative 6.5% payout rate, $1,000,000 buys $65,000 a year for life on every market path and for every lifespan. What it does not protect is purchasing power: that $65,000 is worth $40,659 in today's dollars in year 20 and $31,763 in year 30 at 2.5% inflation, and the premium is gone at death. The 4% rule on the same $1M, 60/40, 30-year plan keeps the income inflation-adjusted and the capital liquid, but ran out of money in 9.2% to 21.5% of 10,000 simulated paths under the five mainstream forecasts in QuantCalc's stress test, and in 97.5% under the mean-reverting outlier. Which is "more secure" depends on whether the risk you care about is outliving the money, a bad first decade, or inflation.

How much income does a $1 million immediate annuity pay at 65?

At the three illustrative payout rates in this study, $60,000 a year at 6.0%, $65,000 at 6.5% and $70,000 at 7.0%, level in nominal dollars for life. These are assumptions chosen to bracket a plausible range for a 65-year-old buying a life-only contract, not quotes; actual payout rates vary by insurer, age, sex, prevailing interest rates and any added features such as a guaranteed period or a survivor benefit, each of which lowers the rate.

How much does inflation erode a level annuity payment?

At 2.5% a year, a payment that starts at $65,000 is worth $52,047 in today's dollars in year 10, $40,659 in year 20 and $31,763 in year 30, a loss of 51.1% of its purchasing power by the last year of a 30-year retirement. At 3.5% the year-20 and year-30 values are $33,810 and $23,969. The erosion is the same proportion at every payout rate.

What is the break-even age on a life annuity bought at 65?

Counting cumulative income in today's dollars at 2.5% inflation, the payments first add up to the premium after 20 payments at a 6.5% payout rate, that is by age 84 (22 payments, age 86, at 6.0%; 18 payments, age 82, at 7.0%). In nominal dollars the break-even is earlier: 16 payments, age 80, at 6.5%. From the SSA period life table, a 65-year-old man reaches age 84 with probability 45.9% and a woman with probability 58.1%.

How likely is a 65-year-old to reach 80, 85, 90 or 95?

From the SSA 2022 period life table this site already uses for its Social Security claiming research, a 65-year-old man reaches 61.6% to 80, 41.8% to 85, 21.3% to 90, 6.5% to 95; a 65-year-old woman reaches 72.0% to 80, 54.1% to 85, 32.3% to 90, 12.7% to 95. The expected number of annual payments from 65 is 18.0 for a man and 20.6 for a woman (table truncated at 100). QuantCalc's claiming Monte Carlo, which samples the SSA 2021 table from age 62, publishes a median age at death of 82 for men and 85 for women, with the middle half of lifetimes ending between 75 and 88 (men) and 78 and 90 (women).

Does annuitising only the essentials get the best of both?

It splits the two risks rather than removing either. Annuitising a $30,000 floor costs $461,538 at a 6.5% payout rate and leaves $538,462 at market, from which the remaining $10,000 of the $40,000 target is a 1.86% withdrawal in year 1. Because the floor is nominal, the portfolio's share of the real target grows: by year 20 at 2.5% it must supply $21,234 in today's dollars, 3.9% of the original residual, and by year 30 $25,340. This study does not simulate the residual, so it makes no claim about how often it keeps up.

Are the 4%-rule failure rates here new simulations?

No. Every 4%-rule figure on this page is quoted from QuantCalc's published Monte Carlo studies with a link: the forward-looking stress test (success by forecast source, terminal wealth), the sequence-of-returns study (a pooled 6.0% failure rate that rises to 45.6% when the first decade lands in the worst tenth of markets) and the historical-cohort study (4% lasted 30 years in 95.9% of 123 start years). This page adds the annuity arithmetic, the survival figures and the comparison; it re-runs nothing.

Related research

Changelog

• v2026.1 (2026-09-07) — initial release. Three illustrative payout-rate cases (6.0%, 6.5%, 7.0%), real values at 2.5% and 3.5%, nominal and real break-even ages, the $30,000-floor hybrid, survival from 65 read from the SSA 2022 period life table and cross-checked against the claiming Monte Carlo’s published percentiles; 4%-rule figures quoted from three published QuantCalc studies.

Last updated 2026-09-07. Dataset license: CC-BY-4.0. Mortality data: SSA 2022 period life table (public domain). QuantCalc is an independent retirement-planning research project. Not affiliated with, endorsed by, or sponsored by the Social Security Administration, any insurer, or any referenced firm including BlackRock, J.P. Morgan, Vanguard, GMO, Schwab or Invesco; forecast names identify the published capital-market assumptions quoted in the linked study, and all trademarks belong to their respective owners. Educational research, not financial, tax, insurance or legal advice.

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  title  = {Annuity or the 4 Percent Rule: Which Gives More Secure Retirement Income? (2026)},
  author = {{QuantCalc Research}},
  year   = {2026},
  url    = {https://quantcalc.app/research/annuity-vs-4-percent-rule-2026/},
  note   = {Accessed <date>}
}