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For many retirees, building up savings is only half the battle. The bigger hurdle is determining how to turn those savings into a steady income stream that lasts throughout retirement. And, that question is only becoming more pressing, as issues like rising medical expenses, sticky inflation and longer life spans are making it tough for retirees to fully ensure that they have enough put away to cover all of their expenses. Amid this landscape, about 64% of retirees say they’re more concerned about running out of money than they are about dying, according to the 2025 Annual Retirement Study from Allianz Life.
Traditional rules of thumb can offer some guidance. For example, the 4% withdrawal rule suggests that you should withdraw 4% of your retirement portfolio each year to avoid running out of money. However, that guideline was built on historical market assumptions that may not hold up in today’s environment, given that interest rates and markets don’t look like they did when those rules were created. That’s why many retirees are looking for fresh approaches to securing their retirement strategies.
And, one of the more recent strategies that’s gaining traction is known as the “rule of thirds.” This rule could come in handy for retirees who are concerned about ensuring that their money lasts for their full retirement, but before you try and adhere to it, it’s important to fully understand how it works and whether it aligns with your needs.
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What is the rule of thirds for retirement?
The rule of thirds for retirement is a strategic approach that aims to generate more immediate cash flow than relying solely on traditional withdrawal methods. Rather than simply drawing down from a diversified portfolio of stocks and bonds, this strategy involves converting exactly one-third of your total retirement savings into a guaranteed lifetime income product, most commonly a fixed annuity. Here’s how it works:
- One-third of your retirement savings goes into a product offering guaranteed lifetime income. This typically means buying a fixed annuity, which provides a steady paycheck for life, regardless of market performance. However, there may be other ways to achieve this.
- The other two-thirds of your retirement savings remain available. You then have the option to invest these funds for growth, apply the 4% withdrawal rule or use them to cover unexpected expenses.
By combining a pension-like income stream with accessible savings, the rule of thirds aims to strike a balance between security and flexibility. The core premise is that by securing a base level of guaranteed income through the annuity portion, you create a more stable financial foundation that can potentially allow for higher overall withdrawal rates from your combined retirement resources.
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What should retirees know about the rule of thirds?
While the rule of thirds offers a clear framework for retirement planning, you should keep these key points in mind when determining whether this rule works for your needs:
- The rule balances certainty with flexibility. Putting a portion of savings into an annuity ensures that some of your retirement income is guaranteed for life. This can help cover essentials like housing, food and health care. The other two-thirds of your savings provide options, including growth potential through investments and ready access to cash.
- It may reduce stress in volatile markets. When stock prices fall, retirees relying only on withdrawals may worry about drawing down too much too quickly. But if one-third of your savings is providing a guaranteed income, the impact of any future market downturns may feel less threatening.
- Liquidity comes with trade-offs. While the annuity provides stability, the money allocated there is locked in. That makes it important to keep the remainder of your retirement savings available for emergencies or large expenses. Without that, you could risk being too cash-strapped.
- It doesn’t eliminate market risk. The invested portion of your savings will still be subject to ups and downs with the economy. So, if you plan to take this route, you should make sure your portfolio is well-diversified and aligned with your risk tolerance.
- Timing matters. The payouts from an annuity depend heavily on factors like interest rates and your age at the time of the purchase. With rates higher now than they’ve been in recent years, annuities are offering stronger income guarantees, but locking in too early or too late can change the outcome.
- It may not fit everyone. Those who already have enough guaranteed income through Social Security or pensions may not need an annuity. Retirees with modest savings may also feel uncomfortable locking away a third of their nest egg. Your personal circumstances should guide the choice.
The bottom line
The rule of thirds is one way to rethink retirement income, blending the security of annuities with the flexibility of market-based withdrawals. By dedicating a portion of your savings to securing guaranteed lifetime income, this rule can reduce the financial uncertainty during retirement and potentially increase what you’re able to spend in the early years. This strategy won’t be right for everyone, of course, but for retirees concerned about making their money last, it can be a compelling framework to consider, especially at a time when annuity payouts remain strong.