A New Metric to Measure How Annuities Can Help Maximize Retirement Income

Most people know they need to save for retirement, but far fewer know where to start when it comes to figuring how much to spend once they get there. After all, there’s no way to know for sure how much money you’ll need or want in retirement, much less how long you’ll need it to last.

The conundrum is why TIAA created a new metric that can offer perspective on whether your savings will be enough to maintain your lifestyle after you stop working.

Our TIAA Annuity Payout Advantage metric compares how much a new retiree would get to spend if they withdrew 4% of their investment savings in the first year (a dominant rule of thumb for new retirees), versus how much they’d get if they converted one-third of their savings into guaranteed income with TIAA Traditional, our flagship fixed annuity, then used the 4% rule on the remaining balance.

The real-money difference between the two approaches can be big. For 2024, the TIAA Annuity Payout Advantage is 32%. Put simply: If a new retiree dedicates one-third of their savings to lifetime income through TIAA Traditional, they’d get 32% more to spend each month in their first year of retirement than if they applied only the 4% withdrawal rate.

Three Steps to a 32% Bigger Retirement Check

First, recall how fixed annuities such as TIAA Traditional work. They’re agreements that come with a guaranteed minimum rate of interest while you save and, if you choose lifetime income, a minimum payment in retirement that lasts for life. TAPA focuses on that last bit—what happens if you choose to convert a portion of savings into guaranteed lifetime income at retirement.

Next, imagine you have $1 million in retirement savings. According to the 4% rule, you would withdraw a total of $40,000 in your first year of retirement. That $40,000 amounts to $3,333 per month to live on. (A retiree following the 4% rule will typically withdraw the same dollar amount each subsequent year, adjusted only for inflation).

Last, compare that $40,000 against a scenario in which you elect to convert one-third of your savings into monthly checks with TIAA Traditional. As of March 1, for a 67-year-old who selects a single-life annuity with payouts ensured for at least 10 years, the TIAA Traditional income rate was 7.8%. In a year, this retiree would get $26,000 in annuity checks from the $333,333 they converted into guaranteed income, plus $26,667 based on withdrawing 4% of the remaining $666,667. All in, by annuitizing one-third of the savings with TIAA Traditional, the retiree would get a total of $52,667 in 2024—32% more than $40,000.

Imagine the Possibilities

With annuity income coming from one-third of a million-dollar nest egg, a new retiree would bring in an extra $1,056 per month in their first year, compared with a 4% withdrawal strategy. That’s no small change. A trip to see kids and grandkids. New appliances or a piece of furniture that ties the whole room together. More meals out. More time with friends.<

Persistent Income Advantage Over Three Decades

Benny Goodman, a vice president at the TIAA Institute, notes that, with TIAA Traditional, when applying TAPA to past years, it has ranged from 16% to 44% every month since at least 1994—the year the pioneering research on the 4% rule was first published.

We’ll continue to update the TIAA Annuity Payout Advantage comparison metric to give savers nearing retirement a real-life snapshot of the potential income benefits of fixed annuities and TIAA Traditional. 

Whether and how much to annuitize are highly personal decisions, however, and no two situations are the same. Talk to a trusted financial professional about your personal situation before converting any savings into guaranteed lifetime income.

Learn more by reading the full article here or calculate your own number using our calculator at vision.tiaa.org/public/vistaplus/aia-calculator/home.

This is an excerpt from an article that appeared in the TIAA TMRW Magazine.

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This material is for informational or educational purposes only and is not fiduciary investment advice, or a securities, investment strategy, or insurance product recommendation. This material does not consider an individual’s own objectives or circumstances which should be the basis of any investment decision.

Any guarantees under annuities issued by TIAA are subject to TIAA’s claims-paying ability.

Converting some or all of your savings to income benefits is an irrevocable decision once benefit payments begin.

The 2024 Annuity Payout Advantage is hypothetical and for illustrative purposes only. The Annuity Payout Advantage calculations use the TIAA Traditional “new money” income rate for a single life annuity (SLA) with a 10-year guarantee period at age 67 using TIAA’s standard payment method beginning on Mar. 1, 2024. Individual results may vary.

Example: Participants A and B both had a retirement savings balance of $1 million as of Mar. 1, 2024. Participant A withdrew 4% ($40,000) in year 1. Participant B made a one-time transfer to TIAA Traditional and selected an SLA with a guarantee period of 10 years at age 67, starting on Mar. 1, 2024. Participant B received an income rate of 7.8% ($26,000) on $333,333 annuitized in year 1; Participant B also withdrew 4% ($26,667) from the $666,667 remaining savings balance in year 1. The result ($52,667) is initial income for Participant B in year 1 that is 32% higher than the initial income of Participant A ($40,000). Income rates for TIAA Traditional annuitizations are subject to change monthly. TIAA Traditional Annuity income benefits include guaranteed amounts plus additional amounts as may be declared on a year-by-year basis by the TIAA Board of Trustees. The additional amounts, when declared, remain in effect through the “declaration year,” which begins each Jan. 1 for payout annuities. Additional amounts are not guaranteed beyond the period for which they are declared. TIAA has paid more in lifetime income than its guaranteed minimum amount every year since 1949. Over the past 30 years, TIAA has given 19 income increases to existing annuitants (as of January 2024). Past performance is not a guarantee of future results. An annuity is a product issued by an insurance company. It is an agreement that comes with a contract outlining certain guarantees. Fixed annuities guarantee a minimum rate of interest while you save and, if you choose lifetime income, a minimum monthly amount in retirement. Converting some or all of your savings to income benefits (referred to as “annuitization”) is a permanent decision. Once income benefit payments have begun, you are unable to change to another option.

The 2024 Annuity Payout Advantage uses the income rate on a new money annuitization as of Mar. 1, 2024. TIAA Traditional income rates are subject to change monthly. Additionally, the exact amount of spending money available to both a retiree who uses a withdrawal strategy and one who combines that with an annuity of one-third of their portfolio may rise or fall in subsequent years based on the performance of financial markets and annuity income rates.

Annuity contracts may contain terms for keeping them in force. For full details, including costs, call TIAA at 877-518-9161.

TIAA Traditional is issued through these contracts by Teachers Insurance and Annuity Association of America (TIAA), 730 Third Avenue, New York, NY, 10017: Form series including but not limited to: 1000.24; G-1000.4; IGRS-01-84-ACC; IGRSP-01-84-ACC; 6008.8. Not all contracts are available in all states or currently issued.

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