TIAA-CREF recently announced that they are allowing the public to invest in their fixed and income annuities inside a Traditional or Roth IRA (via Bogleheads). This includes their most well-known TIAA Traditional Annuity, which has traditionally been only available to those working in nonprofit colleges, universities, hospitals (TIAA stands for Teachers Insurance and Annuity Association of America).
This was a Father's Day coincidence, as what they suggest is very similar to what I helped set up for my father. As a long-time educator, the bulk of his retirement savings was accumulated using the TIAA Traditional annuity through both employer and employee contributions. After considering many factors, I advised him to annuitize a portion of it upon retirement for guaranteed lifetime income. The rest of the portfolio was stock and bond mutual funds.
In the example that TIAA provides, they annuitize 1/3rd of the total available portfolio, and the rest is spent down using the popular “4% withdrawal rule”. Their claim is that “annuitizing a portion of your savings with TIAA Traditional offers between 33% and 43% more income than a 4% withdrawal strategy.”
Looking at the fine print, they state:
Calculation uses the TIAA Traditional “new money” income rate for a single life annuity with a 10-year guarantee period at age 67 using TIAA's standard payment method beginning income on March 1, 2025 (7.9462%).
So a 67yo person taking a single-life income annuity with a 10-year guarantee, which pays out 8% of principal every year. So if you annuitized $1,000,000, you would get roughly $80,000 a year in annual income, guaranteed, every year until death (with minimum 10 years of payments, or $800,000). 8% is double (100% more) what you'd get out from the “4% rule”, so if you annuitize 1/3rd if your portfolio, it would boost the first-year income by 33%. Math works out.
Here are some additional details I would emphasize:
- With the income annuity used, the 8% withdrawal rate won't ever go up or adjust with inflation. It's a fixed payout every year, so the real inflation-adjusted value will decrease over time. After 15 years or 30 years, the payout from $1M would still be $80,000.
- The “4% rule” taken from perhaps a 60% stock/40% bond portfolio is designed to be raised with inflation each year. After 15 years, the $40,000 a year from $1M would be $62,000 with 3% average inflation and $72,000 a year with 4% average inflation. After 30 years, the $40,000 a year from $1M would be $97,000 with 3% average inflation and $130,000 a year with 4% average inflation.
- At death, the TIAA annuity would have zero value (assuming past the 10-year guarantee). Your 60/40 portfolio may have a lot (or a little, or nothing) left over.
- The TIAA annuity is a guaranteed only by the claims-paying ability of TIAA. TIAA is usually one of the absolute top-rated insurance companies in terms of safety, but it doesn't print its own money.
Overall, I felt that the trade-offs were worth it for my parents. They are financially conservative folks. Their annuitized income was lower because they took a joint-life annuity with my mother, but when added on top of their combined Social Security, their guaranteed monthly paycheck in retirement was large enough to cover all of their basic monthly expenses. Unless there was a big one-time expense, they would not have to take a single penny out of the rest of their investment portfolio.
I knew the value of the TIAA income would decrease over time due to inflation, but some studies have shown that retiree expenses also tend to trend downward over time. Social Security will still go up with inflation, and so should their investment portfolio over the long run.
TIAA Traditional as an accumulation vehicle. My dad was already with TIAA Traditional for decades before I started helping him with his finances, and while I am thankful for the financial stability of TIAA-CREF, I don't know that I would pick the TIAA Traditional Annuity if I was starting out today. As a fixed annuity, there is a guaranteed minimum interest rate and then they credit extra if their underlying investments do well. The value thus is always increasing steadily and never goes down, which some people may like. Even a “safe” bond fund can have a negative year, as we saw recently. But the long-term average return of TIAA Traditional will likely not be as high as if you held a Target Retirement Fund with stocks/bonds. However, I could see TIAA Traditional as a partial substitution for the bond portion of your portfolio, especially if you plan on annuitizing it upon retirement and can thus earn some of that vague “loyalty bonus”.
(You can view the current TIAA Traditional interest rates here. Note that there are multiple different rate classes, and since the IRA class is fully liquid, it tends to offer one of the lower rates.)
For my parents, I am quite happy with the results of annuitizing a portion of your retirement portfolio. It depends on your own goals, but a fixed base monthly paycheck in retirement offers great peace of mind. I personally enjoy the fact that they stress much less about market swings. If TIAA continues to offer competitive income payout rates along with their top-tier safety rating, I will definitely keep this option in mind for myself.
