How much of an income edge could retirees get from annuities?

TIAA, a provider of lifetime income solutions, has introduced a new metric designed to illustrate the potential income boost new retirees could achieve from incorporating an annuity strategy into their financial planning compared to just following the 4% rule.

The TIAA Annuity Paycheck Advantage measures the difference between a standard 4-percent withdrawal strategy and a strategy that involves allocating one-third of retirement savings to a TIAA Traditional annuity, while withdrawing 4 percent of the remaining balance.

As the company’s math goes, if a 67-year-old new retiree in 2024 were to allocate a third of their savings to lifetime income with a 10-year guarantee period through its TIAA Traditional annuity and withdraw 4 percent of the remaining balance, they could see a 32-percent increase in their first-year retirement income compared to relying solely on the 4-percent rule.

“First-year retirees can think of the TIAA Annuity Paycheck Advantage as a new 'North Star' that can help them achieve a higher guaranteed payout potential and greater certainty around how much to safely spend in retirement,” Kourtney Gibson, chief institutional client officer at TIAA said in a statement.

The conventional 4-percent rule suggests retirees withdraw 4 percent of their savings at most in the first year of retirement. However, Colbert Narcisse, TIAA's chief product officer, stated that incorporating an annuity alongside a 4-percent withdrawal strategy has historically put retirees in a better financial position.

“We can show that a retiree who has opted to annuitize, alongside a 4-percent withdrawal, has historically been in a better financial position than the person who simply pulled money out of their accounts each year,” he said.

“In addition to enhancing income, TIAA Traditional offers the opportunity for interest above guaranteed minimums while saving and income above guaranteed minimums while retired,” Narcisse said. He added that contributing earlier and longer to the annuity can lead to even higher income.

TIAA plans to update its Annuity Paycheck Advantage metric annually to reflect current information on the impact of lifetime income on Americans’ financial security.

“The 4-percent rule is a starting point and isn’t right for everyone,” said Benny Goodman, vice president with the TIAA Institute. “We believe in a more tailored and holistic approach to financial planning and have seen that including some annuitization offers more diversification, with additional safety and security, all while maximizing their total retirement income,” he said.