How much of TIAA Traditional should you turn into lifetime income?

Key Takeaways

• A common rule of thumb is that two-thirds of your expenses in retirement should be covered by guaranteed sources of income.
  
• But individual circumstances matter. Talk to your TIAA wealth management advisor to determine whether (and how much) lifetime income may be right for your retirement plan.
  

In the April and May issues of In Balance, we told you about the TIAA annuity advantage—TIAA’s new metric that helps prospective retirees analyze the benefits of converting a portion of their savings into lifetime income.

This month, we explore how big that portion should be.

As a refresher, the TIAA annuity advantage makes a simple comparison, expressed in percentage terms.¹ It compares how much money a new retiree would have to spend in their first retirement year if they withdrew 4% of their investment savings (a common guideline) versus what they would have if they converted a portion of their savings into lifetime income provided by the TIAA Traditional fixed annuity and then used a 4% withdrawal on their remaining balance.² The conversion process is known as annuitization.

In one of our examples, we showed how a 67-year-old retiree with $1 million in savings could enjoy 32% more retirement income by annuitizing one-third of his savings versus drawing it down annually using the 4% rule.

Annuitizing one-third of savings is a common choice for retirees; it’s also the midpoint of the 25% to 40% range recommended by Benny Goodman, a veteran actuary and vice president with the TIAA Institute. It is derived from a different retirement rule of thumb—that two-thirds of your monthly retirement expenses should be covered by Social Security, pensions, annuities and other guaranteed sources that pay out as long you live.

Retirement income review

But not every retirement rule of thumb is right for every retiree. Individual circumstances—such as age of retirement, assets and income needs—will influence the optimal amount of annuitization. To provide customized advice, TIAA’s team of wealth management advisors use proprietary tools that evaluate the amount of income clients may need in retirement and determine an optimal amount of annuitization for each client.

“We analyze their retirement plan, their savings and their life goals to provide a clear idea of how much income will need to be replaced,” says Melissa Shaw, a TIAA wealth management advisor in Palo Alto, Calif. 

Jim Schlag, a TIAA executive wealth management advisor in Roseland, N.J., says the tools allow him to tally a client’s projected monthly expenses in retirement—food, shelter, medical, taxes, etc.—and then compare the sum to the monthly income clients would get by annuitizing 100% of their savings in TIAA Traditional. “If 100% would give them way more guaranteed income than they want or need, it’s very easy to then work backwards and calculate the right amount,” says Schlag.

Here’s an example. Let’s say Jane has a $1,000,000 portfolio and anticipates $9,000 in monthly expenses once she retires at age 67. As we said, a good rule of thumb is that two-thirds of your monthly retirement expenses should be covered by Social Security, annuities and other guaranteed sources of lifetime income. In Jane’s case, that two-thirds works out to $6,000 a month.

If Jane is getting $3,500 a month from Social Security and $1,500 a month from a pension, she would need $1,000 a month from annuities. But if Jane gets $3,500 a month from Social Security and does not have a pension, she then needs $2,500 a month from annuities. Based on TIAA’s Lifetime Income Calculator,³Opens in a new window a $1,000 monthly payment from a single-life annuity with a 10-year guarantee would require annuitizing approximately 15% of a 67-year-old’s $1,000,000 portfolio. A $2,500 monthly payment would require annuitizing approximately 37% of the portfolio.

Generally speaking, the longer you work, the less money you need to annuitize. There are two reasons for this. First the obvious one: You’ll have fewer years of post-retirement expenses to cover (according to actuarial tables, at least). Second, TIAA may pay, and has a strong history of paying, a Loyalty Bonus to long-time participants. This means the longer you own TIAA Traditional, the higher your monthly payments will likely be if you annuitize.⁴

The Lifetime Income Calculator does not reflect the Loyalty Bonus; neither did the TIAA annuity advantage of 32% mentioned above. (This is why we encourage near-retirees to review their retirement income plan with their TIAA advisors.) Nevertheless, even if you work well past retirement age, and even if the vast majority of your retirement income needs will be met by Social Security and pensions, there could still be a case for annuitizing some TIAA Traditional savings.

Loyalty pays

Goodman says he’s run calculations for clients who were TIAA Traditional participants for most of their working lives and who chose not to retire until their late seventies or early eighties. Given that they retired late, they had fewer years of post-retirement expenses to account for. So, the assumption was these clients might get less benefit from annuitizing. But because the Loyalty Bonuses they earned were so large—and also because annuity payments are larger when you annuitize later in life—the initial assumptions proved incorrect. In some scenarios, clients wound up with more money by choosing an annuitization option with a 10-year guarantee than when taking a 10-year withdrawal—a surprising and counterintuitive result. 

Says Goodman, “The money you get from the Loyalty Bonus is incredible.”

Talk to your TIAA wealth management advisor if you need help understanding annuitization or determining how much lifetime income you may need. Don’t yet have an advisor? Schedule an appointment.Opens in a new window