Loyalty bonus

Key takeaways

• Long-time contributors to the TIAA Traditional fixed annuity may earn more income in retirement.
• Talk to your wealth advisor about the TIAA Annuity Paycheck Advantage.¹

TIAA recently launched a new metric to help prospective retirees analyze the potential benefits of converting a portion of their savings into guaranteed monthly paychecks that last for the rest of their lives.

As a refresher, the TIAA Annuity Paycheck AdvantageOpens in a new window makes a simple comparison, expressed in percentage terms.² It compares how much income a new retiree would have available to spend in their first retirement year if they withdrew 4% of their investment savings (a common rule of thumb) versus what they would have if they converted a portion of their savings into income provided by the TIAA Traditional fixed annuity (and then used a 4% withdrawal on their remaining balance).¹

For example, a 67-year-old retiree with $1 million in savings could spend $40,000 in the first year of retirement using the 4% rule. But if the same person used one-third of their savings to provide income from their TIAA Traditional fixed annuity and began receiving payouts on March 1, 2024 (and withdrew 4% of the remaining two-thirds), they would get $52,667 to spend in the first year of retirement—or 32% more income.

What if … ?

But a 32% larger paycheck is only a starting point for the TIAA Annuity Paycheck Advantage. Consider the profile of steady contributors who were diligent about saving for retirement and who consistently put money into their retirement plans that had TIAA Traditional as one component of it during their working years. (For an easy comparison, the long-time contributor starts retirement with a $1 million retirement portfolio and chooses a single-life annuity (meaning the annuity benefit is for the plan participant only) with a 10-year guarantee period—same as in the previous example). 

After years of continually holding a TIAA Traditional balance, steady contributors may qualify for a benefit called the TIAA Loyalty Bonus^SM.  The TIAA Loyalty BonusOpens in a new window^SM is the result of our longstanding practice of returning profits to participants. Historically, the longer someone’s been saving in TIAA Traditional, the larger their Loyalty Bonus and the more income they could get when lifetime income payments begin.

An even bigger advantage

The Loyalty Bonus is not guaranteed but, as of March 1, 2024, a retirement plan participant who contributed to TIAA Traditional over the last 20 years could receive a 10.2% Loyalty Bonus. That boosts the first-year paycheck by $221 a month, making the steady contributor’s Annuity Paycheck Advantage 38% rather than 32%. A 30-year contributor would get a TIAA Annuity Paycheck Advantage to 44%.

Every little bit helps. A retirement plan participant who contributed to TIAA Traditional for five years would get a TIAA Annuity Paycheck Advantage of 33%.

How much should I convert to annuity income?

Examples in this article assume that a retiree uses one-third of total savings to provide income from their TIAA Traditional fixed annuity, but this amount is a highly personal decision. Every retiree’s situation is different. You may want to consider a range of 10% to 40% of savings depending on your income needs and desire for potential growth in the rest of your investment portfolio.

As a starting point, TIAA generally recommends covering two-thirds of a retiree’s income needs with lifetime income sources (through some combination of fixed and variable annuity payments, Social Security, and pension payouts), while using an investment portfolio of stocks and bonds to cover the remaining third.³

Remember: No two situations are the same. It's always wise to talk with a TIAA wealth advisorOpens in a new window for help.

CITATIONS

¹Annuity Paycheck refers to the annuity income received in retirement. Guarantees of fixed monthly payments are only associated with TIAA’s fixed annuities.

² The 2024 Annuity Paycheck Advantage is hypothetical and for illustrative purposes only. The Annuity Paycheck 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 Paycheck 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.

³This point of view is designed to be a starting point for the retirement income conversation. It is not a recommendation.