What you'll get from this article

• The 4% rule is an increasingly arthritic rule of thumb—and one most people don’t understand. Here’s why it may not be enough.
• The TIAA Annuity Payout Advantage^SM demonstrates the power of annuitization. Today’s retirees could get 32% more money in their first year of retirement.
• Ensure employees have access to guaranteed income and help them maximize their retirement spending power.

Read more in the article below. And use our new tool to see the Annuity Payout Advantage in action.

Try the tool

Socking money away for retirement year after year can feel like a slog, but at least the marching orders are clear: work, save, hope the market goes up, repeat.

Parsing how much to spend after you finally retire isn’t nearly as straightforward. It requires even hyper-organized supersavers to wrestle with uncertainty. It’s hard enough to know how much money you’ll need or want, much less how long you’ll need it to last—two, three, maybe four decades?

Convert retirement savings into retirement spending

When even a Nobel Prize-winning economist calls retirement spending the “nastiest” problem in all of finance, it’s little wonder there’s so much collective handwringing. Outliving retirement savings is the top retirement fear voiced by savers across every generation.¹

Now, there’s no shortage of books, calculators, blogs, TikTok influencers, friends and family all too willing to advise on your retirement readiness. All that noise can make it hard to know where to start. And even the best, most thoughtful advice tends to focus on how much to save.

We’re here to tell you how much you can spend.

TIAA has created a new metric—drawn from facts and using real numbers—showing a different way to get more out of retirement. (Read our press release for more information.) Saving is important, of course, but the critical factor when approaching retirement is knowing whether those savings will maintain the lifestyle you want to lead.

The rule dictates, for example, that a couple with $100,000 across retirement accounts shouldn’t withdraw more than $4,000 in their first year of retirement, while a couple with $1 million shouldn’t take more than $40,000. In subsequent years, retirees should withdraw the same dollar amount, adjusted for inflation.

But the 4% rule is a starting point and was never right for everyone. It was originally calibrated to a 30-year timeline—not a helpful guidepost for someone who wants to retire young, or is already in their 70s—and has been increasingly problematic in recent markets. It may be too aggressive when bond yields are low, as they were for much of the past decade, or when inflation is rising fast, as it did during and after the COVID-19 pandemic era.

To boost the chances of not running out of money in retirement, research firm Morningstar ratcheted down its safe-withdrawal guidance in 2021 to 3.3% of total savings, and then moved back up to 3.8% in 2022, given changes in inflation forecasts and prevailing interest rates. They landed back at 4% in 2023.⁴

Time to retire the 4% rule?

There are many other caveats. For one thing, the 4% rule assumes someone will always keep about half of their portfolio in stocks throughout retirement. If the stock market falls, the strategy may require spending more of the remaining savings to deliver adequate monthly income. And that could increase the risk of running out of money.

“If you're a big believer in the 4% rule, you're also supposed to believe you should be really aggressive with your investments,” says Wade Pfau, author of the “Retirement Planning Guidebook” and professor of practice at the American College of Financial Services, in a recent conversation with TMRW. “I don't think most people understand that.”

That fairly aggressive portfolio means the 4% rule makes more sense for people who can cover large portions of their expenses with guaranteed income sources such as Social Security, pensions and fixed annuities.

Social Security payments are adjusted for inflation; pension payouts typically are not. And neither income source is swayed by market conditions. Annuity payouts depend on long-term interest rates. And because current long-term interest rates are near their highest levels in decades, now is an especially attractive time to annuitize.

Annuity income rates are largely based on the yield generated by the investments inside an insurance company’s general account, which funds the payouts. The reliability of annuity payments can help a retiree be more comfortable with the amount they invested across financial markets.

Says Pfau: “By having the annuity, you’re able to invest more aggressively with the rest of your money.”

To be clear, the TIAA Annuity Payout Advantage can’t forecast the future. There’s no crystal ball. Instead, the Annuity Payout Advantage shows just how much more spending power people can enjoy by annuitizing with TIAA Traditional.

How we get to 32% more retirement income in 2024

Bear with us: The math here isn’t difficult, and there are just two important steps to our methodology. First, though, recall how a fixed annuity works. It’s an agreement that comes with a guaranteed minimum interest rate while you save and, if you choose lifetime income, a minimum monthly amount in retirement you receive for the rest of your life.

TIAA’s Annuity Payout Advantage focuses on that last bit: if you choose to convert a portion of savings into a retirement check for life.

Now here comes the math: Imagine you’ve got $1 million in savings, in one account or across several. According to the 4% rule, you’d withdraw a total of $40,000 in your first year of retirement. (Keep in mind you might owe tax on that withdrawal, which means you’d have less money to spend. To keep things simple, all numbers are pre-tax.)

That $40,000 amounts to $3,333 per month to live on, not including Social Security. A retiree following the 4% rule then typically would withdraw the same dollar amount each subsequent year, adjusted only for inflation. Note that this is not the same as withdrawing 4% every year, which is a common misunderstanding of the 4% rule.

For step two, compare that $40,000 against what happens if you annuitize a third of your savings into monthly checks from TIAA Traditional. As of March 1, 2024, for a 67-year-old who selects a single-life annuity with payouts ensured at least 10 years, the TIAA Traditional income rate is 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 a 4% withdrawal on the remaining $666,667.

All in, by annuitizing a third of your savings with TIAA Traditional, you’d get a total of $52,667 in 2024—32% more than $40,000. That’s $1,056 more per month in the first year of retirement than by using the 4% rule alone.

Benny Goodman, vice president with the TIAA Institute, says the Annuity Payout Advantage has been persistent over time. Generally, the higher the prevailing interest rate, the higher the advantage. He notes TIAA Traditional has provided an Annuity Payout Advantage between 16% and 44% every month since at least 1994—the year the research on the 4% rule was first published.⁵

“There’s no voodoo here. It’s just math,” Goodman says. “A retiree who has opted to annuitize has historically been in a better financial position than the person who simply pulled out money each year from their accounts.”

Imagine the possibilities

Think of what you could do with an extra $1,056 a month this year. Business-class flights on a trip you always wanted to take. A bottle of champagne and a fancy meal at your favorite special-occasion restaurant. Toys for a grandchild while you can still enjoy watching them play.

Of course, you could tackle the practical to-do list in your brain. A fatter monthly check also could mean your children don’t have to pay for your medical or assisted living care or other such expenses. After all, an average healthy 65-year-old man retiring in 2023 would need $185,000 in savings to cover healthcare expenses during retirement, while a healthy 65-year-old woman would need $203,000, according to the Milliman Retiree Health Care Cost Index.⁶

What if … ?

Extra income from an annuity can open the door to new spending strategies. For example, a retiree might combine that income with Social Security or pension payments to cover essential needs such as housing, car and food costs. After that, you could apply the 4% rule to your remaining investment portfolio to fund your fun money.

Or you could take a variable approach to withdrawing from your remaining savings, taking more in years when the market’s up and less when it’s down. This adds another layer of safety, since there’s a real danger in withdrawing too much after the markets fall. By using this strategy, you’ve got the flexibility to cut back a bit after a market loss without affecting the essentials.