Closing the book
on annuity myths.

A second type of annuity—pioneered in the 1950s—is a variable annuity, a contract that delivers income that can rise or fall with specific stocks or bonds chosen to generate the income.

These variable annuities don’t offer a guaranteed rate while saving or as a payout, because their returns depend on the performance of their underlying investments. However, both fixed and variable annuities guarantee you’ll get income as long as you live.

Myth II: Fixed annuities are all the same.

When financial firms talk about their annuities, they might sound similar, but they often work quite differently. Take TIAA Traditional, our flagship fixed annuity.

Unlike any other fixed annuity, TIAA Traditional was built around our culture of profit sharing, which has rewarded savers and annuitants for decades. We’ve paid annual interest rates higher than the minimum guaranteed rate since 1948, so savers have gotten more. And in 19 of the past 30 years, we’ve given annuitants higher payout rates than they were promised.

TIAA Traditional has another unique feature in our Loyalty Bonus^SM. The longer you contribute to TIAA Traditional, the larger your Loyalty Bonus is at retirement. The Loyalty Bonus isn’t guaranteed, but TIAA has added it to retirement checks for the past 30 years, in addition to other ways we’ve shared profits.

Myth III: Annuities are expensive.

Fixed annuities offered inside retirement plans do not cost participants or employers anything. Really. Pricing of in-plan annuities works like a certificate of deposit you get from a bank. With a CD, you pay no fees because the bank invests to earn a return on your money—typically expressed as an interest rate. Any investing fees come out of that interest before it ever hits your account.

With your in-plan annuity, TIAA posts an annual interest rate every March that’s guaranteed to savers for the following 12 months. In other words, what you see is what you get in terms of in-plan annuity returns.

Contrast in-plan annuities with “retail” annuities—those bought directly through an advisor or a broker. Because they are sold outside a retirement plan, buyers usually pay a hefty sales charge at the time of purchase. Retail annuities can offer more options, which typically results in added costs.

Myth IV: I’m still saving, and too young for an annuity.

Annuities can be effective even if you’re just starting to save. For example, fixed annuities may complement a saver’s fixed income allocation by providing steady growth at the specified rate without the volatility of bond funds. Even when other investments are down, the money in your annuity continues to grow.

Myth V: I’ve saved my whole career and have plenty of money. I don’t need an annuity.

Maybe your savings really will last your lifetime. There are a few reasons you still might want to consider an annuity.

First, no one knows how long they’ll live. A 67-year-old man today has a 66% chance of reaching age 80; a 67-year-old woman has a 75% chance.¹ Even if you, at age 65, are certain your money will last 30 years, what if you live 31 years?

Further, there's no way to know how much money you’ll have left at age 75 or 85, or what medical and longevity advances might occur in the next 20 years that could extend your lifespan. Odds are you’ll need more retirement savings over a longer period of time than you might expect. An annuity ensures that you will have an income stream no matter how long you live.

Second: Turning that big pile of money into an income stream in retirement is a complex undertaking. It only gets harder as you age and are more likely to face unexpected medical costs and cognitive decline.

But even young, healthy retirees struggle to know how much money they can take out in any given year, depending on how the markets have performed and what expenses they’re facing. The income stream from an annuity makes managing your portfolio easier and, as a result, facilitates better spending decisions in retirement.

Third: Your heirs. If a good portion of your expenses are covered by income from an annuity, you can take a bit more risk with the rest of your portfolio and orient it toward growth—for you or your heirs.

Myth VI: I’d have to give up control of my savings.

Annuitizing at retirement inherently means committing a portion of your savings to “buying” future income. It also means gaining control over your retirement.

There is a real trade-off between liquidity (the ability to convert your investments into cash) and stability (a guaranteed rate of return). Some people want more control over their retirement investments. Others see value in a fixed annuity’s guarantee of retirement income. Still others prefer a mix of both.

No one should annuitize their entire savings. Depending on what your necessary expenses are, how much you expect to get from Social Security and a pension (if you have one), experts recommend annuitizing 15% to 40% of your total portfolio at retirement.

That leaves retirees with money they can allocate to cash, stocks and bonds to meet variable expenses (be it a vacation or hospital bill Medicare doesn’t cover) and other needs.

Myth VII: The 4% rule is all I need.

Retirement is full of rules of thumb. Perhaps the biggest is the 4% rule to govern spending. The rule is if retirees withdraw 4% of their savings in their first year of retirement, and keep withdrawing that same dollar figure annually, adjusted for inflation, they have a good chance of weathering market ups and downs and not outliving their savings.

Sounds simple, right? Well, you’ll need to be heavily invested in stocks throughout retirement and willing to cope with volatility (at least half a portfolio must be invested in stocks to make the math work). The research also is based on a 30-year timeframe, so people retiring early and/or living longer probably won’t be able to spend that much each year.

Moreover, while this strategy can work pretty well in steadily growing markets and among financially savvy people, it gets complicated (and less predictable) in volatile markets.

When the 4% rule is used in connection with TIAA’s fixed retirement annuity, however, retirees can eliminate some of the guesswork and reduce the stress of watching the markets.

TIAA recently published research that shows first-year retirees could get 32% more income in 2024, by dedicating one-third of their savings to lifetime income with a TIAA Traditional fixed annuity and withdrawing 4% of their remaining portfolio balance. For more information, read up on the advantage of annuitizing with TIAA.

Myth VIII: People don’t have the attention spans to understand annuities.

Study after study shows people are attracted to the concept of lifelong, predictable income, but when the term “annuity” enters the equation their eyes glaze over. They love the income annuities can provide, but not the label.²

There may be a learning curve, but you can motivate employees to ensure they’ll have payments coming in after they stop working. Consider a recent study that found 70% of workers worry about not having enough to retire, and more than half of employees are “very” or “extremely” interested in retirement plans that include guaranteed lifetime income.³

How you address income matters. Education matters too. That’s why more employers are adding or bolstering financial wellness benefits that include independent financial advice. Pre-retirement financial planning can kickstart thinking about where a soon-to-be-retiree can derive income after they stop working—meetings that can include frank and personalized conversations about how annuities can help them.