Get more in retirement: the TIAA Annuity Paycheck Advantage.
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 Paycheck AdvantageSM 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.
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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
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
TIAA has created a new metric showing a different way to get more out of retirement.
The TIAA Annuity Paycheck Advantage lays out, in percentage terms, the difference between what a first-year retiree can withdraw (using the conventional retirement spending formula—more on this later) and what they could get by converting some savings into lifetime retirement paychecks, guaranteed by TIAA.
The 2024 TIAA Annuity Paycheck Advantage is 32%2
If a new retiree dedicates one-third of their savings to lifetime income through TIAA Traditional, our flagship fixed annuity, they’ll get 32% more to spend each month in their first year of retirement than if they applied only the typical, rule-of-thumb withdrawal rate.3 (We’ll continually update this percentage to help people determine how much more income they could expect when retiring with us.)
Think of TIAA’s Annuity Paycheck Advantage and that 32% figure as a new North Star to help steer new retirees toward higher earnings potential and greater control over spending.
An increasingly arthritic rule of thumb
The go-to guidance for retirement spending has long been the so-called 4% rule. It states that new retirees who want a reasonable chance to make their savings last as long as they live can withdraw no more than 4% the first year they retire.
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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.
The 4% rule assume someone keeps about half their portfolio in stocks throughout retirement.
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
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 Paycheck Advantage can’t forecast the future. There’s no crystal ball. Instead, the Annuity Paycheck Advantage shows just how much more spending power people can enjoy by annuitizing with TIAA Traditional.
A Tale of Two Sisters
A hypothetical example that shows how partially annuitizing with TIAA Traditional in 2024 compares with the standard 4% withdrawal strategy.
Twin sisters Tara and Rachel were always joined at the hip. By age 67, each had $1 million in savings and was ready to retire. In 2024, Tara pulled 4% from her investments, resulting in $40,000 in income.
Rachel followed the 4% rule for two-thirds of her savings. But she annuitized the remaining third, resulting in $26,000 in annuity income. This helped her take less from her retirement accounts—$26,667 instead of $40,000—but get a total of $52,667 in income—a 32% increase.
How we get to a 32% bigger retirement paycheck 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 Paycheck Advantage focuses on that last bit: if you choose to convert a portion of savings into guaranteed lifetime income—a retirement paycheck for life—at retirement.
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.
Generally, the higher the prevailing interest rate, the higher the Annuity Paycheck Advantage.
For step two, compare that $40,000 against what happens if you annuitize a third of your savings into monthly paychecks with 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 Paycheck 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 Paycheck 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.”
How much should I annuitize?
Experts have many reasons for suggesting people buy an annuity with some portion of their retirement balance—diversification, protection from loss, predictable income that never runs out. An annuity’s ability to offer all that while also maximizing total retirement income is another.
How much to annuitize is a highly personal decision, so broad-stroke recommendations are hard to make—which is why the standard advice is the fairly wide range of 25% to 40% of savings.
To determine the Annuity Paycheck Advantage, we chose the midpoint, 33%, as our baseline assumption. Using TIAA Traditional to annuitize a third of a $1 million portfolio amounts to an extra $1,056 a month in 2024.
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 paycheck 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.
Meet three retirees
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1 Cerulli Associates, “The Cerulli Edge Retirement Edition,” Second Quarter 2023.
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 income on March 1, 2024. Individual results may vary. Example: Participants A and B both had a retirement savings balance of $1 million as of March 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 March 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 saving 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 January 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.
3 The 2024 Annuity Paycheck Advantage uses the income rate on a new money annuitization as of March 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.
4 Morningstar, “The good news on safe withdrawal rates,” Nov. 13, 2023.
5 Bengen, William P. 1994. “Determining Withdrawal Rates Using Historical Data.” Journal of Financial Planning 7, 4 (October): 171-180.
6 Robert L. Schmidt and Eric Walters, “Retirement Planning: How Much Money Will You Need To Cover Your Healthcare Expenses?” Milliman, May 1, 2023.
TIAA Traditional is issued by Teachers Insurance and Annuity Association of America (TIAA), New York, NY.
This point of view is designed to be a starting point for the retirement income conversation. It is not a recommendation.
Annuity contracts may contain terms for keeping them in force. TIAA can provide you with costs and complete details.
TIAA Traditional is a fixed annuity product issued through these contracts: Form series including but not limited to: 1000.24; G-1000.4; IGRS-01-84-ACC; IGRSP-01-84-ACC; 6008.8. Not all contracts are available in all states or currently issued.
Paycheck is the annuity income received in retirement. Guarantees of fixed monthly payments are only associated with TIAA’s fixed annuities.
Any guarantees under annuities issued by TIAA are subject to TIAA’s claims-paying ability. TIAA Traditional is a guaranteed insurance contract and not an investment for federal securities law purposes.
TIAA may provide a Loyalty Bonus that is only available when electing lifetime income. The amount of the bonus is discretionary and determined annually. Your Loyalty Bonus percentage is the additional amount of lifetime income you would receive at the time of annuitization compared to a new contributor who annuitizes an equal amount at the same time.
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.
This material is for informational or educational purposes only and is not fiduciary investment advice, or a securities, investment strategy, or insurance product recommendation. This material does not consider an individual’s own objectives or circumstances which should be the basis of any investment decision.
Annuities are designed for retirement or other long-term goals, and offer a variety of income options, including lifetime income. Past performance is no guarantee of future results.
TIAA Institute is a division of Teachers Insurance and Annuity Association of America (TIAA), New York, NY.