Retire confidently in any market environment

On September 30, 2020, TIAA presented a live webinar discussing the benefits of diversified lifetime income in retirement. The event, hosted by TIAA Wealth Management Director Jim Daniello, CFP., featured insights from TIAA Financial Planning Strategy Director Shelly Eweka, CFP., ChFC., and TIAA Chief Financial Planning Strategist Dan Keady, CFP.

Below are key highlights from the webinar. To access the full, recorded webinar, click here.

Mixed signals and uncertainty abound

In recent months, the financial markets and economy have sent mixed signals, from record stock market gains, a strong housing market and booming auto sales to high unemployment and business closures as a result of the global pandemic.
While these are far from ordinary times, according to Keady, from a historical perspective, people can expect to experience at least three significant market events during a 30-year period in retirement. That makes it critical to plan now, since none of us knows when, or under what circumstances, the next crisis may occur.

Taking steps to secure your retirement in any market environment begins with understanding where you will derive your income in retirement and how to manage risk factors posed by market volatility, inflation, taxes and longevity.

Transitioning from work to retirement

“During your working years, the focus is on using your assets to pay for your expenses and saving for retirement,” said Eweka. “However, once you near retirement, the focus shifts to decumulation—how will you turn those savings into income when you’re no longer working and receiving a paycheck?”

Income in retirement generally comes from several different sources such as Social Security, workplace retirement benefits and your personal savings. However, people often assume that Social Security will pay for a much larger portion of their expenses in retirement than it actually will.

“For most people, Social Security won’t be enough to cover all of your expenses in retirement,” Eweka said. “That’s why your other income sources are critical for maintaining your lifestyle when you’re no longer receiving a paycheck.”

Building your income floor

Once you begin receiving Social Security retirement benefits, you will continue to receive a monthly benefit for the remainder of your life. If you are fortunate enough to have a pension, you can elect to receive those payments for life, as well. When combined, those assets can provide some of the foundation for what is referred to as your income floor.

“Building an income floor to cover your essential expenses in retirement is one of the most fundamental elements of retirement planning,” Keady said. “You never want to be in a position where you’re wondering how long your income will last due to an economic or financial market downturn, or how you’ll pay for unanticipated expenses.”

But what if you don’t have a pension? Or what if your combined Social Security and pension benefits won’t cover all of your essential needs? That’s where your retirement plan savings come in. How you manage these assets will have a direct impact on how long they will last. Fortunately, there are ways to use a portion of these assets to generate guaranteed income to supplement your other lifetime income sources to strengthen your income floor.

That’s where fixed annuities can play a role. Other than Social Security and pensions, annuities are the only retirement option capable of providing lifetime income security.

Understanding fixed and variable annuities

“An annuity is a contract between you and an insurance company,” Eweka said. “You make a lump-sum payment or a series of payments, and in return, you receive regular disbursements, beginning either immediately or at some point in the future. Generally, you have the option to convert to lifetime annuity income in the future but are not required to do so.”

Annuity assets can typically be withdrawn without penalty after age 59 ½. While annuities may be available in your employer retirement plan or IRA, you can also purchase an annuity contract outside of a retirement plan. During your working years, when you’re saving for retirement, annuity earnings accumulate on a tax-deferred basis. During the accumulation phase, you receive regular returns at either a fixed or variable rate. However, once you retire, the focus turns to generating income to help meet your expenses in retirement. That’s the payout phase.

You may choose fixed or variable annuities, or a combination of the two to help meet your income needs in retirement. Fixed annuities provide a guaranteed, fixed amount for life or for a certain period of time that you designate. For those concerned about market risk, fixed annuities offer steady, reliable income regardless of market performance. That makes fixed annuities an appropriate choice for many people seeking to build an income floor to help cover their essential expenses in retirement. However, one disadvantage is that your income payments may not keep up with inflation over time. That’s where variable annuities may be able to help.

One of the biggest differences between fixed and variable annuities is that fixed annuities offer a guaranteed growth rate and income payments, while returns and income payments from variable annuities will fluctuate as market conditions

change over time. They’re designed to help capture market gains, which can help you keep pace with inflation.

“Since the income you receive from the variable annuity will rise and fall with the market, the fixed annuity should be used as part of your stable income floor,” Eweka said.

Variable annuities play an important role as part of a diversified income stream to help pay for discretionary expenses in retirement or help ensure money is available to fund your legacy goals. A strategy that combines both fixed and variables annuities can help secure your retirement in any market environment. ¹

Annuities can help offset market risk

During your working years, when you’re saving for retirement, annuity earnings accumulate on a tax-deferred basis. You can choose to receive regular returns at either a fixed or variable rate during this accumulation phase. However, once
you retire, the focus turns to generating income to help meet your expenses in retirement.

“In today’s uncertain economic environment, many people are considering ways to market-proof their retirement portfolios with guaranteed growth during the accumulation phase to help offset market risk,” Keady said. “A strategy that ensures a portion of returns are guaranteed, through the inclusion of fixed annuities, can help provide a buffer by reducing your exposure to market risk.”

Keady says that people often don’t realize the tools available to them through their employer retirement plans to help manage risk now—and when they enter retirement. In-plan annuities make it possible for clients to meet their savings and investment objectives through regular contributions, often at a much lower cost than their retail alternatives. Later, they can help fortify a diversified retirement income plan by providing the option to convert your savings into income that lasts a lifetime.

Creating diversified lifetime income

“Much like the portfolio diversification process, you don’t want to put all your eggs in one basket where your retirement income is concerned,” Eweka said. “Instead, you want to reduce risk and optimize retirement outcomes by using a combination of income sources.”

A diversified income strategy also helps to mitigate common retirement risk factors such as longevity, market risk and inflation. It can help increase access to income (liquidity) in retirement and may even lead to more money available for some of the things on your retirement wish list, such as fulfilling certain legacy and estate planning goals.

Market-proof your retirement

Many people may be familiar with the 4% rule, a retirement withdrawal strategy that assumes a starting income based on 4% of your investment portfolio balance, adjusted for inflation. However, market volatility and inflation can have an adverse impact. For example, if your strategy is to start withdrawals at 4% annually when you retire, in a declining market you may need to reduce that planned withdrawal rate to prevent depleting your portfolio sooner than expected.

Since fixed annuities aren’t impacted by the ups and downs of the financial markets, including them in a diversified income strategy ensures you receive the same amount every month regardless of what the stock market is doing. That helps to market-proof your retirement. A fixed percentage strategy, like the 4% rule, can’t achieve that on its own. So, adding annuity income not only ensures a guaranteed monthly income in retirement but reduces the risk of depleting your retirement savings, potentially leaving more money for other expenses and goals.

A diversified income strategy also helps protect against possible changes in traditional guaranteed retirement benefits like Social Security and pensions while promoting retirement readiness and desired outcomes.

“Less concern about market volatility and other risk factors can translate to greater confidence that you will be able to meet your essential expenses throughout your lifetime,” Keady said. “That also helps to reduce the potential for emotional decision making, which can derail your plans, especially during times of crisis or uncertainty.”

Getting started

To get started building your diversified lifetime income, review the options available to you through your retirement plan. Keep in mind, annuities available through your workplace retirement plans may also have lower costs associated

with them than those you could buy on your own. However, annuities available outside of your plan may offer additional features and benefits. Income options may also vary by issuer and contract and, for in-plan annuities, may be subject to plan restrictions. So it’s important to do your homework and carefully consider your options before making a decision.

You also want to compare the costs. For fixed annuities, estimate how much guaranteed monthly lifetime income you could potentially receive. For variable annuities, be sure to take the annual fees into consideration, along with the sales loads and surrender fees. But keep in mind, pricing alone may not tell the full story. For example, variable annuities provide other benefits or riders. For any investment or account, take time to read the product literature, including the prospectus, to understand the features and investment objectives, risks, charges and expenses.

Remember, a TIAA professional is always available to explain how different plan options work, as well as the features and benefits. Whether you’re looking for additional sources of guaranteed income in retirement or need help evaluating your retirement income needs, consider scheduling time to meet with your financial advisor.

Your TIAA advisor can help you develop a plan or review your existing plan to determine how you will derive your income in retirement, implement strategies to help protect against common retirement risk factors, and help you build a

dependable income floor. Your advisor can also illustrate how a combination of fixed and variable annuities can help create a tax-efficient income stream that you can’t outlive.

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¹Some annuity products limit liquidity and the ability to make withdrawals once you have annuitized. Fixed annuity guarantees are subject to the claims-paying ability of the issuer.

This material is for informational or educational purposes only and does not constitute fiduciary investment advice under ERISA, a securities recommendation under all securities laws, or an insurance product recommendation under state insurance laws or regulations. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on the investor’s own objectives and circumstances.

No strategy can estimate or anticipate all market risks, and losses can occur. Investment products may be subject to market and other risk factors.

Advisory services are provided by Advice & Planning Services, a division of TIAA-CREF Individual & Institutional Services, LLC, a registered investment adviser.

Please consult your financial or tax professional before taking any action.

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