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Lower volatility and guaranteed returns—just some of the reasons to consider an allocation to fixed annuities.


Read time: 5 minutes

Once upon a time, individual investors had just three asset classes to choose from—stocks, bonds and cash.

Then came the 1990s. A proliferation of real estate investment trusts (REITs) allowed regular investors to easily own stakes in apartment complexes, shopping malls and other commercial property. Before you could say “Sam Zell,” real estate became a fourth asset class.

It wasn’t long before Wall Street started rubbing its collective chin: What else from the lofty world of pensions and institutional investing—commodities, currencies, private equity, hedge funds—could be packaged for the masses? Before long, alternative assets became part of the mix.

What’s missing from diversified portfolios

This boom in financial product innovation has helped individuals further diversify their investments across asset classes. But unrelated asset classes don’t always perform in unrelated ways. In 2022, for instance, neither bonds nor REITs softened the blow from the bear market in stocks. Stocks, bonds and REITs all went down together.

This isn’t as rare as you may think: During the 20-year period from 2003 through 2022, there were only four years when stocks and bonds moved in opposite directions. For stocks and REITs, there were only two years of opposite moves.1 Such diversification breakdowns can leave investors feeling the highs and lows of their investments more acutely.

There is another option, one that has been around for more than a century but has only recently been considered its own asset class—fixed annuities. Fixed annuities offer capital protection, guaranteed returns and guaranteed income in any market environment, making them not only appropriate for retirement income but investment portfolio resilience as well.

How to evaluate fixed annuities

Historically, fixed annuities have been lumped into the fixed income category because many of the underlying investments are bonds. However, fixed annuities perform quite differently from bonds or bond funds, especially when interest rates are rising or falling. The market values of bonds and bond funds decline when interest rates rise: Fixed annuities offer a steady, albeit small, return and will not lose money.

“A fixed annuity is always going to have a positive, guaranteed minimum return,” says Benny Goodman, vice president for applied insights with the TIAA Institute. “The annuity tells you in advance how much you’re going to have in your account by the end of the year. There are other guaranteed income products to consider, like guaranteed investment contracts and stable value funds, but historically those product returns have been lower than fixed annuities.”

Fixed annuities, like bond funds and other traditional fixed income products, should be considered in terms of their risk profile. Investors should consider these four types of risk.

Market risk. The biggie. Fixed annuities’ always-positive returns stabilize portfolios in ways bonds and bond funds cannot. Fixed annuities rely on an insurance company’s access to long-term high-yielding assets to ensure a certain return. A bond fund, in contrast, can’t ever promise positive returns. Investors will see gains and losses every day even if they plan to hold for the long term. And in times of rising interest rates, bond funds often go down in value.

For example, TIAA Traditional, TIAA’s flagship fixed annuity, offers a guaranteed minimum interest rate, plus the opportunity for additional interest thanks to TIAA’s commitment to sharing profits with investors. That means investors see their balances increase steadily over time without risk of market losses. "There's no potential for downside because the contract ensures a positive return every month,” Goodman says.

Credit risk. Not all fixed annuities are created equal of course—there is a risk the insurer doesn’t make good on those promised lifetime payments. Plan sponsors have a fiduciary duty to evaluate the products they choose for their plan. That includes ensuring the company offering the annuity has a high credit rating, which means it has the financial resources to make good on its promises.

Only three insurance groups in the U.S.—New York Life, Northwestern Mutual and TIAA—currently hold the highest rating available from three of the four leading insurance rating agencies.

Longevity risk. Longevity risk emerges upon retirement. People are living longer than ever, which of course is a good thing. But living longerOpens pdf means greater potential of outliving your money. The average 60-year-old man today will live to 82, and the average 60-year-old woman will live to 85.2 Fixed annuities mitigate longevity risk by offering the option of a dependable retirement paycheck. Whether retirees live to 73 or 103, lifetime income provides a minimum monthly payout for as long as they live.

Liquidity risk. Liquidity concerns arise when investors can’t access their money as quickly as they’d like. Fully liquid investments, such as money market funds, allow investors to withdraw money as soon as they need it without risk of loss. Stocks and bonds are less liquid, because they need to be sold, and investors can’t be sure of the sale price. Homes are even less liquid.

But illiquidity has an upside: Illiquid investments can achieve greater long-term value. Think about the time it takes trees to grow and become lumber, a piece of art to appreciate or an early-stage business to become a market leader.

In general, fixed annuities don’t mitigate liquidity risk. Many in-plan fixed annuities have delayed liquidity, which means withdrawals must be done in installments over several years or not until employment ends. Some fixed annuities, including TIAA Traditional, do have fully liquid versions but those tend to pay lower interest rates.

Before investing in an illiquid asset, investors need to consider their comfort with not being able to quickly access that principal.

Portfolio resilience and guaranteed income

No single asset class can tackle every risk in a retirement portfolio. But an allocation to a fixed annuity addresses several of the big ones. They will not decrease in value, which reduces market risk. They can reduce a portfolio’s overall credit risk, since fixed annuity providers tend to have superior credit ratings—participants can sleep well at night knowing issuers can and will make good on their promises.

Finally, fixed annuities reduce longevity risk by providing retirement paychecks for life.

Such advantages are why Stacy Johnson, a senior portfolio manager with TIAA’s Private Asset Management division, believes fixed annuities and other lifetime income retirement products deserve their own slice in asset allocation pie charts.

“Life doesn’t usually have guarantees,” says Johnson. “So if you can get financial safety no matter what’s happening in the bond or equity markets—and also get guaranteed income for as long as you live—that’s a big differentiator. Otherwise, if the markets tank and you're only invested in variable assets, you’re out of luck.”

The right portfolio allocation

So what’s the appropriate allocation to fixed annuities?

There’s no one-size-fits-all answer, but TIAA Institute’s Goodman says “half your age” is a good rule of thumb. That would mean about 30% of a portfolio for someone in their 60s who is getting close to retirement.*

Goodman also advocates including fixed annuities in employer plans’ qualified default investment alternatives [known as QDIAs]—the investments newly enrolled employees get automatically if they don’t choose their own.

“Just about every economist and retirement expert believes lifetime income adds value in retirement,” Goodman says. “The vast majority of new employees use the default investment, so it’s probably the single-most important decision a retirement committee can make.”

If savers convert a portion of their portfolio into annuity income—locking in a retirement paycheck for life—it could allow more flexibility with the balance of their investments.

Imagine a retirement saver who annuitizes $300,000 of their $1 million portfolio. Their asset allocation for the remaining $700,000 doesn’t have to be the plain-vanilla split of 60% stocks, 30% fixed income and 10% cash they may have had prior to annuitizing, Goodman says.

“The whole reason people have 40% of their portfolios in bonds and cash is because they want less-risky investments just in case the market crashes,” he says. “But because they annuitized, they already have the less-risky part taken care of. If they want, they can now invest much more aggressively with the rest of their portfolio.”

That means the potential for higher investment returns over the course of retirement, which can lead to more discretionary “fun money” or bigger bequests or … the sky’s the limit. Ultimately you get more spending flexibility throughout the rest of your life.

To explore the whole TMRW publication, download hereOpens pdf.

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*This represents an approximate starting place for investors allocating a portion of their retirement portfolios into a fixed annuity. It is not to be used in place of advice provided by a registered adviser.

1 “Historical Returns on Stocks, Bonds and Bills: 1928-2022,” NYU Stern School of Business, January 2023. “Annual Returns for the FTSE Nareit US Real Estate Index Series,” National Association of Real Estate Investment Trusts.

2 “Financial literacy, longevity literacy and retirement readiness,” TIAA Institute, January 2023.

Any guarantees are backed by the claims-paying ability of the issuing company.

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.

TIAA Institute is a division of Teachers Insurance and Annuity Association of America (TIAA), New York, NY.