1 Source: TIAA Financial Resiliency Survey, October 2020.
2 Source: Morningstar, "The Benefit of Diversified Income for Retirees: Combining Fixed and Variable Annuities, November 2019". The "certainty equivalent" income calculation incorporates an individual's preference for risk and uncertainty when it comes to funding retirement.
- The potential benefits of developing a retirement income strategy considering both immediate fixed annuities (IFA) and immediate variable annuities (IVA) using a stochastic utility model using a Monte Carlo approach combined with a scenario framework.
- Households that should consider annuitization are generally those with conservative portfolios, lower levels of existing guaranteed income (i.e., Social Security benefits), higher initial withdrawal rates, higher subjective life expectancies, higher levels of shortfall risk aversion, and lower liquidity preferences.
- "Certainty-equivalent" retirement income increases by 20%, on average, when incorporating annuities, although the gains differ significantly across households.
- Withdrawals are always assumed to take place at the beginning of the year. Taxes are ignored for the analysis.
- The discount rate for the IFA pricing calculation is constant and assumed to be 5%.
- The discount rate for the IVA pricing calculation is also constant for the pricing calculation and is based on the assumed interest rate (AIR) of 4%
- The pricing model for the analysis intended to target the average annuity payout, not the best possible payout available.
- For each of the 22 variables we allow for a low, moderate, and high values. Examples of the variables included were retirement age, portfolio equity allocation. Social Security retirement benefits, etc.
- With 31 billion different potential combinations across these 22 different assumptions, the authors ran 10,000 different scenarios generated from the three values randomly selected for each variable.
- The annuity allocation is assumed to never exceed 50% of the portfolio.
- Every retiree household is different. The greater the range of potential products and solutions a financial advisor has available to recommend to the household the better the retirement income strategy is likely to be. In this paper we explore the potential benefits associated with using immediate fixed annuities (IFAs) and immediate variable annuities (IVAs), with a particular focus on when each is the best fit. The analysis suggests there is considerable benefit to not only incorporating additional guaranteed income into retirement income strategies (consistent with past research), but also in helping retirees determine which form of guaranteed income is optimal. While many financial advisors often talk about the benefits of diversification from a portfolio perspective, the same concepts also apply to retirement income products.
3 All guarantees are based on TIAA's claims-paying ability. TIAA Traditional is a guaranteed insurance contract and not an investment for federal securities law purposes. Past performance is no guarantee of future results.
4 "Pension-like" income refers to lifetime income made available by guaranteed-interest annuity contracts, not income provided by a defined benefit pension plan. Annuity contracts may be funding options in defined contribution pension plans, but are not themselves pension plans. Annuity contract guarantees are subject to the financial strength of the issuing insurer. Defined benefit pension plans are subject to the financial strength of the employer’s pension plan.
5 TIAA may share profits with Traditional Retirement Annuity owners through declared additional amounts of interest and through increases in annuity income throughout retirement. These additional amounts are not guaranteed.
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TIAA Traditional is a fixed annuity product issued through these contracts by Teachers Insurance and Annuity Association of America (TIAA), 730 Third Avenue, New York, NY, 10017: 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.
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.