Fewer Choosing Annuities in TIAA Plan

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Woman being carried by a dollarIn a 401(k) world, purchasing an annuity is one way to turn retirement savings into a reliable source of income. But annuities have never been popular.

Now, a new study finds they are losing appeal even among some employees who historically purchased annuities at much higher rates than the general public: members of the TIAA retirement savings plan – one of the nation’s largest. Until 1989, TIAA required that retirees convert their savings into annuities.

Even in 2000, one out of two participants putting money in TIAA would eventually take their first withdrawal in the form of one of the annuity options the plan offers to retirees.

But by 2017, this number had dropped to about one in five, according to an NBER study for the Retirement and Disability Research Consortium that followed some 260,000 employees with careers at universities, hospitals, and school systems.

The researchers identified two distinct groups in terms of their annuity activity.

The first group tended to have smaller account balances and started tapping annuities in their retirement plans prior to the age when retirees are subject to the IRS’s required minimum distribution (RMD), which was, at the time of the study, 70½. Over the period studied, annuity selections by the first group fell from 57 percent to 47 percent.

The second group – people who had larger balances and didn’t touch their retirement accounts until after the RMD kicked in – saw their annuitization rate plummet from 37 percent to just 6 percent of the participants.

The authors suggested two main reasons for annuities’ waning popularity.

First, declining interest rates have reduced the monthly annuity payouts to retirees, meaning that a given amount of savings buys less retirement income – and makes an annuity less appealing. (Prior research suggests people are more influenced by the amount of the annuity’s payout than by how the payout rate compares with the returns to other investments.)

The second potential explanation is that the average retirement age for everyone in the study increased by a year and a half. And as the study showed, the longer people wait to spend down their savings, the less likely they are to annuitize.

To read this study, authored by Jeffrey Brown, James Poterba, and David Richardson, see “Recent Trends in Retirement Income Choices at TIAA: Annuity Demand by Defined Contribution Plan Participants.”

The research reported herein was derived in whole or in part from research activities performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement and Disability Research Consortium.  The opinions and conclusions expressed are solely those of the authors and do not represent the opinions or policy of SSA, any agency of the federal government, or Boston College.  Neither the United States Government nor any agency thereof, nor any of their employees, make any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report.  Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof.

Ken Pidcock

We’re using a transfer payout annuity to provide the income needed to delay a Social Security benefit. Indifference to sequence of returns is something we’ve come to enjoy.

Gayle Dedelow

I have a small annuity with TIAA, from a university in the Midwest. I only put in a small amount but will receive a monthly dividend until I die. The annuity only buys a week of groceries but I’m getting out of it a lot more than I put in!

Michael J. Waggoner

I am retired, but I did not annuitize my TIAA/CREF.
My Social Security provides a substantial inflation-protected annuity.
The next generation, and perhaps the generation after that, could use some help. The fact that one is an enthusiastic saver does not mean one will have saver descendants, particularly in a world where under-saving is common. The health of stock markets since 1980 makes retirement savings harder for the next generation, but made it easier for us.

I do not believe in dynasties, but I see no problems in the tradition that parents long have left to their children the tools of the trade like boats (fishing or transport), livestock, work tools, a small farm, a modest home, etc. To annuitize is instead to bury part of your earnings with you. Your children benefit from your character, contacts, good example, love, etc. A little tangible wealth seems similar.

Low annuity returns, as you note, are another reason, as are historic long-term market returns. Also, I seek security by having several years of living costs in secure savings, with the remainder in broadly-diversified very-low-cost mutual funds. I have learned — I believe — not to try to time markets, and not to be ruled by fear or greed. Your research shows that many professors — people often thought to be wise and thoughtful — share my views.

I believe that the major efforts by reformers to promote annuitizing is a mistake.

Donald Myers

I retired in 1998 (9 years after TIAA changed the rules). Perhaps I didn’t give it enough thought before 1989 but certainly after 1989 I never considered annuitizing (no regrets even in the midst of 2007-2009 and now 2020. I wouldn’t give anyone else any advice on the matter).

I used and am still using TPA’s to move money out of TIAA Traditional but I don’t think of TPA’s as annuities, they are just a way to change investments. I agree that “reformers” promoting annuitizing is a mistake. Giving retirees a choice is fine but not all choices are worthwhile

Rick Ward

The article mentions that one of the waning reasons for the popularity of annuities is: “declining interest rates have reduced the monthly annuity payouts to retirees”. I always thought that TIAA’s Traditional annuity provided guaranteed growth, no matter what interest rates were. Last time I checked it paid about 3% which it has for some time. Or, is the article referring to variable annuities? Is there something I am missing?

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