Yet another financial services firm has rolled out a new way to add a guaranteed lifetime income stream to your retirement portfolio. TIAA last week announced the launch of its Secure Income Account, which allows private-sector companies to provide employees with pension-like guaranteed income for life as part of their retirement plans.
TIAA, which manages $1.2 trillion in assets, is the latest financial services giant to offer a lifetime income option available within corporate retirement plans. More and more providers are rolling out similar products in the wake of SECURE Act, the 2019 legislation that made it easier for annuities to be integrated within retirement plans, among other key changes to the retirement system.
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How Does the TIAA Secure Income Account Work?
The TIAA Secure Income Account is a deferred fixed annuity specifically embedded in managed accounts or custom target-date model portfolios with 401(k) plans. Rather than taking regular withdrawals from your 401(k), the Secure Income Account allows you to convert a portion of your savings into a pension-like stream of lifetime income.
Unlike a traditional retirement account, an annuity is a financial agreement you make with an insurance company, in which you pay a premium in exchange for guaranteed payments at a later date.
For example, a 401(k) plan participant with $500,000 in savings could simply take regular withdrawals from their account when they reach age 59.5. Using the 4% rule for withdrawals, the retiree could withdraw $20,000 from her account in the first year of retirement and then adjust annual distributions for inflation. In this scenario, the retiree’s savings could stretch 25 or 30 years.
Using TIAA’s new option, however, the same retiree could convert $333,000 of her savings into an annuity that would pay her the same $20,000 per year, but for the rest of her life. Plus, the retiree would still have $167,000 remaining to withdraw at her leisure, use for emergencies or leave to her loved ones.
It’s important to note that annuities can be complicated and costly financial products. Typically, annuity benefits are payable until your death and future payments are only guaranteed as long as you’re alive. While some plans allow you to receive payments for a fixed amount of time, you may run the risk of not living long enough to recoup your investment.
The Secure Income Account is available through the defined-contribution investment-only accounts overseen by TIAA’s asset manager, Nuveen. The company says the contributions that plan participants make are guaranteed to grow over time and are protected from a loss of value.
“Employees have the opportunity for more growth and higher amounts of lifetime income per dollar annuitized the earlier and longer they contribute,” Phil Maffei, managing director of corporate retirement income products at TIAA, said in a statement. “At retirement, employees can get guaranteed income for life by converting all or a portion of their SIA balance to monthly income they cannot outlive. In addition, in retirement, lifetime income payments may increase, which can help offset the effects of inflation.”
Why More Retirement Plans Are Offering Annuities
TIAA is the latest in a parade of financial heavyweights to add a lifetime income option to its retirement plan offering. Why? The answer lies in the SECURE Act of 2019.
The landmark legislation made it easier for plan sponsors to offer annuities in retirement plans, leading to the recent uptick in these types of products. The law defined the ways in which a sponsor can satisfy their fiduciary obligations when offering streams of guaranteed income to participants.
Previously, if an insurance company providing an annuity could not make the payments that were guaranteed, the retirement plan sponsor could be held liable. Now, the burden rests solely on the insurance company.
BlackRock, Fidelity, Nationwide, J.P. Morgan and others have all launched similar lifetime income solutions within retirement plans or announced plans to do so since the law was signed.
Yet, most retirement sponsors still do not offer an annuity option. Citing data from the Plan Sponsor Council of America, Pensions and Investments reported in November that only 17.2% of 401(k) plan sponsors were offering annuities as retirement distribution options, while 53.5% of 403(b) plans make this option available to participants.
TIAA is now offering a guaranteed lifetime income option to 401(k) plan participants. The company’s Secure Income Account gives retirement savers the option to divert a portion of their nest egg to an annuity that will deliver guaranteed payments for life. The retirement solution is one of many similar offerings that have been rolled out within the financial services industry since the passage of the SECURE Act in 2019.
Tips to Help You Save For Retirement
- Having a plan in place is key for a successful retirement and having a trusted professional in your corner can make a big difference. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Health savings accounts (HSAs) can be powerful savings vehicles. Contributions are tax-deductible and can be accessed tax-free as long as they are used to pay for qualified medical expenses. And once you reach retirement age, you can use the money in your HSA for other purposes, provided you pay income tax on the money. However, they’re only available to people with high deductible health plans (HDHPs).
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