Deferred fixed annuities: Investors can benefit before & after the retirement income phase

What good is an annuity without annuitizing, that is, converting some or all of the savings to income benefits?

It’s a great question with an even better (little‐known) answer: Investors can benefit tremendously from an annuity well before they enter the retirement income phase – and even if they never annuitize.

This is an important feature to remember as America faces a growing retirement insecurity problem, threatening those approaching their Golden Years and even workers with many years left in the workforce.

Deferred fixed annuities (DFAs) can be part of the solution.

Issued by insurance companies, DFAs provide an explicit minimum guaranteed rate of interest and the potential for additional interest to be declared by the insurance company while a participant saves for retirement.

Put another way, DFAs earn money every day, regardless of market conditions, an important quality especially in uncertain times. (Any guarantees are backed by the claims-paying ability of the issuing company.) And participants know the return in advance of the period because the insurance company will publish the total rate of interest (guaranteed minimum plus potential additional interest) for each applicable time‐period.

Analyzing performance

The ability to protect against losses and create stable returns underscores the value of the DFA as a key tool in the retirement savings toolbox.

A January 2022 TIAA Institute‐sponsored report from Charles River Associates, a global consulting firm, illustrates this point. The discussion and the study, “A Cohort Analysis of the Investment Performance of TIAA Traditional Annuities During Working Life,” itself are educational tools to better understand the role of a deferred fixed annuity within a portfolio and should not be confused with a product recommendation or allocation guideline.

Why annuities work

Simply put, the fixed deferred annuity has a legitimate role as an option within the fixed-income portion of the investment portfolio, regardless of if one annuitizes or not.

Of course, this is great news for retirement savers and retirement plan participants, who often rely on that dependable growth and safety, even in retirement.

Related: In-plan annuities: Are they the next big thing in retirement plans?

The cherry on top is that with a DFA, employees also have the option to elect income they can

never outlive in retirement. Also, many TIAA fixed annuities, such as TIAA Traditional, have historically paid participants more lifetime income based on how long they have regularly contributed. TIAA may share profits with TIAA Traditional annuity owners through declared additional amounts of interest during accumulation, higher initial annuity income, and through further increases in annuity income benefits during retirement. These additional amounts are not guaranteed beyond the period for which they were declared.

In addition, these TIAA DFAs may increase income periodically while people are in retirement. TIAA may establish additional amounts of interest and income benefits above contractually guaranteed levels. Additional amounts are not guaranteed beyond the period for which they are declared.

These are unique features and are evidence of how TIAA seeks to share profits with customers to deliver them competitive outcomes.

DFAs will be commonplace

Looking to the future, we believe including an efficient guaranteed lifetime income vehicle, such as a deferred fixed annuities within defined‐contribution plans, will be as commonplace as plans having a target‐date option.

Retiring with a lifetime income annuity option as part of a portfolio gives workers the power to choose what is best for them and customize their income sources.

During times of uncertainty and market volatility, that’s certainly a good thing.

Chris Stickrod is Executive Vice President, Head of Institutional Managed Solutions at TIAA.