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TIAA Lifetime Income Strategy: Why You Shouldn't Annuitize the Wrong Contract
If you have TIAA Traditional in multiple retirement contracts, there's an important strategy you should understand before initiating lifetime income.
You don't necessarily have to convert your entire TIAA Traditional balance into lifetime income.
And perhaps more importantly, you shouldn't automatically choose which contract to annuitize based solely on the dollar amount of income you want.
I recently worked with a client who had TIAA Traditional in multiple illiquid contracts.
We wanted to establish a specific amount of lifetime income while preserving as much flexibility as possible with the remaining retirement assets.
At first glance, the choice seemed obvious.
But after comparing the payout rates across the contracts, we found a more attractive alternative.
Let me walk you through the strategy using simplified numbers.
Why TIAA Traditional Lifetime Income Can Be Complicated
One of the unique characteristics of TIAA is that participants may hold TIAA Traditional in several different contracts.
For example, you might have Traditional in:
An RA contract
An RC contract
A GRA contract
A GSRA contract
These contracts can have different liquidity provisions, withdrawal options, credited interest rates, and lifetime-income payout illustrations.
And that's where planning becomes important.
Two TIAA Traditional contracts with identical balances can produce different amounts of lifetime income.
That difference can create opportunities when deciding how much Traditional to annuitize and which contract to use.
A Client Example: Two Contracts With Different Payout Rates
Let's simplify the situation.
Suppose a participant has TIAA Traditional in two separate illiquid contracts.
Both contracts have the same balance.
But their lifetime-income payout rates are different.
<box border radius="xl" padding={3} gap={3}> <grid columns={2} gap={3}> <grid-item> <box background="surface-secondary" radius="lg" padding={3} gap={1}> <text color="secondary" weight="medium" size="xs">CONTRACT A</text> <title size="2xl" color="default" tabularNums>9.0%</title> <text color="secondary" size="xs">Illustrated payout rate</text> <divider spacing={1}/> **$200,000** Traditional balance <text weight="medium">$18,000/year lifetime income</text> </box> </grid-item> <grid-item> <box background="surface-secondary" radius="lg" padding={3} gap={1}> <text color="secondary" weight="medium" size="xs">CONTRACT B</text> <title size="2xl" color="default" tabularNums>7.0%</title> <text color="secondary" size="xs">Illustrated payout rate</text> <divider spacing={1}/> **$200,000** Traditional balance <text weight="medium">$14,000/year lifetime income</text> </box> </grid-item> </grid> <caption>Hypothetical example based on simplified figures from the video. Actual TIAA payout illustrations depend on the contract, annuity election, ages, and other applicable factors.</caption> </box>
Now suppose the client wants:
$14,000 annually in lifetime income.
Which contract should we use?
The Obvious Choice Isn't Necessarily the Best Choice
At first glance, Contract B seems like the logical answer.
It has $200,000 in Traditional.
Its payout rate is 7%.
And converting the entire contract into lifetime income would generate exactly $14,000 annually.
Problem solved, right?
Not necessarily.
Because Contract A has a considerably higher payout rate.
That means we can generate the same $14,000 of lifetime income using substantially less principal.
And that's where the strategy becomes interesting.
The Alternative: Partially Annuitize Contract A
Rather than converting all $200,000 of Contract B into lifetime income, we evaluated using only a portion of Contract A.
Here's the calculation:
[
\frac{$14,000}{0.09}=$155,556
]
At a 9% illustrated payout rate, approximately $155,556 would generate $14,000 annually.
That leaves approximately:
[
$200,000-$155,556=$44,444
]
We can potentially generate the same lifetime income while committing approximately $44,444 less to annuitization.
<box border radius="xl" padding={3} gap={2}> <text weight="medium">Comparing the two approaches</text> <table> <table-row><table-cell> </table-cell><table-cell>**Annuitize Contract B**</table-cell><table-cell>**Partially annuitize Contract A**</table-cell></table-row> <table-row><table-cell>Principal annuitized</table-cell><table-cell>$200,000</table-cell><table-cell>$155,556</table-cell></table-row> <table-row><table-cell>Annual lifetime income</table-cell><table-cell>$14,000</table-cell><table-cell>$14,000</table-cell></table-row> <table-row><table-cell>Principal not annuitized across both contracts</table-cell><table-cell>$200,000</table-cell><table-cell>$244,444</table-cell></table-row> </table> <text color="secondary" size="xs">This compares amounts committed to annuitization, not guaranteed liquidity. Remaining assets may still be subject to contract restrictions.</text> </box>
That's a meaningful difference.
But there's an important distinction.
The $44,444 isn't automatically liquid just because we didn't annuitize it.
It remains subject to the applicable contract's withdrawal and transfer provisions.
The benefit is that we've preserved additional principal for another potential strategy.
What Do You Do With the Remaining Traditional Balance?
This is where the second part of the planning process comes into play.
In the client situation discussed in my video, we wanted to accomplish more than simply generate lifetime income.
The client was also retiring before beginning Social Security.
That created a temporary income gap.
We therefore evaluated using another available TIAA Traditional withdrawal strategy to provide income during those years.
In this particular case, we used a five-year fixed-period payment arrangement available under the client's contract.
That provided an additional source of retirement cash flow.
We also coordinated withdrawals from a Schwab rollover IRA.
The result was a retirement-income strategy involving three different sources:
TIAA lifetime income.
Fixed-period payments from TIAA Traditional.
Withdrawals from a rollover IRA as needed.
Together, those sources helped bridge the period between retirement and Social Security.
Why This Strategy Can Be More Effective
The key isn't necessarily choosing the contract with the highest balance.
It's identifying which contract offers the most attractive lifetime-income terms and determining how much of that balance actually needs to be annuitized.
Consider the alternatives.
Strategy One: Annuitize all of Contract B
The participant receives $14,000 annually and commits $200,000 to lifetime income.
Strategy Two: Partially annuitize Contract A
The participant receives the same $14,000 annually but commits approximately $155,556 to lifetime income.
The remaining principal can then be evaluated for available withdrawal, transfer, or future income strategies.
That creates additional planning possibilities.
It does not automatically guarantee a superior overall financial outcome, but it can be a more efficient use of the principal committed to lifetime income.
Partial Annuitization: An Overlooked TIAA Strategy
One misconception I encounter is that participants believe they must convert their entire TIAA Traditional contract into lifetime income.
That isn't necessarily the case.
Depending on the contract and applicable plan rules, you may be able to annuitize only a portion of your Traditional balance.
For example, suppose you have $250,000 in an eligible contract.
You might elect to annuitize:
$100,000
$150,000
$200,000
Another permitted amount
The remaining balance can potentially be used for another available contract option.
This is particularly useful when you have a specific lifetime-income target rather than a desire to annuitize the entire account.
Don't Confuse Payout Rate With Investment Return
There's another important distinction.
A 9% lifetime-income payout rate does not mean your TIAA Traditional balance is earning a 9% investment return.
The payout rate represents the annual payment relative to the amount annuitized.
Lifetime annuity payments can include both earnings and a return of principal, along with the economic benefits of pooling longevity risk.
That means you should not compare a 9% annuity payout directly with a 7% investment return and conclude the annuity is automatically better.
They are different financial arrangements.
The appropriate comparison should consider:
Expected lifetime payments
Longevity
Survivor benefits
Liquidity
Estate value
Investment risk
Alternative uses of the principal
A higher payout rate can be attractive, but it is not the same as a higher rate of return.
The Importance of Comparing Each TIAA Contract
If you have Traditional in multiple contracts, I recommend obtaining a separate lifetime-income illustration for each one.
Don't assume that an illiquid contract automatically provides the highest payout.
And don't assume that two contracts with the same balance will provide identical income.
For each contract, determine:
1. Current Traditional balance
How much money is available for a potential lifetime-income election?
2. Illustrated lifetime-income payout rate
How much annual income would the contract provide under the same relevant annuity election?
3. Available extraction strategies
Does the contract permit a TPA, fixed-period arrangement, installment strategy, surrender option, or another method?
4. Credited interest rate
What is the current credited rate on the Traditional balance, and how could it affect the alternative of leaving the money in accumulation?
5. Partial annuitization availability
Can you convert only the amount needed to achieve your income objective?
Once you have those details, you can begin comparing combinations.
How the Strategy Fits Into a Broader Retirement-Income Plan
The client example illustrates why TIAA decisions shouldn't be made in isolation.
We weren't simply trying to obtain $14,000 in lifetime income.
We were also trying to answer several related questions.
How much income does the client need before Social Security?
How much Traditional should remain available for withdrawal strategies?
How much money should remain in the rollover IRA?
Should lifetime income begin immediately?
Could partial annuitization help preserve more flexibility?
Those questions all influence one another.
A strategy that looks attractive when examining a single contract may look different once you include the entire retirement picture.
Using the TIAA Path Planner to Compare Strategies
This is one of the reasons I developed my TIAA Path Planner.
The tool is designed to compare different ways of using TIAA Traditional alongside other retirement assets.
For example, we can model:
Annuitizing all of Contract A.
Annuitizing all of Contract B.
Partially annuitizing Contract A.
Extracting assets from Contract B.
Combining lifetime income with fixed-period payments.
Coordinating rollover IRA withdrawals.
Adding Social Security income at a future age.
We can then evaluate projected income, remaining assets, taxes, and other planning considerations under the selected assumptions.
The objective is to help identify potentially advantageous strategies that may not be obvious from looking at the individual TIAA contracts.
The model is a planning tool, not a guarantee of future results.
Its usefulness depends on accurate contract information and reasonable assumptions.
What If Contract B Has Better Withdrawal Options?
Here's another reason to compare contracts carefully.
Suppose Contract A offers a higher lifetime-income payout rate.
But Contract B provides a more attractive extraction strategy.
That combination could make it especially appealing to annuitize a portion of Contract A while extracting assets from Contract B.
For example:
Contract A: Use a portion of Traditional to establish lifetime income.
Contract B: Use an available transfer or fixed-period payment option to move money into a rollover IRA or provide temporary income.
This can potentially accomplish two different objectives:
Establish a dependable income foundation while preserving other assets for flexibility.
But the decision still depends on the contract-specific rules and the household's broader financial needs.
When This Strategy May Make Sense
Partial annuitization may be worth considering when:
You hold TIAA Traditional in multiple contracts.
Your contracts have meaningfully different lifetime-income payout rates.
You want a specific amount of guaranteed income.
You don't need to annuitize your entire Traditional balance.
You have a temporary income gap before Social Security.
You want to preserve assets for other withdrawal strategies.
You have outside retirement assets that can complement TIAA lifetime income.
The strategy may be less attractive if the remaining assets have restrictive withdrawal provisions, if annuitization is needed to cover essential spending, or if the annuity election's survivor and estate implications outweigh the potential benefit.
Frequently Asked Questions
Do I have to annuitize my entire TIAA Traditional contract?
Not necessarily. Partial annuitization may be available depending on the specific contract, plan provisions, and applicable election requirements.
Can two TIAA Traditional contracts have different lifetime-income payout rates?
Yes. The illustrated payment amounts can vary based on contract terms, applicable rates, annuity elections, and other factors.
Should I always annuitize the contract with the highest payout rate?
Not automatically. A higher payout rate may allow you to generate the desired income with less principal, but other considerations include liquidity, survivor benefits, contract restrictions, and alternative investment or withdrawal strategies.
Can I use one TIAA contract for lifetime income and another for withdrawals?
Potentially. This depends on the withdrawal and income options available under each contract and the applicable retirement plan.
What is the advantage of partial annuitization?
It may allow you to establish a desired level of lifetime income without committing an entire Traditional balance to the annuity.
Can partial annuitization help bridge the gap before Social Security?
It can be part of a broader strategy. For example, lifetime income may cover a portion of retirement spending while fixed-period payments or IRA withdrawals cover temporary needs before Social Security begins.
Is a 9% TIAA payout rate the same as earning 9% annually?
No. An annuity payout rate is not an investment rate of return. It measures the payment relative to the amount annuitized and incorporates the annuity's payout structure.
Final Thoughts
One of the biggest lessons I've learned after working with TIAA participants for more than two decades is that the obvious retirement-income choice isn't always the most advantageous one.
In this client example, we had two illiquid TIAA Traditional contracts.
Both held approximately $200,000.
One offered a 9% illustrated lifetime-income payout rate.
The other offered 7%.
The client wanted $14,000 in annual lifetime income.
Rather than automatically annuitizing the entire $200,000 contract with the 7% payout rate, we evaluated using approximately $155,556 from the contract offering 9%.
That provided the same illustrated annual income while leaving approximately $44,444 more principal uncommitted to annuitization.
We could then coordinate other available withdrawal strategies with the client's income needs before Social Security.
The takeaway is simple: Before initiating TIAA lifetime income, compare the payout rates of every contract and determine how much principal actually needs to be annuitized.
Sometimes a partial annuitization strategy can create a more flexible retirement-income plan.
And sometimes the most important decision isn't whether to take lifetime income.
It's which contract to use—and how much of it to annuitize.
About Greg Shepard
I'm Greg Shepard, founder and creator of TIAA Simplified.
I specialize in helping higher education professionals and retirees across the country understand their TIAA retirement contracts, compare lifetime-income payout rates, evaluate TIAA Traditional withdrawal strategies, and coordinate retirement income with Social Security and other assets.
Through the TIAA Path Planner, I help clients evaluate different retirement-income scenarios to determine which strategies may best fit their financial circumstances.
If you're considering lifetime income from TIAA Traditional and have multiple contracts, contact S&A Financial Services to learn more about comparing your options.
Website:www.safinancialservices.com
Important Disclosures
This article is for educational purposes only and does not constitute individualized investment, tax, legal, or insurance advice. The examples are hypothetical and use simplified figures based on the strategy described in the accompanying video.
Lifetime-income payout rates are not investment rates of return. Actual TIAA lifetime-income illustrations depend on the contract, participant and annuity partner ages, selected payment option, applicable rates, and other factors. Partial annuitization and withdrawal options depend on the specific contract and retirement plan.
Assets not annuitized may remain subject to contract liquidity restrictions. Annuity elections generally involve long-term commitments, and guarantees are subject to TIAA's claims-paying ability. Investment returns and financial-planning projections are not guaranteed.
The TIAA Path Planner is an independently developed planning tool and is not affiliated with, sponsored by, or endorsed by TIAA. Any projected results depend on the accuracy of inputs and assumptions and should be reviewed alongside official contract illustrations and the client's complete financial circumstances.