TIAA Traditional vs. Bonds - What would you choose?

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Noobvestor
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TIAA Traditional vs. Bonds - What would you choose?

Post by Noobvestor » Thu Jan 16, 2014 6:47 pm

Someone I'm helping sort out their investments has a lot of money in TIAA traditional - about half of their retirement portfolio (and they are nearing retirement). On the one hand, it seems to be pretty safe and solid and higher-yielding than safe bond funds ... but, on the other hand, as someone who likes to think in worst-case-scenario terms I can't help but wonder if there's a bit too much risk in having most of one's 'safe' allocation with one company. I also don't feel entirely confident I understand the different options that go along with TIAA, though I've tried to educate myself through the wiki and otherwise.

So, my main question is: how comfortable would you feel with most or all of your bond allocation being in TIAA? As I understand it they could potentially roll some or all of their money out of TIAA either now or upon retirement, though I need to look into those details more as well. Since the person in question does not have a good financial adviser (they had a really really bad one that I've convinced them to ditch - classic sales shark trying to sell them bad products) I'm hoping I can help them, and, in turn, that you fellow Bogleheads can help me help them! If you have any questions I can probably get them answered, too.
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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by livesoft » Thu Jan 16, 2014 6:49 pm

I own a little bit of TIAA traditional. I would feel perfectly comfortable with all my fixed income in TIAA Traditional paying the 4.45% average that I am getting today.

I would not feel comfortable if it was paying 1%.
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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by nisiprius » Thu Jan 16, 2014 6:52 pm

I would feel completely comfortable. I would not lift a finger to use anything else in place of bonds if TIAA Traditional is available. However, do find out--I am completely kerfoozled by this--there are some flavors of TIAA Traditional that cannot be cashed out or liquidated instantaneously, but only over a period of 10 years in approximately equal installments, and there are some that can be... figure out which it is.
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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by Dutch » Thu Jan 16, 2014 7:17 pm

My fixed allocation consists of savings bonds and TIAA traditional. Feels very confortable.

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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by MN Finance » Thu Jan 16, 2014 7:22 pm

It's fine. Don't worry about all the rules/options or look at alternatives. Leave it as it is. They call treasuries riskless and I would put this very close.

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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by Geologist » Thu Jan 16, 2014 7:29 pm

You get more income in TIAA Traditional if you have limited withdrawals. It is straightforward: TIAA can invest for the long-term at higher rates if you commit to long-term investing too.

If the person is close to retirement, there is another issue. If you annuitize TIAA Traditional, your payment isn't fixed as it is with most SPIA's. You get a guaranteed payment plus additional amounts. Historically, TIAA has always paid additional amounts and these have often grown with time. My father annuitized in 1985 and the additional amounts my mother (as his widow) is receiving are now larger than the guaranteed payment.

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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by winski58 » Thu Jan 16, 2014 7:37 pm

I have all of my fixed income in the TIAA Traditional. Caution: An SRA (Supplemental Retirement Account) is liquid. The RA (Retirement Account) is not and must be converted to a TPA (Transfer Payout Annuity) and is paid out over a 10 year period.

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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by whomever » Thu Jan 16, 2014 7:44 pm

One obvious question - is annuity income part of your friend's retirement plan? If so, get the annuity numbers from TIAA; I think a TIAA Trad annuity might be a good deal in the current low interest environment.

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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by Levett » Thu Jan 16, 2014 7:52 pm

" I also don't feel entirely confident I understand the different options that go along with TIAA, though I've tried to educate myself through the wiki and otherwise."

Through the Wiki?! :?:

You need to comb through the materials posted at TIAA and also check if your "someone" has--or is eligible for--a wealth management advisor (WMA) at TIAA.

There are a number of versions of TIAA Traditional and you need to determine which (and what rules) apply that are determined by "someone's" employer.

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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by sscritic » Thu Jan 16, 2014 7:54 pm

Almost all my tax-sheltered is at TIAA, so approximately 90% of my bonds are at TIAA (Traditional, Bond Market, Inflation-Linked Bond). Traditional of the kind that people are so afraid of is 30% of my bonds, so that would be 33% of my TIAA.

I am completely comfortable leaving my money at TIAA.

As for the Traditional of the kind that people are so afraid of, you can convert to a lifetime annuity, take the money out over 9 years and 1 day, or use their Minimum Distribution Option for your RMD when you hit the right age. [They compute the RMD as if your 403(b) at T/C were your only 403(b) and the money is taken proportionately from all your holdings in that 403(b), so if 80% is in Traditional, 80% of the RMD will come from Traditional.] One example for before RMDs, you could take the 9 year and 1 day option to convert your Traditional of the kind that people are so afraid of to Bond Market within the 403(b) and then take however much of your Bond Market out at any time (or rollover to an IRA). I don't think most of us use the "take all the bond money first and leave the equities" strategy when we hit retirement.

One good question for your friend is how do they envision funding retirement. Does a lifetime annuity fit in?

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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by Browser » Thu Jan 16, 2014 7:57 pm

winski58 wrote:I have all of my fixed income in the TIAA Traditional. Caution: An SRA (Supplemental Retirement Account) is liquid. The RA (Retirement Account) is not and must be converted to a TPA (Transfer Payout Annuity) and is paid out over a 10 year period.
Yes. Also true for TIAA after-tax plans. Can only cash out Traditional via the TPA. You have to factor this into your thinking somehow to figure out your "yield to liquidation." When you convert to a TPA, your rate of return is set to some fixed value. I don't know what that is or how it is determined. If you were earning a return of, say, 4% and then convert to a TPA paying, say, 2%, then your "yield to liquidation" might not be as attractive as you think - based on the current 4% - since you'll be locked into 2% over the 9-year TPA withdrawal period. Does anyone know how the TPA rate is determined?
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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by sscritic » Thu Jan 16, 2014 8:12 pm

Browser wrote: Does anyone know how the TPA rate is determined?
The amount of each Transfer Payout Annuity installment is based on a guaranteed interest rate of 2.5%, plus additional amounts credited above the guaranteed rate.

These additional amounts are voted on by the TIAA Board of Trustees, and when declared they remain in effect for the “declaration year” that begins each March 1. They can go up or down and aren’t guaranteed.
Note that the 4% you quote on accumulation isn't guaranteed either; it most likely is 3% plus 1%. In fact, for the RA, the rate has been 3% for the last year, only recently reaching 3.75%.

P.S. 2.5% is also the guaranteed rate on their lifetime payout annuities (under the contracts I know).

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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by nisiprius » Thu Jan 16, 2014 8:32 pm

When it comes time for retirement itself, i.e. annuitizing the accumulation, i.e. converting the TIAA Traditional "account" to a "lifetime contract," one thing to keep in mind is that--quoting their own literature to be sure--"TIAA currently holds the highest possible ratings: A.M. Best (A++ as of 5/13), Fitch (AAA as of 6/13), Moody’s Investors Service (Aaa as of 7/13) and Standard & Poor’s (AA+ as of 6/13). Per S&P criteria, the downgrade of U.S. long-term government debt limits the highest rating of U.S. insurers to AA+ (the second-highest rating available)." There are very few insurance companies for which this is true. The last time I looked we were talking about maybe three. Also, and again I'm taking TIAA's own claims at face value, they have said that their reserves etc. are many times greater than those needed to get those ratings. Whatever.

As an annuity provider, TIAA-CREF must be among the safest there is. Why, one might say it as as solid as the Rock of... um... wrong company... solid as a Babson boulder:

Image

So one motivation for sticking with TIAA Traditional is that it transitions into a very safe "lifetime payout" contract.

The fact that all of their payouts are variable annuities, and that the TIAA Traditional "vintages" are ... incomprehensible, and that while there is a "graded" payout option that reduces payouts and feeds them back via an AIR in some way that sorta kinda has a tendency to make them increase with time that might or might not keep up with inflation... well... sigh...
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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by Garco » Thu Jan 16, 2014 8:34 pm

To the OP: First thing you need to understand is that TIAA Traditional is not a bond fund, and you should not refer to it as part of someone's bond allocation. It is more akin to a "stable value fund" than to a bond fund. In an RA, it has restrictions on how you can call on that money (as others have mentioned). And the interest accrued during the accumulation stage and the payout stage (if you are taking the money out) does go up or down with the market for fixed income generally, though its value and those rates are not directly driven by short-term changes in interest rates as bond funds are. If someone owns Traditional, the "vintage" (month and year) in which they bought it matters to its accumulation and payout interest rates; those rates are not determined solely by recent or current fixed income market conditions. Vintages matter to Traditional. And really old vintages are much more valuable than recent contributions.

Thus, TIAA Traditional and bond funds are two different things, two different asset classes. One thing they have in common is that they are not equities. TIAA also has its TIAA Real Estate Account (TREA): another asset class, which directly owns commercial real estate. (It's not a REIT.) Traditional and TREA are TIAA's most distinctive investment vehicles.

Be careful that you understand what these funds are before offering much advice to your friend.
Last edited by Garco on Thu Jan 16, 2014 11:04 pm, edited 1 time in total.

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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by fatmike91 » Thu Jan 16, 2014 9:02 pm

Choose both.

I have both. I have some Traditional. I am not uncomfortable with it, but I also wouldn't put a very high percentage of my net wealth in it. It has risks that broad based bond funds don't.

I treat it as part of my bond asset allocation (but it's not a bond).

/

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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by sscritic » Thu Jan 16, 2014 9:07 pm

Just another wrinkle (not about TIAA or Traditional, but about a 403(b)).

Pre-1987 amounts deposited in a 403(b) are grandfathered from the more recent RMD rules. Pre-1987 money doesn't have to come out until you hit 75, however, any money taken out of your 403(b) in excess of the RMD (which is zero when you are 64 for example) is taken first from your grandfathered amounts. For those who like IRSese,
Bifurcated Account

If the issuer or custodian keeps the records necessary to identify the pre-1987 account balance, the minimum distribution commencement requirements apply only to benefits that accrue after December 31, 1986, including the income on pre-1987 contributions.

Prior law (generally requiring distributions by the end of the calendar year in which the participant attains age 75) would apply to pre-1987 accruals.

If records are not kept, the entire account balance is subject to IRC section 401(a)(9).

The minimum distribution incidental benefit (MDIB) requirement applies to the entire account balance, although prior law applies to the pre-1987 account balance in this regard. See Treas. Reg. 1.403(b)-2, Q&A-3.

If no actual amount is required to be distributed by April 1, 1988, because of these rules, the participant may treat December 31, 1988, as the RBD for all purposes under IRC section 403(b)(10). See Notice 88-39, 1988-1 C.B. 525.
Any amount distributed in a calendar year from a contract in excess of the required minimum
distribution for a calendar year with respect to that contract is treated as paid from the pre-’87 account balance, if any, of that contract.
This is the one that is hard to find; it's in 26 CFR 1.403(b)-6, but I usually find it in Revised Regulations Concerning Section 403(b) Tax-Sheltered Annuity Contracts (2007), which formulated the CFR language.
http://www.irs.gov/pub/irs-tege/td9340.pdf

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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by ghostdog1108 » Thu Jan 16, 2014 9:36 pm

I am retiring in a couple months (65) and currently have 90% in TIAA Traditional providing a guaranteed minimum 3% and currently paying 3%.
All of 2013 I had 42% in Vanguard Total Stock Market gaining 31% along with the 3% in TIAA so I decided to take a break from equities and 'sell high'.
I know I have broken the rule of 'staying the course' but I could not resist.

What risk does TIAA Traditional have that broad based bond funds do not?

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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by The Wizard » Thu Jan 16, 2014 10:10 pm

ghostdog1108 wrote:I am retiring in a couple months (65) and currently have 90% in TIAA Traditional providing a guaranteed minimum 3% and currently paying 3%.
All of 2013 I had 42% in Vanguard Total Stock Market gaining 31% along with the 3% in TIAA so I decided to take a break from equities and 'sell high'.
I know I have broken the rule of 'staying the course' but I could not resist.

What risk does TIAA Traditional have that broad based bond funds do not?
Trad has NO risk.
The only issue is if you want liquidity or if you want permanance...
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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by ghostdog1108 » Thu Jan 16, 2014 10:30 pm

I expect to withdraw 4% for a number of years ($1M portfolio) so I expect to be back in equities at some point...,

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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by The Wizard » Thu Jan 16, 2014 11:00 pm

The point with Trad is that it's the best guaranteed rate you can get presently at 3.75% in a GRA.
Coming off a year where stocks have gone up 30%, that looks kinda pathetic.
So you need to ask what your bond funds are giving you now and compare to that.
I'm getting a bit more in both my Junk Bond fund and in TREA, so I'm not heavy into Trad, tho I have a bit.
YMMV...
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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by fatmike91 » Fri Jan 17, 2014 7:02 am

The Wizard wrote:
ghostdog1108 wrote:I am retiring in a couple months (65) and currently have 90% in TIAA Traditional providing a guaranteed minimum 3% and currently paying 3%.
All of 2013 I had 42% in Vanguard Total Stock Market gaining 31% along with the 3% in TIAA so I decided to take a break from equities and 'sell high'.
I know I have broken the rule of 'staying the course' but I could not resist.

What risk does TIAA Traditional have that broad based bond funds do not?
Trad has NO risk.
The only issue is if you want liquidity or if you want permanance...


I absolutely disagree that is has no risk. You are backed by TIAA. You are completely exposed to the financial health of a single organization. To say it has no risk is completely incorrect.

I am in the Traditional (I find the risks acceptable).

IF you were invested in a broad based bond fund, then you are exposed to interest rates (good/bad) and also the financial health of a few thousand companies (so any one company has a tiny impact).

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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by Levett » Fri Jan 17, 2014 7:45 am

On the subjects of risk and ratings, a brief visit to the TIAA Morningstar site (highly recommended for TIAA folk) will reveal that Fitch has just reaffirmed its AAA rating of TIAA, but the commentary contains something more--namely a contrast between TIAA and the US sovereign debt:

"Fitch rates the local currency sovereign obligations of the United States of America at 'AAA'; Rating Watch Negative, and the Country Ceiling is similarly 'AAA'. In the event that Fitch downgrades the credit rating of the United States of America one notch, certain highly rated insurers such as TIAA may be rated above the sovereign rating. Fitch's opinion is that these companies are structurally shielded from foreign exchange transfer and convertibility risks and their financial condition is sufficient to withstand a sovereign crisis"

(I added the boldface). :happy

Lev

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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by nisiprius » Fri Jan 17, 2014 7:57 am

Just saying what I did, not whether it was right... when I still had large amounts of TIAA Traditional, I did carry it on my spreadsheet in a separate category from "bonds" because it sure weren't stocks but it sure wasn't the same thing as a bond mutual fund. CREF "accounts" like Bond Market, which had no withdrawal restrictions, I treated just as if they were mutual funds. It didn't really matter because when it came to judging asset allocation I always added up all of the bond-like-thingies (TIAA Traditional, savings bonds, actual individual TIPS, and bond mutual funds) but I did keep them separate so that I could mentally track what percentage of my portfolio each of them represented.

It occurs to me that it is a deficiency of most personal finance books and "education," stemming I think from the fact that this stuff is put out by 401(k) providers and writers connected with the investment industry, that they act as if your portfolio consisted only of things you can hold in a brokerage account.
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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by raywax » Fri Jan 17, 2014 8:53 am

This is only marginally applicable to this thread but here it is anyway. I have two TPAs and I am in the process of annuitizing the remaining investment in both; not a particularly large sum but significant. I started investing in the Traditional Account back in 1969 some some of my investment in it is in pre-1992 vintages which still carry quite high payout interest rates. Using the TIAA on-line calculator I ran it on these two TPAs for a two-life annuity with 100% going to the survivor and a 20-year guarantee and the result I got was equivalent to a return of 8.22% on the amount to be annuitized.

Ray

PS I am 75. Also here is the URL on the FITCH rating for TIAA Issued yesterday: http://www.fortmilltimes.com/2014/01/16 ... t-aaa.html
Last edited by raywax on Fri Jan 17, 2014 9:03 am, edited 1 time in total.

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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by The Wizard » Fri Jan 17, 2014 9:01 am

fatmike91 wrote:
The Wizard wrote:
ghostdog1108 wrote:I am retiring in a couple months (65) and currently have 90% in TIAA Traditional providing a guaranteed minimum 3% and currently paying 3%.
All of 2013 I had 42% in Vanguard Total Stock Market gaining 31% along with the 3% in TIAA so I decided to take a break from equities and 'sell high'.
I know I have broken the rule of 'staying the course' but I could not resist.

What risk does TIAA Traditional have that broad based bond funds do not?
Trad has NO risk.
The only issue is if you want liquidity or if you want permanance...


I absolutely disagree that is has no risk. You are backed by TIAA. You are completely exposed to the financial health of a single organization. To say it has no risk is completely incorrect.

I am in the Traditional (I find the risks acceptable).

IF you were invested in a broad based bond fund, then you are exposed to interest rates (good/bad) and also the financial health of a few thousand companies (so any one company has a tiny impact).
You can disagree with me all you want, that's OK.
TIAA essentially has a higher rating than the U.S. Government.
And to me, that equates to "no risk".

You are alluding to Specific Company Risk above, which certainly CAN be an issue.
But that's not what TIAA Traditional is. It is in fact a broadly based portfolio of securities.
Read more here: www.surs.com/pdfs/SMP/funds/T-TrAn.pdf

Edit: I'm talking specifically about the TIAA Traditional Annuity here, in any of its "flavors"...
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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by jjustice » Fri Jan 17, 2014 10:32 am

I want to stress something that I believe has been mentioned only by Garco and Raywax (I may have missed it in other posts). Much of your older friend's Traditional investment will be in vintage (old) funds, which will be earning rates that may surprise you. Don't mess with an old Traditional account. You'll only do worse.

John

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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by sscritic » Fri Jan 17, 2014 10:37 am

Money taken out of Traditional comes out of each vintage proportionally once the grandfathered amounts have been depleted by withdrawals in excess of your RMD.

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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by fatmike91 » Fri Jan 17, 2014 12:27 pm

The Wizard wrote:
fatmike91 wrote:
The Wizard wrote:
ghostdog1108 wrote:I am retiring in a couple months (65) and currently have 90% in TIAA Traditional providing a guaranteed minimum 3% and currently paying 3%.
All of 2013 I had 42% in Vanguard Total Stock Market gaining 31% along with the 3% in TIAA so I decided to take a break from equities and 'sell high'.
I know I have broken the rule of 'staying the course' but I could not resist.

What risk does TIAA Traditional have that broad based bond funds do not?
Trad has NO risk.
The only issue is if you want liquidity or if you want permanance...


I absolutely disagree that is has no risk. You are backed by TIAA. You are completely exposed to the financial health of a single organization. To say it has no risk is completely incorrect.

I am in the Traditional (I find the risks acceptable).

IF you were invested in a broad based bond fund, then you are exposed to interest rates (good/bad) and also the financial health of a few thousand companies (so any one company has a tiny impact).
You can disagree with me all you want, that's OK.
TIAA essentially has a higher rating than the U.S. Government.
And to me, that equates to "no risk".

You are alluding to Specific Company Risk above, which certainly CAN be an issue.
But that's not what TIAA Traditional is. It is in fact a broadly based portfolio of securities.
Read more here: http://www.surs.com/pdfs/SMP/funds/T-TrAn.pdf

Edit: I'm talking specifically about the TIAA Traditional Annuity here, in any of its "flavors"...

According to their web site, your money is backed by "the stability, financial strength and claims paying ability of TIAA". I am not disputing that TIAA-CREF is a very stable and conservatively managed company. But, investing in TIAA Traditional has single company risk that is distinctly not zero. It wasn't that long ago that a whole bunch of AAA rated mortgage debt went sideways. It can happen.

Again, I am in Traditional. I find the risks acceptable. But, the risk is not zero.

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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by Noobvestor » Fri Jan 17, 2014 2:20 pm

First, thanks for the really helpful responses so far - from opinions as well as additional facts I'm starting to get a better picture of things (and really appreciate the various views).

Regarding the SRA/TPA distinction, I went ahead and found out more:

All guarantee 3% minimum. A and B are from one institution, C and D from a later one. The SRAs (B and D) are only a small percentage each.
(a) retirement plan - 4.3% (10 payments over 9 years) ~48% of TIAA total
(b) tax deferred annuity plan (SRA) - 3.7% - fully liquid ~12% of TIAA total
(c) faculty retirement plan - 4.3% (5 payments over 4 years before retired, 10 payments over 9 years after retired) ~35% of TIAA total
(d) optional retirement plan (SRA) - 3.7% - fully liquid ~5% of TIAA total

As mentioned before, the above constitutes about half of their total portfolio. My two main goals are to try and help them (1) figure out if some should be converted out of TIAA if/when possible, and (2) what to 'count' them as within the portfolio (I realize they don't neatly fit into the stock or bond category - annuity and stable value fund have been suggested - but that of course makes it difficult to assess how they do fit ... riskier end of fixed-income? Create a whole other category, but then, as Nis points out, how does this work with general investing advice? Tricky.). FWIW, they *want* to target 50/50 stocks/bonds, but I'm reluctant to say 'OK, then just treat your current 50% in TIAA as all bond and put the rest in stocks', for instance.

For anyone worried about me steering someone in the wrong direction: (1) I am only one point of input here for them, but (2) better me (I hope) than the adviser they had who pushed the individual I'm talking about into buying the Permanent Portfolio Fund, a few active funds (including at least one with a load) and a small annuity - basically typical hodge-podge of overlapping and overpriced active stuff. I'm going to advise them to get additional advice, regardless, but I want to at least help them get their bearings and understand what they have as best I can, too.
Last edited by Noobvestor on Fri Jan 17, 2014 2:57 pm, edited 2 times in total.
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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by SunnySeattle » Fri Jan 17, 2014 2:56 pm

I also have most of my TIAA 403b in Traditional and am very comfortable with this. TIAA Traditional represents about 25% of our fixed allocation. The rest of our fixed is split between a taxable Muni fund VWIUX (25%) and tax deferred Total Bond fund VBTSX (50%). We are both 41 with current AA at 55 Equities/45 Fixed. I don't mind that TIAA Traditional will be paid out as an annuity or installments either. By the time we get to distributing it (early 70s) an annuity type pay out will be preferable. We plan to retire in our early 50s and pull funds from our taxable first, then his 401k, then my 403b last. At least that's 'the plan' for now.

Sunny

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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by raywax » Fri Jan 17, 2014 6:24 pm

Noobvestor wrote:First, thanks for the really helpful responses so far - from opinions as well as additional facts I'm starting to get a better picture of things (and really appreciate the various views).


For anyone worried about me steering someone in the wrong direction: (1) I am only one point of input here for them, but (2) better me (I hope) than the adviser they had who pushed the individual I'm talking about into buying the Permanent Portfolio Fund, a few active funds (including at least one with a load) and a small annuity - basically typical hodge-podge of overlapping and overpriced active stuff. I'm going to advise them to get additional advice, regardless, but I want to at least help them get their bearings and understand what they have as best I can, too.
Given the choices originally presented was the Traditional Account or Bonds I most definitely would NOT do what the adviser suggested! Leave it in the Traditional Account.

Ray

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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by MN Finance » Sat Jan 18, 2014 11:16 am

Technically, we allocate a defined amount to guaranteed and to bonds since I think there's some benefit to rebalancing between them (and other classes) in maintaining a constant AA, but in practical application you're absolutely fine to simply include TIAA as the bond component. In addition, I see no downside to market timing into/out of TIAA based on rates since the guaranteed 3% minimum is not market driven (ie, it does not reflect current risk - ie, free lunch). That last point is not relevant today since you're unlikely to add to it, but it's still important.

I would absolutely consider the half in TIAA as bonds/safe and then allocate the other half to stocks (if 50/50 is the goal). Ask the board if they'd put all their fixed income into a guaranteed 4% instead of their current bond holdings. Aside from the standard sky-is-falling crowd it would be unanimous. I would not consider this on the high end of the bond risk scale, quite the opposite, it's one step beyond treasuries. I say that as someone who personally loathes the company, but can't argue with the investment choice.

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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by Browser » Sat Jan 18, 2014 12:50 pm

I have a couple of legacy TPAs paying out over 9 years. They were hatched about 7-8 years ago, so are about paid out. I note that the guaranteed minimum on them is 2.5%. They were payout annuities from my RA accounts. They are presently also getting an additional 1.75% "dividend", so the combined interest is 4.25% on the remaining balance. I don't know if the 1.75% dividend bonus was fixed at the inception of the TPA and remains constant, or if it can be reset periodically during the payout period - my guess is that it was set at the inception because it's a rather generous bonus today. It seems likely it would be lower now. I guess in a "worst case" you would have to calculate your "interest to depletion" as consisting of the 3% guaranteed minimum over the years until withdrawal plus the 2.5% guaranteed minimum for the last 9 years (the length of the TPA payout). You might do better than this, but this provides a "floor" for what you might expect as your total payout until depletion of your Traditional account.
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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by ourbrooks » Sat Jan 18, 2014 1:01 pm

You know that Ben guy, the one who just left some big bank in Washington? Well, he keeps part of his money in TIAA Traditional; it's a matter of public record. There's a rumor, probably false, that the reason why he quit his Washington job after eight years was because that's how long the university would let him stay on leave and if he actually resigned, he'd lose his ability to contribute to TIAA Traditional.

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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by tibbitts » Sat Jan 18, 2014 1:25 pm

ghostdog1108 wrote:I am retiring in a couple months (65) and currently have 90% in TIAA Traditional providing a guaranteed minimum 3% and currently paying 3%.
All of 2013 I had 42% in Vanguard Total Stock Market gaining 31% along with the 3% in TIAA so I decided to take a break from equities and 'sell high'.
I know I have broken the rule of 'staying the course' but I could not resist.

What risk does TIAA Traditional have that broad based bond funds do not?
There's no harm in getting out of equities as long as you're absolutely committed to not getting back in at higher levels than when you exited. Are you sure you're completely committed to that, and that you'll be ok with staying out of equities forever if you don't get that buying opportunity?

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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by MN Finance » Sat Jan 18, 2014 2:23 pm

ourbrooks wrote:You know that Ben guy, the one who just left some big bank in Washington? Well, he keeps part of his money in TIAA Traditional; it's a matter of public record. There's a rumor, probably false, that the reason why he quit his Washington job after eight years was because that's how long the university would let him stay on leave and if he actually resigned, he'd lose his ability to contribute to TIAA Traditional.
By pointing this out you imply that's an endorsement. It's clearly not one way or the other. Half the world of washington have their roots in higher ed or other similar. For nearly a century that meant you had to invest with TIAA. And up until the 90s your only investment choices were Stock and TIAA. Nearly everyone chose 50/50 and then went about their lives and suddenly 40 years passes and nothing has changed. I bet you a buck Sharpe and Markowitz have half their money in TIAA, but I'm sure so did Joe Pateno and Bear Bryant.

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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by Noobvestor » Sun Jan 19, 2014 7:20 pm

I confess I am a bit surprised that the consensus opinion seems to be 'stay in TIAA' despite it being such a large chunk of the portfolio in this case, but I can see the argument: (1) despite having a single point of failure, the odds of failure are extremely low, and (2) you really can't beat the rates involved, at least not currently.

My own worries: (1) small risk is still risk, and (2) there is no inflation protection.

For anyone willing to weigh in based on the added info I provided (a, b, c and d above): what about a hybrid approach of taking the fully-liquid portion (about 17% of the total TIAA) and converting that to TIPS? It provides a bit of diversification but leaves the higher-yielding segment intact. I realize this lowers overall expected returns and introduces interest-rate risk, but it also reduces inflation risk and diversifies credit risk. Curious as to opinions on this.

Side note: in retrospect I kind of wish I had started this whole thread with a poll, but kind of think it would have been 'TIAA' by a landslide from what you've all said so far ;)
Last edited by Noobvestor on Sun Jan 19, 2014 7:25 pm, edited 1 time in total.
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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by livesoft » Sun Jan 19, 2014 7:25 pm

I'd wait on any changes. In today's context vintage TIAA holdings makes sense. Maybe in 1983, it didn't make sense.
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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by Browser » Sun Jan 19, 2014 7:34 pm

Based in inflation estimates, you have to go out to about 13 years with TIPS to get an expected 3% nominal yield. You're getting that in TIAA Traditional without the term risk.
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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by ghostdog1108 » Sun Jan 19, 2014 8:13 pm

tibbitts wrote:
ghostdog1108 wrote:I am retiring in a couple months (65) and currently have 90% in TIAA Traditional providing a guaranteed minimum 3% and currently paying 3%.
All of 2013 I had 42% in Vanguard Total Stock Market gaining 31% along with the 3% in TIAA so I decided to take a break from equities and 'sell high'.
I know I have broken the rule of 'staying the course' but I could not resist.

What risk does TIAA Traditional have that broad based bond funds do not?
There's no harm in getting out of equities as long as you're absolutely committed to not getting back in at higher levels than when you exited. Are you sure you're completely committed to that, and that you'll be ok with staying out of equities forever if you don't get that buying opportunity?
That, of course, is the rub...,

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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by ourbrooks » Sun Jan 19, 2014 8:28 pm

MN Finance wrote:
ourbrooks wrote:You know that Ben guy, the one who just left some big bank in Washington? Well, he keeps part of his money in TIAA Traditional; it's a matter of public record. There's a rumor, probably false, that the reason why he quit his Washington job after eight years was because that's how long the university would let him stay on leave and if he actually resigned, he'd lose his ability to contribute to TIAA Traditional.
By pointing this out you imply that's an endorsement. It's clearly not one way or the other. Half the world of washington have their roots in higher ed or other similar. For nearly a century that meant you had to invest with TIAA. And up until the 90s your only investment choices were Stock and TIAA. Nearly everyone chose 50/50 and then went about their lives and suddenly 40 years passes and nothing has changed. I bet you a buck Sharpe and Markowitz have half their money in TIAA, but I'm sure so did Joe Pateno and Bear Bryant.
Bear Bryant was a professor of economics or finance? I never knew! Perhaps there's some financial wisdom for Bogleheads in his quotes: http://www.saturdaydownsouth.com/2012/b ... 50-quotes/.

In modern times, nearly all university retirement plans offer many, many choices; Ben Bernanke has more than 40 choices, including many Vanguard funds. If Sharpe and Markowitz and Bernanke have half their money in TIAA Traditional, then it seems to me that I ought to give as much weight to their choice in this matter as I do to their publications.

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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by newstreetnj » Sun Jan 19, 2014 8:38 pm

Fascinating discussion

The TIAA annuities can be " inflation adjusted". You get a lower periodic payment, of course, but have inflation protection.

The "vintage" can be extremely important. I annuitized more than a year ago and am getting more than 8%. I'm very happy- those vintages did originate back in the 1970s.

Bob

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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by sscritic » Sun Jan 19, 2014 8:45 pm

newstreetnj wrote: I annuitized more than a year ago and am getting more than 8%.
The highest interest rate used for new lifetime payout annuities in 2013 was 7.75%, in 2012 and 2011 it was 7.5%; the highest in 2010 was 6.25%. You have to go back to 2008 to get a rate over 8% (or go back just a week, as the highest rate this month is 8.25%).

Note that the interest rate used to determine the annuity payment is not what you get as a payment. If you are 104, you would probably get 50% of your money each year even with an interest rate of zero.

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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by Noobvestor » Sun Jan 19, 2014 9:20 pm

Well, I'm glad I asked you folks ... I'm going to advise them to leave all the TIAA in place and count is at the FI allocation until/unless something changes with rates down the line, and even then suggest they explore the annuitization options before making changes. I *was* thinking of suggesting they move out the liquid and lower-paying portion, but if safety-minded Bogleheads concur it's not necessary, who am I to argue? :D
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Re: TIAA Traditional vs. Bonds - What would you choose?

Post by aelfa » Sat Jan 24, 2015 6:51 pm

Browser wrote:
winski58 wrote:I have all of my fixed income in the TIAA Traditional. Caution: An SRA (Supplemental Retirement Account) is liquid. The RA (Retirement Account) is not and must be converted to a TPA (Transfer Payout Annuity) and is paid out over a 10 year period.
Yes. Also true for TIAA after-tax plans. Can only cash out Traditional via the TPA. You have to factor this into your thinking somehow to figure out your "yield to liquidation." When you convert to a TPA, your rate of return is set to some fixed value. I don't know what that is or how it is determined. If you were earning a return of, say, 4% and then convert to a TPA paying, say, 2%, then your "yield to liquidation" might not be as attractive as you think - based on the current 4% - since you'll be locked into 2% over the 9-year TPA withdrawal period. Does anyone know how the TPA rate is determined?
Browser - can you please clarify? I'm considering TIAA Trad as a portion of my fixed income AA -- I have two GSRAs available (403b and 457b). Both have Traditional and Roth options, and I currently contribute Roth dollars (as part of a diversified tax strategy). Are you saying if I purchase TIAA Trad with Roth funds that I lose the liquidity normally available in GSRAs? Or are you saying the opposite... That any after-tax contributions are more liquid? Thanks for clarifying!

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