TIAA traditional is compounded daily, but not at the displayed crediting rate

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livesoft
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TIAA traditional is compounded daily, but not at the displayed crediting rate

Post by livesoft » Sat Jan 06, 2018 12:07 pm

So I have a little bit of money in TIAA Traditional Annuity that I neither contribute to nor withdraw from. I see that the return on this is pretty simple:

I take the guaranteed rate and multiple the starting value (1/1/2017) by 1 plus the guaranteed rate (the crediting rate) and that's what I end up with on 12/31/2017. No compounding, no nothing extra.

For TIAA Traditional owners, did you think your earnings compounded during the year?

(I edited the title, since compounding happens, but not at the rate you think.)
Last edited by livesoft on Sat Jan 06, 2018 1:04 pm, edited 1 time in total.
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ByThePond
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Re: TIAA traditional is simple interest, not compounded

Post by ByThePond » Sat Jan 06, 2018 12:12 pm

I don't think I ever expected compounding. Sorry to see it confirmed, though.

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Re: TIAA traditional is simple interest, not compounded

Post by nisiprius » Sat Jan 06, 2018 12:36 pm

I don't think you're saying there's no compounding over the years, plural. (Which I wouldn't believe).

When you talk about compounding "during the year" what are you saying? Are you simply saying that the "guaranteed rate" is an annual percentage yield (APY)? That's what I would have expected, just as in a bank account.

If they aren't quoting an APY, what exactly would you expect them to be quoting?

If my head's screwed on right I'd expect that if you dug further you'd find that the interest credited during the first quarter was a skosh less than 1/4th of the total for the whole year. (Do they do it quarterly or monthly? If monthly, I'd expect that interest credited during the first month was a skosh less than 1/12th of the total for the whole year). If so, then "compounding during the year" could be taking place.

Could you, in fact, see it? What IS the guaranteed rate? Vintage mumble. Let's say 3%, is that correct? If an account is compounding quarterly, and the APY is 3%, and the amount at the start of the year is $100,000, then the amount at the end of a quarter would be $100,741.71, and, if not compounding--simple interest--$100,750.00. So, yes, you could see it on a $100,000 account, and you could just barely see it ($74.17 versus $75) on a $10,000 account.
Last edited by nisiprius on Sat Jan 06, 2018 12:49 pm, edited 1 time in total.
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Re: TIAA traditional is simple interest, not compounded

Post by livesoft » Sat Jan 06, 2018 12:49 pm

I am thinking that during the course of the year, I see the value reported of the TIAA TA that I have going up each day and month if I look at the web site. I assumed the crediting rate was APY and compounding was involved daily, weekly, or monthly. That is, when I see the value of my account grow, I'm thinking, I'll get 3% (or whatever) on all that new money I've already earned. I got doodly-squat or an APR of 3%. And if compounding was happening, then the crediting rate was less than 3%.

So, yes, I can see 3.00000000% increase from 1/1/2017 to 12/31/2017 right there in my statement in black and white.

And sscritic sends me this link with explanation:
https://www.tiaa.org/public/pdf/TT_FAQ.pdf

So daily compounding, but the reported 3.0% what I thought it was. Those TIAA folks are scumbags. Send me cheese for my whine.
Last edited by livesoft on Sat Jan 06, 2018 12:56 pm, edited 2 times in total.
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nisiprius
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Re: TIAA traditional is simple interest, not compounded

Post by nisiprius » Sat Jan 06, 2018 12:51 pm

So, how many dollars did the account balance grow during the first month of the year compared to the last month? Or quarter, or whatever is the natural time period? Same exact number each quarter or a bit less near the beginning and a bit more near the end?
So, yes, I can see 3.00000000% increase from 1/1/2017 to 12/31/2017 right there in my statement in black and white.
What number did you expect to see, if the guarantee is "3.00%?" How would you adjust the annual number to account for whatever kind of "compounding during the year" you would have liked to see happening?
Last edited by nisiprius on Sat Jan 06, 2018 12:53 pm, edited 1 time in total.
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Re: TIAA traditional is simple interest, not compounded

Post by spdoublebass » Sat Jan 06, 2018 12:53 pm

I have a little in this fund. I've always been confused by it.

For my question I'm going to use easy small figures.

Are you saying that say you have $1000 in TIAA Trad. with a guaranteed 3%. (I know I read your's is a little more, but doesn't matter for this example).

The 3% is over 12 months. So 1/12 x 3% each month.

So if you didn't contribute any money to the fund....

at the end of January you'd have $1002.50

What about at the end of Feb? Would you have:
$1002.50 x (1/12 x 3%)
or still just
1000 x (1/12 x 3%)

What I mean is when you say compounding, do you mean monthly or yearly? I see my TRAD go up throughout the month. I think this is important to know.
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Re: TIAA traditional is simple interest, not compounded

Post by oldzey » Sat Jan 06, 2018 12:55 pm

Hmmm... I thought the interest was compounded daily.

Here's a link to an old publication that I've uploaded to my Dropbox (which is no longer on the TIAA website, at least that I can find):

CALCULATING TIAA TRADITIONAL ANNUITY EARNINGS 2005
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Re: TIAA traditional is simple interest, not compounded

Post by livesoft » Sat Jan 06, 2018 12:57 pm

oldzey wrote:
Sat Jan 06, 2018 12:55 pm
Hmmm... I thought the interest was compounded daily.
That's true and expressed in the TIAA PDF that I linked. But the crediting interest is thus not 3%, but slightly lower.

Image

TIAA is careful not to mention both APY and APR in their document.
Last edited by livesoft on Sat Jan 06, 2018 1:03 pm, edited 1 time in total.
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Re: TIAA traditional is simple interest, not compounded

Post by spdoublebass » Sat Jan 06, 2018 1:01 pm

Tiaa states:
TIAA Traditional Annuity accumulations are credited with interest based on when contributions and transfers are received, and your performance will reflect your pattern of contributions. The returns shown in the table reasonably represent what an individual making level monthly premiums would have historically earned over the time periods. Returns for different time periods are calculated in two steps: monthly performance returns are calculated from an accumulation created by a series of level monthly premiums over the prior 10 years (or the inception date of the product if later), and those monthly returns are linked together to determine historical performance for each of the return periods shown.

It also gives a graph, which I don't know how to insert, with info as:
1 month = .26%
3 month = .77%
1 year = 3.14 %

This is a ll for the GRSA TRAD, getting 3% guaranteed and currently getting 3.25%
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Re: TIAA traditional is simple interest, not compounded

Post by The Wizard » Sat Jan 06, 2018 1:02 pm

Another amusing point is that Trad credits interest to your accumulations seven days per week, though the updated balance across weekends and holidays may not be shown until the next working day.

The last trading day for 2017 was Friday, 12/29, so most funds' end of year value is as of that day.
But not Trad, since it added interest earned on the 30th and 31st as well.
This matters for old folks subject to RMDs...
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Re: TIAA traditional is simple interest, not compounded

Post by livesoft » Sat Jan 06, 2018 1:05 pm

The Wizard wrote:
Sat Jan 06, 2018 1:02 pm
Another amusing point is that Trad credits interest to your accumulations seven days per week, though the updated balance across weekends and holidays may not be shown until the next working day.

The last trading day for 2017 was Friday, 12/29, so most funds' end of year value is as of that day.
But not Trad, since it added interest earned on the 30th and 31st as well.
This matters for old folks subject to RMDs...
Yes, I did notice that, too.
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ofckrupke
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Re: TIAA traditional is compounded daily, but not at the displayed crediting rate

Post by ofckrupke » Sat Jan 06, 2018 1:15 pm

This seems like one of the simpler aspects of TIAA Traditional to be confused about, and says more about the ease of (feynmanesque) self-deception than TIAA's practice of the deceptive arts.

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Re: TIAA traditional is compounded daily, but not at the displayed crediting rate

Post by livesoft » Sat Jan 06, 2018 1:19 pm

Yes, you all can now explain APY and APR to livesoft. Thanks.

I guess that with a bond fund, the SEC yield is not an APY, while with an Ally savings account, the expressed interest rate is APY. TIAA traditional is neither a bond fund nor a savings account, so I'm not sure what I expected.
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Re: TIAA traditional is compounded daily, but not at the displayed crediting rate

Post by spdoublebass » Sat Jan 06, 2018 1:35 pm

livesoft wrote:
Sat Jan 06, 2018 1:19 pm
Yes, you all can now explain APY and APR to livesoft. Thanks.

I guess that with a bond fund, the SEC yield is not an APY, while with an Ally savings account, the expressed interest rate is APY. TIAA traditional is neither a bond fund nor a savings account, so I'm not sure what I expected.
I'm still confused and have 2 questions:

1. Does TRAD compound daily? monthly? And is it going to be at a rate of 1/12 of 3% (or whatever your guaranteed rate is?

2. Is there a way (there has to be some equation) to see what the result of 3% APR would look like in a bond fund? What I'm asking is TRAD getting 3% equal to TBM getting 3%? If not, how can you figure it out?
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Re: TIAA traditional is compounded daily, but not at the displayed crediting rate

Post by The Wizard » Sat Jan 06, 2018 1:37 pm

I think when one looks at calendar year 2017 12-month performance of a bond fund compared to a traditional accumulation with assorted vintages, the percentage growth will be comparable.
By this I mean the reported performance of VBILX, to pick a bond fund, is not a compounded number either...
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Re: TIAA traditional is compounded daily, but not at the displayed crediting rate

Post by The Wizard » Sat Jan 06, 2018 1:41 pm

spdoublebass wrote:
Sat Jan 06, 2018 1:35 pm
livesoft wrote:
Sat Jan 06, 2018 1:19 pm
Yes, you all can now explain APY and APR to livesoft. Thanks.

I guess that with a bond fund, the SEC yield is not an APY, while with an Ally savings account, the expressed interest rate is APY. TIAA traditional is neither a bond fund nor a savings account, so I'm not sure what I expected.
I'm still confused and have 2 questions:

1. Does TRAD compound daily? monthly? And is it going to be at a rate of 1/12 of 3% (or whatever your guaranteed rate is?

2. Is there a way (there has to be some equation) to see what the result of 3% APR would look like in a bond fund? What I'm asking is TRAD getting 3% equal to TBM getting 3%? If not, how can you figure it out?
Bond funds have principal fluctuation included in total return. You can't know a priori what a bond fund's return for a year will be.
Vanguard does report that VBILX had 12-month return of 3.85% through 12/31/2017...
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Re: TIAA traditional is compounded daily, but not at the displayed crediting rate

Post by student » Sat Jan 06, 2018 2:45 pm

I always assume that the quoted rate is APY. As an example say 3% per year. So by investing $100 for a year, you get 3%. Here is a link to note the difference between the terms. http://www.moneychimp.com/articles/finw ... unding.htm 3% APR compounded daily gives 3.0453% yield. If it is compounded hourly, it gives 3.0454% yield. If it is compounded continuously, it gives 3.0455% yield.

If a bank is doing compounding daily, they can advertise the rate as 3.04% APY or they can advertise it as 3% APR. Most banks use APY as the number is bigger. Interestingly, many banks will state APR in loan because the number is lower. It would seem that this is indeed industry standard to state APY when they pay you and state APR when you pay them. https://www.thebalance.com/what-is-the- ... ngs-315437

So I would say TIAA's practice is consistent with other banks. TIAA Traditional is like a savings account.

Edit: Corrected some errors. I wasn't thinking straight and swapped the definitions.

Edit: Additional link.

Edit: Corrected some typos and edited for clarification.
Last edited by student on Sat Jan 06, 2018 3:49 pm, edited 3 times in total.

livesoft
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Re: TIAA traditional is compounded daily, but not at the displayed crediting rate

Post by livesoft » Sat Jan 06, 2018 3:41 pm

spdoublebass wrote:
Sat Jan 06, 2018 1:35 pm
1. Does TRAD compound daily? monthly? And is it going to be at a rate of 1/12 of 3% (or whatever your guaranteed rate is?
TRAD compounds daily as stated in the link and a screen capture from the link I showed in this tread. The crediting rate is the APY and the APY is the crediting rate, so if the crediting rate is 3.0%, then the APR is about 2.956%.
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Re: TIAA traditional is compounded daily, but not at the displayed crediting rate

Post by ofckrupke » Sat Jan 06, 2018 3:46 pm

spdoublebass wrote:
Sat Jan 06, 2018 1:35 pm
1. Does TRAD compound daily? monthly? And is it going to be at a rate of 1/12 of 3% (or whatever your guaranteed rate is?
TRAD compounds daily. In the simplified case in a period or a 3% contract for which there is no "additional amount" payable, the daily rate is the 365th root of 1.03, minus 1. [In a leap year, it's the 366th root.]

However the underlying mechanism is more complicated, and just simplifies to the above when there is no "additional amount" payable...and is trivially different when an additional amount is payable only if a participant's entire account history is presently subsumed in a single "vintage". [This latter case is irregular, but does apply to some frozen contracts, like pre-late-2010 IRAs.]
Last edited by ofckrupke on Sat Jan 06, 2018 3:47 pm, edited 1 time in total.

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Re: TIAA traditional is compounded daily, but not at the displayed crediting rate

Post by jalbert » Sat Jan 06, 2018 3:47 pm

One way to look at it is that the published crediting rate is the effective rate you get after compounding the actual rate, which they don't publish.

I think TIAA would just say it compounds annually.
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Re: TIAA traditional is compounded daily, but not at the displayed crediting rate

Post by spdoublebass » Sat Jan 06, 2018 4:12 pm

Thank you all. Very helpful. Sorry for being a little slow.

I like the fund because it guarantees a rate. Unless I'm missing something, I think it kind of works (for me anyway) better than a st bond fund. Although, VCSH (st corporate bond) could do better at times.
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Re: TIAA traditional is compounded daily, but not at the displayed crediting rate

Post by House Blend » Sun Jan 07, 2018 9:19 am

Because of the vintage system, understanding what you earn from Traditional is more complex than understanding the difference between APR and APY.

Each contribution belongs to a "vintage". In practice, one can think of these as keeping track of the month and year for each contribution. The vintages earn guaranteed amounts and "additional" amounts; different vintages can earn different additional amounts. These additional amounts are adjusted every year on March 1. Once a rate for a vintage is set, it remains constant until the next March 1.

The daily interest is separated into the guaranteed and additional portions. The guaranteed portion buys more of the vintage from which it came; the additional portion buys into today's vintage.

So if 3% is the minimum guarantee for your contract, what is true is that at the end of the year, you will have 3% more in the 2002 vintage than you had at the beginning of the year. However, the additional amounts earned by 2002 vintages will have bought into the current year's vintages, and will be earning some rate(s) which may be different.

So even if your entire investment in Traditional was a lump sum in 2002, you should expect to own small amounts of most/all subsequent vintages, and expect that your effective rate will be a blend of several rates.

(You could have a happy accident where all vintages you own are earning the same additional amounts.)

(And to not have any dollars in, say, the July 2010 vintage, all of your holdings of Traditional would have to have been earning only the guaranteed minimum during that month.)

The "View interest rates" link available from the web interface to your TIAA account allows you to drill down and see how many dollars you have in each vintage and what they are currently earning.

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Re: TIAA traditional is compounded daily, but not at the displayed crediting rate

Post by livesoft » Sun Jan 07, 2018 9:22 am

I am one of the unhappy and unlucky people with a single vintage nowadays earning no additional amounts. Thus, the numbers are straightforward which is why I can see what's going on now. I like that in a leap year TIAA seems to keep an extra day of interest for itself. :twisted:
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Re: TIAA traditional is compounded daily, but not at the displayed crediting rate

Post by ofckrupke » Sun Jan 07, 2018 9:52 am

livesoft wrote:
Sun Jan 07, 2018 9:22 am
I am one of the unhappy and unlucky people with a single vintage nowadays earning no additional amounts.
The black box is a popular metaphor for occulted investment schemes, but I think that is inside out: TIAA Trad is a coal mine, and yours is the lamentation of a distressed canary from a nearby chamber.

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Re: TIAA traditional is compounded daily, but not at the displayed crediting rate

Post by tibbitts » Sun Jan 07, 2018 11:01 am

livesoft wrote:
Sun Jan 07, 2018 9:22 am
I am one of the unhappy and unlucky people with a single vintage nowadays earning no additional amounts. Thus, the numbers are straightforward which is why I can see what's going on now. I like that in a leap year TIAA seems to keep an extra day of interest for itself. :twisted:
I'm more unhappy with my 1.90% fixed 457 account than with my 3% fixed TIAA account. If the 457 guys paid 3% they could calculate that any way they wanted, because there's no compounding scheme that will make 1.9 % into anywhere close to 3%.

I would have assume that with a 3% rate, I'd have exactly 3% more money in the account at year end than at the beginning. Even in a leap year.

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Re: TIAA traditional is compounded daily, but not at the displayed crediting rate

Post by oldzey » Sun Jan 07, 2018 2:29 pm

The Wizard wrote:
Sat Jan 06, 2018 1:41 pm
spdoublebass wrote:
Sat Jan 06, 2018 1:35 pm
livesoft wrote:
Sat Jan 06, 2018 1:19 pm
Yes, you all can now explain APY and APR to livesoft. Thanks.

I guess that with a bond fund, the SEC yield is not an APY, while with an Ally savings account, the expressed interest rate is APY. TIAA traditional is neither a bond fund nor a savings account, so I'm not sure what I expected.
I'm still confused and have 2 questions:

1. Does TRAD compound daily? monthly? And is it going to be at a rate of 1/12 of 3% (or whatever your guaranteed rate is?

2. Is there a way (there has to be some equation) to see what the result of 3% APR would look like in a bond fund? What I'm asking is TRAD getting 3% equal to TBM getting 3%? If not, how can you figure it out?
Bond funds have principal fluctuation included in total return. You can't know a priori what a bond fund's return for a year will be.
Vanguard does report that VBILX had 12-month return of 3.85% through 12/31/2017...
Is TIAA Traditional a Good Deal? - The Accumulation Phase

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Re: TIAA traditional is compounded daily, but not at the displayed crediting rate

Post by rff000 » Mon Mar 05, 2018 11:38 am

Even though I have had TIAA Traditional for many decades, I only recently understood what "crediting rate" really means. It is what you end up with in a year's time, with no idea of compounding built in.

Since my current average "crediting rate" is 4.339%, I was curious as to what APY with daily compounding this would imply. Doing a calculation, I found out that my 4.339% crediting rate is almost exactly equal to a 4.248% APY with daily compounding.

In other words, the crediting rate (my 4.339%) implies zero compounding.

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