TIAA Traditional annuitization vs. cash out

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HelpingParents
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TIAA Traditional annuitization vs. cash out

Post by HelpingParents » Wed May 09, 2018 4:52 pm

I'm tasked with helping my parents determine whether to annuitize a $131k TIAA Traditional annuity account vs. cash it out via a Transfer Payout Annuity over 9 years. My parents are currently 64 and will be retiring in the next year or so. They're planning to delay Social Security until age 70, at which point they will receive a total of about $60k/year in benefits. That should be more than enough to cover their current annual expenses of $45k, though they may move to a higher cost of living area after retirement. They also have a very large investment portfolio (>$8m) that it seems like should provide way more additional variable income should they need it.

The TIAA Traditional annuity is in an RA contract and has a 3% guaranteed rate. The average return typically hovers around 4.25%, though. Using the Retirement Income Planner on TIAA's site, it appears that if they annuitize now with a Joint Life option (no guaranteed period), they would receive about $9k per year in income, for a payout rate of 6.9%. If they select the graded payout option to provide some degree of inflation adjustment, they would get $7390/year in income, for a payout rate of 5.6%.

What are the factors that one should consider in deciding whether to cash out over time (investing the proceeds in a low-cost diversified portfolio) vs. annuitizing?

I know TIAA has a weird "vintage" system that seems to suggest two same-age retirees with the same TIAA Traditional balance may get different payouts depending on when the money was contributed. (Most of the funds in my parents' account were contributed decades ago.) Am I understanding this correctly? If so, I'm particularly interested in understanding if this factor alone makes one or the other a better deal.

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nisiprius
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Re: TIAA Traditional annuitization vs. cash out

Post by nisiprius » Wed May 09, 2018 5:50 pm

I have no idea how to calculate it, sorry.

About a third of my retirement savings were in TIAA Traditional, and I ultimately ended up putting about a third of that into a transfer payout annuity, and the rest of it into a lifetime payout contract with the "graded" option. I based this mostly on (a) a decision that this amount of annuitization was suitable for us, and (b) blind trust that TIAA-CREF was nonprofit, "good guys," and that their annuity was probably a good deal even if I didn't understand it.

I'm currently happy with my decision. However, I do not have the same degree of warm fuzzy feeling about TIAA-CREF as I used to. Maybe I was naïve back then. I was never really comfortable with the "graded payout" not being formally linked to the CPI-U. I also thought it was a pity that the actual "guaranteed" amount was so much lower than the "illustration" or "estimate" or whatever they called it. But so far the payouts have been as expected.

I also take note that ten years ago, TIAA-CREF was one of very, very few insurers--I think there were four--rated AAA for financial strength by all four of the nationally recognized statistical ratings organizations (NRSRO's), A. M. Best, Fitch, Moody's, and S&P--and that this is no longer true. Not that the current ratings aren't good; they are, they're fine, but it is no longer in a special class almost by itself.

https://www.tiaa.org/public/pdf/perform ... rength.pdf

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PhilosophyAndrew
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Re: TIAA Traditional annuitization vs. cash out

Post by PhilosophyAndrew » Wed May 09, 2018 6:00 pm

With such a low annual spend and over $8m in investable assets, this decision makes no material difference in their financial lives. So, they should simply do whichever they prefer without investing too much time or worry in the decision.

Andy.

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Re: TIAA Traditional annuitization vs. cash out

Post by ResearchMed » Wed May 09, 2018 6:01 pm

nisiprius wrote:
Wed May 09, 2018 5:50 pm
I have no idea how to calculate it, sorry.

About a third of my retirement savings were in TIAA Traditional, and I ultimately ended up putting about a third of that into a transfer payout annuity, and the rest of it into a lifetime payout contract with the "graded" option. I based this mostly on (a) a decision that this amount of annuitization was suitable for us, and (b) blind trust that TIAA-CREF was nonprofit, "good guys," and that their annuity was probably a good deal even if I didn't understand it.

I'm currently happy with my decision. However, I do not have the same degree of warm fuzzy feeling about TIAA-CREF as I used to. Maybe I was naïve back then. I was never really comfortable with the "graded payout" not being formally linked to the CPI-U. I also thought it was a pity that the actual "guaranteed" amount was so much lower than the "illustration" or "estimate" or whatever they called it. But so far the payouts have been as expected.

I also take note that ten years ago, TIAA-CREF was one of very, very few insurers--I think there were four--rated AAA for financial strength by all four of the nationally recognized statistical ratings organizations (NRSRO's), A. M. Best, Fitch, Moody's, and S&P--and that this is no longer true. Not that the current ratings aren't good; they are, they're fine, but it is no longer in a special class almost by itself.

https://www.tiaa.org/public/pdf/perform ... rength.pdf

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There may be other life annuity providers with good ratings, but do you have enough experience with your own "income" from TIAA's offering to compare how much of a difference that "black box extra" has been making?
(Comparing the non-graded with similar, obviously.)

And that should make more and more of a difference as time goes on, both by continuing into the future and also from additional little bumps up.

Many thanks.

RM
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Re: TIAA Traditional annuitization vs. cash out

Post by jjustice » Wed May 09, 2018 6:38 pm

Speaking from personal experience, I am very happy on the first of the month to get an annuity check that I know will continue through both my and my wife's lifetime. Five years ago I started four annuities with TIAA. They were CREF Stock, TIAA Real Estate, TIAA Traditional graded payment, and TIAA Traditional standard payment. I requested that as much as possible of my Traditional annuity be graded payment. My contributions for 2012-2013 were not earning the 4% minimum required for the graded payout method.

Graded payout is not linked to CPI. It is a sort of deferred or increasing annuity in that any interest income above 4% is diverted to buy more Traditional. (The annuity pays more than 4% annually since it is not simply paying its earnings.) Each year the annuity is a bit larger. So far payments have grown faster than inflation. I chose graded payment (for as much as was eligible) because I like the idea of an annual raise. I've been happy with the choice.

My guess is that your parents would take pleasure in the annually increasing monthly payments that they were guaranteed to receive for life.

John

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Re: TIAA Traditional annuitization vs. cash out

Post by ResearchMed » Wed May 09, 2018 6:45 pm

jjustice wrote:
Wed May 09, 2018 6:38 pm
Speaking from personal experience, I am very happy on the first of the month to get an annuity check that I know will continue through both my and my wife's lifetime. Five years ago I started four annuities with TIAA. They were CREF Stock, TIAA Real Estate, TIAA Traditional graded payment, and TIAA Traditional standard payment. I requested that as much as possible of my Traditional annuity be graded payment. My contributions for 2012-2013 were not earning the 4% minimum required for the graded payout method.

Graded payout is not linked to CPI. It is a sort of deferred or increasing annuity in that any interest income above 4% is diverted to buy more Traditional. (The annuity pays more than 4% annually since it is not simply paying its earnings.) Each year the annuity is a bit larger. So far payments have grown faster than inflation. I chose graded payment (for as much as was eligible) because I like the idea of an annual raise. I've been happy with the choice.

My guess is that your parents would take pleasure in the annually increasing monthly payments that they were guaranteed to receive for life.

John
Ah - you've got both graded and not.
For those two TIAA Trad Annuity lifetime incomes, are you able to compare the percentage (or yearly average percentage) of the *increase*?

Only the graded has the "sort-of-inflation-proxy", but both should have some of that "black box" increase whenever it's appropriate from the TIAA investment returns, correct?
(Or am I not understanding these correctly. If not, perhaps eventually I will...! :confused )

Thanks.

RM
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Re: TIAA Traditional annuitization vs. cash out

Post by oldzey » Wed May 09, 2018 11:26 pm

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Re: TIAA Traditional annuitization vs. cash out

Post by jjustice » Thu May 10, 2018 8:59 am

ResearchMed wrote:
Wed May 09, 2018 6:45 pm
Ah - you've got both graded and not.
For those two TIAA Trad Annuity lifetime incomes, are you able to compare the percentage (or yearly average percentage) of the *increase*?
I began my Traditional annuities on August 1, 2013. Using the CPI-U index for July 2013 and April 2018, inflation has been 7.26%. My standard payout Traditional annuity now pays 4.13% more than when it began. The graded payout Traditional annuity is currently paying 10.33% more than when it began.

Other people's graded payout will differ if they have different relative amounts in the different vintages.

John

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Re: TIAA Traditional annuitization vs. cash out

Post by ResearchMed » Thu May 10, 2018 9:08 am

jjustice wrote:
Thu May 10, 2018 8:59 am
ResearchMed wrote:
Wed May 09, 2018 6:45 pm
Ah - you've got both graded and not.
For those two TIAA Trad Annuity lifetime incomes, are you able to compare the percentage (or yearly average percentage) of the *increase*?
I began my Traditional annuities on August 1, 2013. Using the CPI-U index for July 2013 and April 2018, inflation has been 7.26%. My standard payout Traditional annuity now pays 4.13% more than when it began. The graded payout Traditional annuity is currently paying 10.33% more than when it began.

Other people's graded payout will differ if they have different relative amounts in the different vintages.

John
Thanks so much.

That's very interesting as a comparison.

Do you happen to remember "how much less" (percentage less) the graded cost back in 2013?
(That's probably age-dependent, in addition to the age factor of any annuity itself?)

And the vintages are the same for your two, if started at the same time.
TIAA pulls proportionately from every vintage for this (or TPA's, etc.), right?

We are starting to think seriously about how to handle this, but have a couple of years still.

RM
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jjustice
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Re: TIAA Traditional annuitization vs. cash out

Post by jjustice » Thu May 10, 2018 10:02 am

ResearchMed wrote:
Thu May 10, 2018 9:08 am
Do you happen to remember "how much less" (percentage less) the graded cost back in 2013?
(That's probably age-dependent, in addition to the age factor of any annuity itself?)
I take your question to be about how much more I would have gotten on my first payment if it had all been standard payout. The answer is that I don't know--and don't know how to find out. I really wasn't worried about the size of the original payment. It was plenty large for my needs. I just didn't want to watch the payments shrink in real terms over the years.

By the way, although I have four TIAA annuities, I get one check (bank deposit) on the first of each month. I get two 1099-Rs each January. One for the CREF annuity (Stock) and one for the three TIAA annuities (Real Estate, graded Traditional, and standard Traditional).

John

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Re: TIAA Traditional annuitization vs. cash out

Post by MNR » Thu May 10, 2018 6:16 pm

The question I would have is an echo of Andy’s earlier response. Given the size of other assets, there’s seems no need to annuitize (and thus no need to wade through the various TIAA options), with the result that TIAA gets whatever remains after death or some guaranteed period. Instead, why not simply let the TIAA account accumulate interest? When the time for RMDs arrives, do the minimum RMD each year, thereby probably passing on to beneficiaries whatever remains after death? (To repeat, this option seems worth considering primarily because of the substantial assets available outside TIAA.)

HelpingParents
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Re: TIAA Traditional annuitization vs. cash out

Post by HelpingParents » Sun May 13, 2018 12:17 am

Thanks for all the responses so far.

Is anyone familiar with the inner workings of TIAA Traditional? Specifically, how will the fact that the contributions to the fund were made many years ago affect the value of annuitizing it?

Is it true that a participant with the same account balance but who contributed recently instead of in the past may end up with a different benefit?

Regarding the comment about it not mattering much in terms of retirement safety, I agree, but we'd still like to do the optimal thing with the funds.

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Re: TIAA Traditional annuitization vs. cash out

Post by RedJunglefowl » Sun May 13, 2018 12:57 am

6.9% payout rate for a joint life at age 64 sounds like a good deal. If they are both in good health, I would annuitize it.

Ultimately, with such a high net worth it won't matter much. But having a baseline income is nice in case they somehow spend or lose 8M.

I think this is more a guess about their health. If they are in better health than the average person their age I lean towards the annuity.

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Re: TIAA Traditional annuitization vs. cash out

Post by ofckrupke » Sun May 13, 2018 1:07 am

Obviously the people who write/maintain the accumulation software at TIAA know the inner workings of traditional, but they're not going to share the code, and the people upstream from them who draw/redraw the vintage boundaries do too, but they don't give speeches about the process or publish the minutes of their monthly crediting rate decision meetings.

So you might as well consider it a black box, but recognize that a notion of equitability comes into to play in those meetings. That is, loosely, crediting rates for premia (contributions) paid in at times of high market interest rates tend to be higher than for premia paid in during times of low market interest rates. Possibly, their notion of equitability also modestly rewards those with liquid flavors of Traditional who stay put rather than exercising that liquidity to market-time Trad vs other available TIAA asset classes (the market timers require the account managers to hold more liquid, lower-returning assets)....but this possibility is essentially speculative. It's been observed for decades that more aged premia also tend to be credited interest at a high rate than less aged premia; but since for the last 35 years the general trend of market interest rates has been downward, it's almost impossible to tell how much of this phenomenon is credit purely for "aging in place" in traditional, and how much is due to the fact that older premia were necessarily made at times of higher market interest rates. [When one transfers out, one loses proportionally from all held vintages, so this makes it impossible to switch out just one's lower paying vintages for a contemporary high-paying one by transferring out, waiting 121 days, and transferring back in. Of course one can transfer out in entirety and then back in after the delay, but for most with extended accumulations this would involve throwing out as much baby as bathwater. ]

Here's a listing of representative lifetime payout rates effective 1 June 2018, published by TIAA and reproduced at the morningstar TIAA forum:

Code: Select all

INCOME PAYOUT RATES FOR LIFETIME ANNUITIES ISSUED DURING JUNE 2018
VINTAGE		LIFETIME INCOME PAYOUT RATE			LIFETIME INCOME PAYOUT RATE
(WHEN MONEY 	SINGLE LIFE WITH 10-YEAR GUARANTEE	JOINT LIFE WITH 20-YEAR GUARANTEE
WAS CONTRIBUTED)	
2018 		6.2% 								5.3%
2016 - 2017 	6.0% 								5.1%
2012 - 2015 	6.2% 								5.3%
2002 - 2011 	7.0% 								6.1%
Pre-2002 	8.4% 								7.5%

An income payout rate represents the amount of annual income you will receive as a percentage 
of the amount you convert to lifetime annuity payments. 
Note that while the crediting rates within the payout annuities are embedded/hidden within these published payout rates,
one can infer both the existence of a range of crediting rates and its approximate extent from the range of payout rates.
That is, something like a range of 2.4% from the oldest to the 2016-2017 vintages.

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Re: TIAA Traditional annuitization vs. cash out

Post by HelpingParents » Sun May 13, 2018 11:53 am

Just to update the thread, we decided to do a 9 year Transfer Payout Annuity to start rolling over the funds slowly to a Traditional IRA. We are still able to annuitize the remaining balance at a later date, if desired.

Other than current health, what factors would you look at to determine if annuitizing makes sense? I've seen conflicting info: some say that if the balance of other investments is high enough, annuities aren't necessary, but others say that you should use a portion to match your liabilities with guaranteed income, and just use the remaining investment portfolio for the gravy on top.

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Re: TIAA Traditional annuitization vs. cash out

Post by PhilosophyAndrew » Sun May 13, 2018 5:22 pm

I would look at health of the recepients as well as their financial need. In your parents’ case, there is no need to annuitize and so they should only do so if that is their preference for some other reason.

Andy.

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Re: TIAA Traditional annuitization vs. cash out

Post by The Wizard » Sun May 13, 2018 9:38 pm

HelpingParents wrote:
Sun May 13, 2018 11:53 am

Other than current health, what factors would you look at to determine if annuitizing makes sense? I've seen conflicting info: some say that if the balance of other investments is high enough, annuities aren't necessary, but others say that you should use a portion to match your liabilities with guaranteed income, and just use the remaining investment portfolio for the gravy on top.
Annuitizing may not have been necessary for me.
But given TIAA's better than average annuitization policies, I think it definitely makes sense to set up at least some level of guaranteed income no matter how much your total is.
I'm five years in and quite content with my decision, both fixed and variable annuity income.
I find it comfortable having somewhat higher income in retirement than when working, even with higher income taxes. I suppose your mileage may vary, as they say...
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