Locked into a "sticky" annuity: Opinions for best course of action?

[EasyC]

Hello everyone.

My first post here was a question about a friends retirement plans as I am trying to help her out. She had an annuity from former employer with TIAA and was wondering if it made sense to rollover into an IRA. It was mentioned we needed more info about the plan to find the best way forward. She spoke with them today and we now have what I believe to be the full picture. Also, the representative at TIAA was the one who called it "sticky", haha.

She has $31k currently in the annuity. It is earning 4% interest plus whatever the TIAA bonus is. These combined would have here at $70k at age 67 (She is currently 49). At 67, she would have a guaranteed monthly payment of $556 with that balance, before taxes of course.

The other option is to surrender the annuity and cash out. No penalty at 59.5 years old, of course, but a 10% penalty if she withdraws prior to that age.

Here is the rub, and what makes it sticky: She cannot cash out the entire account in one transaction, either now or at retirement. She is only allowed to withdraw/rollover 10% of the balance once per year spread out over the course of ten years. This to me sounds like a far from ideal arrangement for her.

What would you do? I have came up with a few options, crunched some numbers on my end, and wonder what others think, as well what some other choices might be. My thoughts:

A guaranteed $556 per month 20 years from now does not feel like a good return on investment for that money. Assuming my math is correct, that is only a 4% and some change annualized return. That monthly payment comes out to $6672/year, that divided into $70k is about 10.5 years to break "even" on the accumulated value. All the payments there after would be "extra", for lack of a better term.

What I think may make more sense is to go ahead and rollover the $31k over the course of the next ten years into an IRA. The balance remaining each year will continue to earn interest and she will still have the full $7k contribution cap available (or whatever it is going forward) on her other tax advantaged accounts.
Assuming an 8% annualized return on her portfolio she would have around $51,500 10 years from now. Add and additional 9 years invested (when she would be 67) and that would grow to $103k without any additional contributions and of course can continue to stay invested.

A part of her just wants to take money and pay the penalty. However, she would NOT be getting a lump sum and getting around $3100 in your pocket each year, minus taxes and penalties, seems like the worst option to me.

Thoughts on this matter?

[JayB]

She has $31k currently in the annuity. It is earning 4% interest plus whatever the TIAA bonus is. These combined would have here at $70k at age 67 (She is currently 49). At 67, she would have a guaranteed monthly payment of $556 with that balance, before taxes of course.

The other option is to surrender the annuity and cash out. No penalty at 59.5 years old, of course, but a 10% penalty if she withdraws prior to that age.

Here is the rub, and what makes it sticky: She cannot cash out the entire account in one transaction, either now or at retirement. She is only allowed to withdraw nor 10% of the balance once per year spread out over the course of ten years. This to me sounds like a far from ideal arrangement for her.

What would you do? I have came up with a few options, crunched some numbers on my end, and wonder what others think, as well what some other choices might be.

Please specify what type of TIAA Traditional account this is (e.g., GRA, RA, etc.). RAs can be withdrawn or transferred to an IRA in 10 payments over 9 years plus one day. GRAs can be withdrawn in 5 payments over 4 years plus one day via a fixed period annuity.

[EasyC]

She has $31k currently in the annuity. It is earning 4% interest plus whatever the TIAA bonus is. These combined would have here at $70k at age 67 (She is currently 49). At 67, she would have a guaranteed monthly payment of $556 with that balance, before taxes of course.

The other option is to surrender the annuity and cash out. No penalty at 59.5 years old, of course, but a 10% penalty if she withdraws prior to that age.

Here is the rub, and what makes it sticky: She cannot cash out the entire account in one transaction, either now or at retirement. She is only allowed to withdraw nor 10% of the balance once per year spread out over the course of ten years. This to me sounds like a far from ideal arrangement for her.

What would you do? I have came up with a few options, crunched some numbers on my end, and wonder what others think, as well what some other choices might be.

Please specify what type of TIAA Traditional account this is (e.g., GRA, RA, etc.). RAs can be withdrawn or transferred to an IRA in 10 payments over 9 years plus one day. GRAs can be withdrawn in 5 payments over 4 years plus one day via a fixed period annuity.

Thanks for the reply. I believe it is an RA as the rep on the phone said the account must be liquidated over the 9 yr plus 1 day schedule.

[Harmanic]

A guaranteed $556 per month 20 years from now does not feel like a good return on investment for that money. Assuming my math is correct, that is only a 4% and some change annualized return. That monthly payment comes out to $6672/year, that divided into $70k is about 10.5 years to break "even" on the accumulated value. All the payments there after would be "extra", for lack of a better term.

Two things:

First, the crediting rate that you are looking at is usually similar to the 10 year treasury bond. That makes it a good fixed income / bond type allocation. Moreover, you have a guarantee of 3%, so if interest rates fall to 1% again, you will still get 3%. That's a good deal.

Second, don't confuse the crediting rate with the payout rate. The 10 pay option that you are referring to does not get loyalty bonuses that make this annuity better than most (any?) commercial annuity. To get that bonus and end up with a much higher payout rate in retirement, you need to annuitize it into lifetime income. Right now, a 65 year old long time holder of this annuity can get payout rates over 10% for the rest of their lives. That's pretty good IMO.

[EasyC]

A guaranteed $556 per month 20 years from now does not feel like a good return on investment for that money. Assuming my math is correct, that is only a 4% and some change annualized return. That monthly payment comes out to $6672/year, that divided into $70k is about 10.5 years to break "even" on the accumulated value. All the payments there after would be "extra", for lack of a better term.

Two things:

First, the crediting rate that you are looking at is usually similar to the 10 year treasury bond. That makes it a good fixed income / bond type allocation. Moreover, you have a guarantee of 3%, so if interest rates fall to 1% again, you will still get 3%. That's a good deal.

Second, don't confuse the crediting rate with the payout rate. The 10 pay option that you are referring to does not get loyalty bonuses that make this annuity better than most (any?) commercial annuity. To get that bonus and end up with a much higher payout rate in retirement, you need to annuitize it into lifetime income. Right now, a 65 year old long time holder of this annuity can get payout rates over 10% for the rest of their lives. That's pretty good IMO.

Thanks for the feedback and I apologize as I am not fully understanding what you are saying.
By crediting rate are you referring to the interest rate?

Also, I may have made my question a bit more complicated then it needs to be, as I often do. A simplified query:

According to TIAA, with the growth of the current balance she will receive a lifetime payment of $556 before taxes when she turns 67 years old.
She currently has ZERO saved for retirement outside of this (she does have lower balance 401k from previous employer).

Would she be better served by rolling over 10% of the balance each year for 9 years and reinvesting it in TDF within a tax-deferred account

or

Is it better for her to leave as-is and take the guaranteed payout when she annuitizes it at that age?

[Harmanic]

Would she be better served by rolling over 10% of the balance each year for 9 years and reinvesting it in TDF within a tax-deferred account

or

Is it better for her to leave as-is and take the guaranteed payout when she annuitizes it at that age?

I did this analysis for myself. I began investing in TIAA Traditional in the early 2000s. At the time, the crediting (interest) rate was around 6% with a guaranteed minimum of 3%. If I had invested in a 2030 TDF at the time, I would have been more heavily invested in stocks during the "lost decade" when stock returns went nowhere. Then the TDF would have gradually shifted to bonds during the 2010s when bonds had really low returns. It would have been the worst of both worlds. If I were to convert the TDF to a commercial annuity this year, I would end up with less than the TIAA Traditional Annuity. The balance of the account would be similar, but TIAA Traditional has a payout rate that is 27% higher than a commercial annuity (most of my money is in the two oldest vintages, so the bonus is higher too).

Now these results are unique to me and my investing period. As they say, past results are not a guarantee of future results. There are always elements of chance. The biggest benefit for me was not worrying about the market at all during the 2000s and 2010s. I just focused on my life and my family. And by chance it ended up being better financially too. In hindsight, I would have done MUCH better if I had put everything in an S&P 500 fund. But hindsight is 20/20, as they say. I could also have bought Bitcoin in 2009, or Apple. Getting rich quick was never my goal.

My overall average crediting rate for the past 25 years is between 4.5 and 5 percent.

[Dottie57]

Would she be better served by rolling over 10% of the balance each year for 9 years and reinvesting it in TDF within a tax-deferred account

or

Is it better for her to leave as-is and take the guaranteed payout when she annuitizes it at that age?

I did this analysis for myself. I began investing in TIAA Traditional in the early 2000s. At the time, the crediting (interest) rate was around 6% with a guaranteed minimum of 3%. If I had invested in a 2030 TDF at the time, I would have been more heavily invested in stocks during the "lost decade" when stock returns went nowhere. Then the TDF would have gradually shifted to bonds during the 2010s when bonds had really low returns. It would have been the worst of both worlds. If I were to convert the TDF to a commercial annuity this year, I would end up with less than the TIAA Traditional Annuity. The balance of the account would be similar, but TIAA Traditional has a payout rate that is 27% higher than a commercial annuity (most of my money is in the two oldest vintages, so the bonus is higher too).

Now these results are unique to me and my investing period. As they say, past results are not a guarantee of future results. There are always elements of chance. The biggest benefit for me was not worrying about the market at all during the 2000s and 2010s. I just focused on my life and my family. And by chance it ended up being better financially too. In hindsight, I would have done MUCH better if I had put everything in an S&P 500 fund. But hindsight is 20/20, as they say. I could also have bought Bitcoin in 2009, or Apple. Getting rich quick was never my goal.

My overall average crediting rate for the past 25 years is between 4.5 and 5 percent.

Justa note on the lost decade. If stock prices had been rising, you would own fewer number of stock shares. The falling prices in 2008 and 2009 helped me build my portfolio as did low prices earlier . The low prices in the 2000s were helpful. I just didn’t know what the future would bring.

[InMyDreams]

Is it better for her to leave as-is and take the guaranteed payout when she annuitizes it at that age?

Hopefully crefwatch will chime in.

TIAA contracts are often more favorable to women than other commercial annuities when it comes to annuitizing their TIAA Trad holdings.

She needs to decide if she wants an annuity income.

She could compare what TIAA would pay vs. what she is quoted at annuity sites (there's a site that BHers usually recommend for a quote, but I don't know the name, something like immediate spias??).

[EasyC]

Would she be better served by rolling over 10% of the balance each year for 9 years and reinvesting it in TDF within a tax-deferred account

or

Is it better for her to leave as-is and take the guaranteed payout when she annuitizes it at that age?

I did this analysis for myself. I began investing in TIAA Traditional in the early 2000s. At the time, the crediting (interest) rate was around 6% with a guaranteed minimum of 3%. If I had invested in a 2030 TDF at the time, I would have been more heavily invested in stocks during the "lost decade" when stock returns went nowhere. Then the TDF would have gradually shifted to bonds during the 2010s when bonds had really low returns. It would have been the worst of both worlds. If I were to convert the TDF to a commercial annuity this year, I would end up with less than the TIAA Traditional Annuity. The balance of the account would be similar, but TIAA Traditional has a payout rate that is 27% higher than a commercial annuity (most of my money is in the two oldest vintages, so the bonus is higher too).

Now these results are unique to me and my investing period. As they say, past results are not a guarantee of future results. There are always elements of chance. The biggest benefit for me was not worrying about the market at all during the 2000s and 2010s. I just focused on my life and my family. And by chance it ended up being better financially too. In hindsight, I would have done MUCH better if I had put everything in an S&P 500 fund. But hindsight is 20/20, as they say. I could also have bought Bitcoin in 2009, or Apple. Getting rich quick was never my goal.

My overall average crediting rate for the past 25 years is between 4.5 and 5 percent.

Thanks for the follow up.

To your point about having invested in an S&P 500 instead, that is what I am debating: Is the risk of moving away from a fixed-income for life worth the reinvestment into a more aggressive strategy in hopes of a larger return which, as we know, is not a guarantee. Furthermore, since she has to rollover over the balance over 9 years she is effectively DCA into the market; potentially mitigating some risk over this tumultuous period.

At the end of the day, I just have a hard time thinking $475 after taxes per month is worth it to continue holding the annuity, potentially missing a change to have what could be a much higher growth rate.

I mentioned a TDF simply because she, unlike me, wants nothing to do with picking/balancing/managing different index funds.
I also think a total world/total bond would also work for her, with most likely a conservative allocation to start until she feels comfortable taking on more risk. S
She honestly hates the fact that she has to invest in the market in order to give her a chance of a financially secure retirement. To be honest I often feel the same.

Also, whether or not this matters, none of the contributions came out her pocket. Her former employer made all the contributions for her during her time there.

Interestingly enough, the place she worked was the Sante Fe Institute where they do theoretical research in math and science. She mentioned during her time there they researches were working various mathematical theories related to finance.

With all that said, I guess there are no easy answers to her situation, as is often the case.

[WillRetire]

I don't know anything about TIAA annuities. Applying present-value calculations to some of the information you provided suggests annuitizing at age 67 for $556/month ($6672/year) using a discount rate of 5% is better than the lump sum option (or lump sum over 10 years). You'd need a discount rate of 7% or greater to justify cashing out sooner and without lifetime income.

Also, in your initial post you mentioned potential IRA investment returns of 8%. That is quite high for a long-term RoR, even if 100% stocks. I would use something more conservative, no more than 6% for planning purposes. 5% is typical for a balanced portfolio, for planning purposes.

Cashing out & investing a lump sum takes some discipline, nerve, confidence, and expertise. Is your friend willing and able to stay the course through market crashes & corrections that impact her nest egg?

It may be best to keep the annuity, and draw lifetime income starting at age 67. If she lives to age 86, that income stream has a present value of $34,550 using a discount rate of 5%.