TIAA Traditional account or intermediate term bond index?

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Kelly
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TIAA Traditional account or intermediate term bond index?

Post by Kelly » Mon May 30, 2016 10:43 am

Folks

Is there any reason why someone would want to use Vanguard's Intermediate Term Bond Index (VBILX) with a 2.18% yield when they also have access to two TIAA traditional annuities?

One TIAA Traditional Annuity has a 3.25% current crediting rate (Retirement Choice Plus) and doesn't appear to have any withdrawal restrictions. The other (Retirement Annuity) has a 3.75% crediting rate but does have withdrawal restrictions.

Many thanks for any insight!

Kelly

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cheese_breath
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Re: TIAA Traditional account or intermediate term bond index?

Post by cheese_breath » Mon May 30, 2016 11:03 am

I don't. The TIAA rates are great in today's environment. Personally I have a 3% guarantee TIAA tIRA in place of all bonds. The only question seems to be whether you will want to withdraw some someday or can live with the restrictions. Perhaps you want a mixture of both.

edit: I forgot to ask you to make sure the annuities have a guaranteed minimum rate before you make your decision though. I think most (maybe all) TIAA annuities guarantee at least 3% (some more) on TIAA Traditional.
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Re: TIAA Traditional account or intermediate term bond index?

Post by Kelly » Mon May 30, 2016 11:53 am

cheese_breath wrote:I don't. The TIAA rates are great in today's environment. Personally I have a 3% guarantee TIAA tIRA in place of all bonds. The only question seems to be whether you will want to withdraw some someday or can live with the restrictions. Perhaps you want a mixture of both.

edit: I forgot to ask you to make sure the annuities have a guaranteed minimum rate before you make your decision though. I think most (maybe all) TIAA annuities guarantee at least 3% (some more) on TIAA Traditional.
Many thanks for your reply.

Agreed, I can't think of a reason to not go 100% TIAA.

Yes they have guaranteed minimum rates. I think they all do but can't be sure.

Kelly

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cheese_breath
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Re: TIAA Traditional account or intermediate term bond index?

Post by cheese_breath » Mon May 30, 2016 11:57 am

Kelly wrote:
cheese_breath wrote:I don't. The TIAA rates are great in today's environment. Personally I have a 3% guarantee TIAA tIRA in place of all bonds. The only question seems to be whether you will want to withdraw some someday or can live with the restrictions. Perhaps you want a mixture of both.

edit: I forgot to ask you to make sure the annuities have a guaranteed minimum rate before you make your decision though. I think most (maybe all) TIAA annuities guarantee at least 3% (some more) on TIAA Traditional.
Many thanks for your reply.

Agreed, I can't think of a reason to not go 100% TIAA.

Yes they have guaranteed minimum rates. I think they all do but can't be sure.

Kelly
Just make sure the guarantee is at least 3%.
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Re: TIAA Traditional account or intermediate term bond index?

Post by livesoft » Mon May 30, 2016 12:04 pm

Of course there are reasons. The bond fund could do better than TIAA over the long-term. The liquidity of the bond fund is more likely higher.

I have TIAA TA paying more than 4.5% nowadays, but I don't have 100% of my fixed income in that. Over the years, bond funds have actually done just as well. I am in the middle of a transfer-payout annuity of some of the TIAA assets.
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Re: TIAA Traditional account or intermediate term bond index?

Post by Kelly » Mon May 30, 2016 12:09 pm

livesoft wrote:Of course there are reasons. The bond fund could do better than TIAA over the long-term. The liquidity of the bond fund is more likely higher.

I have TIAA TA paying more than 4.5% nowadays, but I don't have 100% of my fixed income in that. Over the years, bond funds have actually done just as well. I am in the middle of a transfer-payout annuity of some of the TIAA assets.
I have noticed that over time, the Traditional account is not much better than the bond market. Not sure if this will be the case moving forward. What's wrong with going 100% TIAA until the bond market yields more?

Kelly

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Re: TIAA Traditional account or intermediate term bond index?

Post by livesoft » Mon May 30, 2016 12:12 pm

Kelly wrote:
livesoft wrote:Of course there are reasons. The bond fund could do better than TIAA over the long-term. The liquidity of the bond fund is more likely higher.

I have TIAA TA paying more than 4.5% nowadays, but I don't have 100% of my fixed income in that. Over the years, bond funds have actually done just as well. I am in the middle of a transfer-payout annuity of some of the TIAA assets.
I have noticed that over time, the Traditional account is not much better than the bond market. Not sure if this will be the case moving forward. What's wrong with going 100% TIAA until the bond market yields more?

Kelly
Maybe for contributions that will work, but I don't think you can simply "exchange" from TIAA TA to a bond fund.
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Re: TIAA Traditional account or intermediate term bond index?

Post by cheese_breath » Mon May 30, 2016 12:39 pm

livesoft wrote:
Kelly wrote:
livesoft wrote:Of course there are reasons. The bond fund could do better than TIAA over the long-term. The liquidity of the bond fund is more likely higher.

I have TIAA TA paying more than 4.5% nowadays, but I don't have 100% of my fixed income in that. Over the years, bond funds have actually done just as well. I am in the middle of a transfer-payout annuity of some of the TIAA assets.
I have noticed that over time, the Traditional account is not much better than the bond market. Not sure if this will be the case moving forward. What's wrong with going 100% TIAA until the bond market yields more?

Kelly
Maybe for contributions that will work, but I don't think you can simply "exchange" from TIAA TA to a bond fund.
OP indicated Retirement Choice Plus Traditional didn't have withdrawal restrictions. If that's true it could be moved into bonds at a later date.
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Re: TIAA Traditional account or intermediate term bond index?

Post by House Blend » Tue May 31, 2016 11:03 am

cheese_breath wrote:
livesoft wrote:
Kelly wrote:
livesoft wrote:Of course there are reasons. The bond fund could do better than TIAA over the long-term. The liquidity of the bond fund is more likely higher.

I have TIAA TA paying more than 4.5% nowadays, but I don't have 100% of my fixed income in that. Over the years, bond funds have actually done just as well. I am in the middle of a transfer-payout annuity of some of the TIAA assets.
I have noticed that over time, the Traditional account is not much better than the bond market. Not sure if this will be the case moving forward. What's wrong with going 100% TIAA until the bond market yields more?

Kelly
Maybe for contributions that will work, but I don't think you can simply "exchange" from TIAA TA to a bond fund.
OP indicated Retirement Choice Plus Traditional didn't have withdrawal restrictions. If that's true it could be moved into bonds at a later date.
Right. RCP ("Retirement Choice Plus") Traditional has no restrictions on transfers/exchanges.

Well, actually there are some funny rules that limit your ability to game the rates paid on all of the liquid forms of Traditional. For example, if the rate announced tomorrow for June contributions is 0.25% higher, then you might want to exchange all of your old vintages into something else, say a bond fund, and then exchange it all back into Traditional for a quarter point boost.

But their rules say that if you do a round trip like that within 120 days, you won't get the new vintage rate.

(Actually the oldest vintages of RCP are paying 4.25%, so this makes sense only if the bulk of what you have in it is of recent vintage.)

There's one other pecularity to keep in mind with RCP compared with the older liquid forms of Traditional, and that is in the nature of its minimum guaranteed rate: it's an oxymoronic variable constant. Every March 1, TIAA consults their crystall ball and decides what the
minimum guaranteed rate shall be for the next 12 months. They promise only that this minimum will be in the range from 1% to 3%. (Currently it is 3%.)

So if TIAA is under financial pressures 9 months from now, they could start paying 1% on all of your vintages of RCP Traditional.

The other liquid forms, in GSRA and SRA contracts, have a constant minimum guarantee of 3%.

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Re: TIAA Traditional account or intermediate term bond index?

Post by ofcmetz » Tue May 31, 2016 1:06 pm

We split the difference between TIAA Traditional and a Intermediate bond index for our fixed income. We feel like we win either way.
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Re: TIAA Traditional account or intermediate term bond index?

Post by Kelly » Tue May 31, 2016 5:32 pm

So if TIAA is under financial pressures 9 months from now, they could start paying 1% on all of your vintages of RCP Traditional.
Good to know! I missed this nuance.

Many thanks

Kelly

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Re: TIAA Traditional account or intermediate term bond index?

Post by crefwatch » Tue May 31, 2016 6:39 pm

House Blend wrote:
cheese_breath wrote:
livesoft wrote:
Kelly wrote:
livesoft wrote:For example, if the rate announced tomorrow for June contributions is 0.25% higher, then you might want to exchange all of your old vintages into something else, say a bond fund, and then exchange it all back into Traditional for a quarter point boost.
On the other hand, if you retired ten years later, you might discover that if you wanted to ANNUITIZE your TIAA Traditional, you had given up the highest effective rate you could have gotten in the PAYOUT stage vintages, because you "flipped" your liquid TIAA Traditional.

http://socialize.morningstar.com/NewSoc ... px#2557216

Just what's so bad about getting an extra 1/2% to .75% in exchange forfor 9 year liquidity? We're talking about a retirement account here, not someone's Kramer Mad Money speculation fund! (I hope ... ) When the time comes to annuitize or take MRDs or even Interest-Only payouts, the 9-year limitation will have no effect on your plans. Only if you want to take all the money out at once to buy a Lamborghini for your grandson will you feel frustrated.

Have you considered how you will feel if you buy a bond fund and interest rates go up 1 or 2 percent over two years? Do you know what will happen to your bond fund? It won't happen to TIAA Traditional.

There is no promise, but TIAA does try to keep a relation between the Traditional interest rate and the 10-year Treasury.

This is a very complicated question, and I urge the OP not to make a snap judgment based on the most facile and glib response she likes in the thread.

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Re: TIAA Traditional account or intermediate term bond index?

Post by CFM300 » Wed Jun 01, 2016 10:20 am

crefwatch wrote: On the other hand, if you retired ten years later, you might discover that if you wanted to ANNUITIZE your TIAA Traditional, you had given up the highest effective rate you could have gotten in the PAYOUT stage vintages, because you "flipped" your liquid TIAA Traditional.

http://socialize.morningstar.com/NewSoc ... px#2557216
Thanks for pointing that out and for providing the link to the previous discussions.

Man, this product is complicated!

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Re: TIAA Traditional account or intermediate term bond index?

Post by grabiner » Wed Jun 01, 2016 8:36 pm

crefwatch wrote:Just what's so bad about getting an extra 1/2% to .75% in exchange forfor 9 year liquidity? We're talking about a retirement account here, not someone's Kramer Mad Money speculation fund! (I hope ... ) When the time comes to annuitize or take MRDs or even Interest-Only payouts, the 9-year limitation will have no effect on your plans. Only if you want to take all the money out at once to buy a Lamborghini for your grandson will you feel frustrated.

Have you considered how you will feel if you buy a bond fund and interest rates go up 1 or 2 percent over two years? Do you know what will happen to your bond fund? It won't happen to TIAA Traditional.
However, the 9-year payout rule essentially means that your TIAA Traditional investment has a duration of 4.5 years, not zero. If rates rise, you won't lose any dollars now, but you will be receiving future dollars at lower-than-current rates. A payment next year in a fund growing by 3% when rates are 4% is equivalent to a loss of 1% of the value of that payment.

I like TIAA Traditional, and your first sentence explains that trade-off; you get a fair premium for that interest-rate risk.
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Re: TIAA Traditional account or intermediate term bond index?

Post by crefwatch » Thu Jun 02, 2016 1:51 pm

grabiner, I don't support the use of the word "duration" in connection with TIAA Traditional. It's not a helpful concept in this situation, mainly because the principal amount will not fluctuate with changes in interest rates. And there is a big difference between a Participant saying "I want all my money back as soon as I can get it" and a Participant content to receive their money over a longer period.

In particular, although it's not "guaranteed" to happen, if interest rates rise it can be expected that TIAA Traditional rates (like those of bond mutual funds) will gradually rise at a similar rate. Now, once someone has selected a TPA (i.e. a 9-year payout), their interest rate is fixed. But a contented TIAA Participant who simply holds on to their TIAA Traditional (or one who selects IPRO or MRD payouts, both without a 9-year lockup) isn't exposed to any interest rate risk: Their principal will not go down, and their interest rate will go up as prevailing rates rise.

The OP is right when she says that this is a very complicated product. While the following comment involves a great deal of OPINION, I would add that the complexity is not intended to deceive or cheat clients. It is how a product developed in 1918 has been able to provide comfortable retirements to many generations of distracted eggheads, with an orderly means of investing and paying out, but avoiding the risk and profit harvested by the main-line insurance companies offering (dissimilar) annuities!

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Re: TIAA Traditional account or intermediate term bond index?

Post by livesoft » Thu Jun 02, 2016 1:57 pm

crefwatch wrote: But a contented TIAA Participant who simply holds on to their TIAA Traditional (or one who selects IPRO or MRD payouts, both without a 9-year lockup) isn't exposed to any interest rate risk: Their principal will not go down, and their interest rate will go up as prevailing rates rise.
Is that really true? The reason I ask is that just yesterday, the very last payout from my TIAA transfer payout annuity was made to me. Yep, it was started 9 years ago. Over those years, the credit rate or interest rate has varied. It has gone up as well as down. I think it may have gone down when prevailing rates have gone up and vice versa.
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Re: TIAA Traditional account or intermediate term bond index?

Post by Kevin M » Thu Jun 02, 2016 3:17 pm

livesoft wrote:
crefwatch wrote: But a contented TIAA Participant who simply holds on to their TIAA Traditional (or one who selects IPRO or MRD payouts, both without a 9-year lockup) isn't exposed to any interest rate risk: Their principal will not go down, and their interest rate will go up as prevailing rates rise.
Is that really true? The reason I ask is that just yesterday, the very last payout from my TIAA transfer payout annuity was made to me. Yep, it was started 9 years ago. Over those years, the credit rate or interest rate has varied. It has gone up as well as down. I think it may have gone down when prevailing rates have gone up and vice versa.
This makes it even harder to apply the duration concept directly. But for any fund with restricted payout, I would expect a liquidity premium, which I think basically is why the rates can appear attractive. The uncertainty about future bond rates and the rate paid by the TIAA Traditional fund introduces a dimension of risk that is not present for a security or fund with no liquidity constraints. One should expect some compensation for this risk.

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Re: TIAA Traditional account or intermediate term bond index?

Post by oldzey » Thu Jun 02, 2016 4:00 pm

Most of my fixed income is in a TIAA Traditional RA (so yes, it has the 9 year + 1 day TPA liquidity restriction).

At this point, I have about 20 years of accumulation left and it's comforting to have several of the aforementioned options available during the withdrawal stage (and thank goodness owning a Lamborghini is not on my bucket list). :D

Do I care that my TIAA Traditional is "locked up" for 9 years? Nope. Do I sleep well at night knowing that my TIAA Traditional balance never goes down? Yup. Will a bond fund do better than the TIAA Traditional vintages in the future? Maybe and then again, maybe not.
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Re: TIAA Traditional account or intermediate term bond index?

Post by MN Finance » Thu Jun 02, 2016 6:26 pm

Don't confuse TIAAs past security over generations of a bond bull market and real estate expansion. The future will look vastly different with lower rates

There is also almost no value in trying to anticipate payout rates a couple decades from now. Current payout tranches are very wide and clearly linked to historical rates. Today's money will not have an impressive rate in hindsight.

I would split between tiaa and bond. Over time the expected return is probably the same, but over short periods they are not (ex over q1 bonds up 3%, tiaa under 1)
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Re: TIAA Traditional account or intermediate term bond index?

Post by crefwatch » Thu Jun 02, 2016 6:33 pm

livesoft wrote: Is that really true? The reason I ask is that just yesterday, the very last payout from my TIAA transfer payout annuity was made to me. Yep, it was started 9 years ago. Over those years, the credit rate or interest rate has varied. It has gone up as well as down. I think it may have gone down when prevailing rates have gone up and vice versa.
livesoft, the part of my statement you quoted isn't the one that applies to a TPA. It is possible that I'm wrong about the TPA interest rate-People have posted both ways on the Morningstar TIAA board - I've never had one. But if the interest rate did vary, I'd count that as, in general, a plus.

If you meant to ask, do TIAA accumulation rates tend to move in the same direction as prevailing US interest rates, the answer is yes. In recent years, TIAA has publicly acknowledged (first time since 1918) that there is a relation to 10-year Treasuries. (Not a lock, not a ratio, just a relation.)

Maybe you meant to ask, "Is an accumulating stage TIAA Traditional customer with an RA or GRA account (a 9-year lockup, and usually, 1/4% to 3/4% extra interest ... that's the compensation asked about nearby in this thread) exposed to Interest Rate Risk?"

As usually stated in prospectuses and other places where Interest Rate Risk has to be admitted to, it usually means risk to bond principal in the event of rising interest rates. That clearly and definitively does not exist in TIAA Traditional.

It can also cover being locked into a constant interest rate during a period when more interest could be earned with the same degree of risk. Since TIAA accumulation stage interest rates tend to rise when market rates rise, I feel it's correct to say that you are not exposed to such a risk. If your rate was related to 10-year Treasuries one year, it will be related to 10-year Treasuries ten years later. (No, that is not a promise of TIAA, and no such guarantee is offered. But it's been a fact since at least 1950.) By the way, if one is going to complain about a loss of opportunity in a TPA if interest rates go up, shouldn't you at least acknowledge that the principal (unlike that of a bond or bond fund) won't go down if interest rates go up?

If a TPA has a varying interest payout rate, then the exposure to Interest Rate risk is greatly, greatly reduced. If a TPA has a fixed interest payout rate for 9 years, then there is a degree of lock-in. But I still say that Duration is the wrong way to measure it. There is no "market" for a running TPA, and there is no choice about getting all your cash "now". TIAA doesn't have to offer you anything in exchange for that vestigial risk.

I joined TIAA in 1975. Until 1987 (really, 1989 maybe), TPAs were not available. TIAA Traditional could only be paid out in a life annuity. Period. The end. Maybe that's why I react this way when people complain about TPA's. I think a TPA is a great deal, for someone who chafes at those golden handcuffs.

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Re: TIAA Traditional account or intermediate term bond index?

Post by livesoft » Thu Jun 02, 2016 6:47 pm

Thanks for comments. I joined TIAA in 1986. While I don't chafe at the TPA (I don't even have one anymore :) ) I think everyone can appreciate that one cannot predict the future 9 years hence when they are contemplating starting a TPA. I simply exchanged my payouts into TIAA Real Estate. At the present time all my TIAA assets are liquid including the remaining Traditional Annuity assets.

Did I make the right decision? My records show that this bit of my portfolio would have been better off if I had done nothing, so the answer right now is No. I would have done much better if I had delayed starting the TPA by a couple of years after TREA had dropped 20%.
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Re: TIAA Traditional account or intermediate term bond index?

Post by ofckrupke » Thu Jun 02, 2016 8:21 pm

I believe that TIAA essentially re-casts the TPA for a year-shorter term at the time of each annual payment, using the vintage/rate structure for payout annuities at the time. This means that the payment will rise if the vintage-weighted average interest rate has risen since the previous payment; and this mitigates the interest-rate risk that David Grabiner assessed with a duration of 4.5y based on an equal-payments assumption.

However, original premia/dates will dominate the piddling daily cells from subsequent (variable) additional amounts including those arriving after the TPA is launched, and rates on old vintages seem to be tethered if not anchored to contemporaneous external market rates for the sorts of long term instruments that TIAA bought with those premia (as discussed by others upthread). So the scale of mitigation is limited, and in terms of the effect of a step change in discount & interest rates on the present value of a newly launched TPA, the 1st order term aka duration is probably not a lot smaller than his 4.5y figure.

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Re: TIAA Traditional account or intermediate term bond index?

Post by House Blend » Thu Jun 02, 2016 9:58 pm

ofckrupke wrote:I believe that TIAA essentially re-casts the TPA for a year-shorter term at the time of each annual payment, using the vintage/rate structure for payout annuities at the time.
I agree with most of the rest of your post, but my experience contradicts this.

I have a small TPA--60% finished. The money that has not been distributed retains its vintage structure, but the rates paid on those vintages are the same as the crediting rates, not the payout rates. This makes it unlike all of their "real"--i.e., lifetime, not fixed term--annuity options for Traditional.

It's also peculiar when you realize that the minimum rate guaranteed for a TPA is only 2.5%, not 3%. Nevertheless, when I click the "View Interest Rates" tab for my account online, I see that the breakdown of rates being paid on what remains in the TPA are 0.5% lower on the "Guaranteed" side and 0.5% higher on the "Additional Amounts" side compared to the vintages in my RA accounts.

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Re: TIAA Traditional account or intermediate term bond index?

Post by ofckrupke » Thu Jun 02, 2016 10:34 pm

House Blend wrote: I have a small TPA--60% finished. The money that has not been distributed retains its vintage structure, but the rates paid on those vintages are the same as the crediting rates, not the payout rates. This makes it unlike all of their "real"--i.e., lifetime, not fixed term--annuity options for Traditional.
That's interesting and I thank you for reporting this observation. On further review of the example in TIAA's TPA brochure I see that they don't actually specify whether the vintage-weighted average 4.0% rate in effect at launch is an accumulation or payout rate. As you note, it is interesting that although an accumulation/crediting rate is used, its breakdown uses the guaranteed rate of the life payout annuity. These features probably both contribute positively, if modestly, to the interest rate mitigation in TPAs provided by annual recasting.

edit to fix attribution in cited text (that is an annoying bug).

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