Should I get out of TIAA traditional annuity?

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Kelly
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Should I get out of TIAA traditional annuity?

Post by Kelly » Tue Jan 10, 2017 2:33 pm

Folks

I have access to a TIAA Traditional Annuity Supplemental Retirement Account which has a fixed 3.25% interest rate (3% guaranteed + declared additional amounts). This appears to be favorable to the Total Bond Market Index with a 2.5% yield and 6 year duration. If I understand duration, if rates go up, I can still count on approximately 2.5% annualized return from that index over 6 years. Since only 20% of the portfolio is in bonds, I'd expected an additional return of about 0.15%=.75% x 20%, where .75% is the additional return of the TIAA account.

This is an old employer plan which could be rolled to a Vanguard IRA. That would allow me to put a small cap and value tilt to my total portfolio. Bill Bernstein stated in his last book (Rational Expectations) that the expected premium for small is 0.6% and 1% for value. Based on the portfolio weights I'd use, my expected portfolio small/value premium should be 0.3%.

So, do I give up the 0.15% extra for the expected 0.3% premium? Small numbers, but I'm left wondering what others think.

Many thanks

Kelly

autopeep
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Re: Should I get out of TIAA traditional annuity?

Post by autopeep » Tue Jan 10, 2017 2:44 pm

Are you asking if you should exchange tiaa traditional for equity?

beardsworth
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Re: Should I get out of TIAA traditional annuity?

Post by beardsworth » Tue Jan 10, 2017 2:59 pm

And are you sure that you will never want to annuitize any amount of money in TIAA Traditional for lifetime income, the main purpose for which it was designed.

And are you aware that TIAA Traditional has various internal rates of accumulation interest rates and payout rates ("vintages") depending on when the money was originally contributed, and that if you take the money out of TIAA Traditional and move it elsewhere, you are "wiping the vintage slate clean" with regard to the monies removed?

https://www.tiaa.org/public/investment- ... r=47933633
Last edited by beardsworth on Tue Jan 10, 2017 3:06 pm, edited 1 time in total.

alrick
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Re: Should I get out of TIAA traditional annuity?

Post by alrick » Tue Jan 10, 2017 3:06 pm

Kelly:

If you are in the TIAA fund that hold the TIAA real estate investments, you may not be able to get out quickly. These funds are tied up in the many real estate properties owned by TIAA and are not liquid.

I had about $50,000 accumulated in a traditional TIAA account and had to enter into a 10 year withdrawal plan to get the assets shifted to another account.....in this case I shifted the funds from TIAA/CREF to Vanguard over a period of years.

Personally, I'd stay away from placing funds in TIAA or any other fund that did not permit me much more flexibility should I decide to transfer all or a portion of the funds.

I would ask your TIAA contact about any restrictions on withdrawals.

Alrick

beardsworth
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Re: Should I get out of TIAA traditional annuity?

Post by beardsworth » Tue Jan 10, 2017 3:09 pm

alrick wrote:I had about $50,000 accumulated in a traditional TIAA account and had to enter into a 10 year withdrawal plan to get the assets shifted to another account.....in this case I shifted the funds from TIAA/CREF to Vanguard over a period of years.
That sounds like a Retirement Annuity or a Group Retirement Annuity, both of which are relatively illiquid.

The OP referred to a "Supplemental" Annuity, which has fewer liquidity restrictions, but, in "exchange" for being less locked up, also earns a lower interest rate during the accumulation period.

https://www.tiaa.org/public/investment- ... r=47933630

https://www.tiaa.org/public/investment- ... r=47933633

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oldzey
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Re: Should I get out of TIAA traditional annuity?

Post by oldzey » Tue Jan 10, 2017 3:16 pm

There are many posts about TIAA Traditional on this forum that may answer your question.

Here's one: viewtopic.php?t=160748

Here's some results from typing "TIAA Traditional" into the search box at the upper right of this page:
https://www.google.com/search?sitesearc ... raditional
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Kelly
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Re: Should I get out of TIAA traditional annuity?

Post by Kelly » Tue Jan 10, 2017 3:33 pm

I'm aware of the vintages and this would be an initial investment in that account. There is currently no money in that TIAA traditional so no old vintages to give up.

I would not be trading fixed income for equities but would establish the 20% bond position in the total bond market index.

The TIAA account would not be annuitized.

The question is whether it's wise to give up the additional 0.15% of the TIAA account in order to get the 0.30% expected small value premium.

Many thanks!

Kelly

The Wizard
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Re: Should I get out of TIAA traditional annuity?

Post by The Wizard » Tue Jan 10, 2017 3:54 pm

Keep the old TIAA plan. Trad beats bonds hands down right now...
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ResearchMed
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Re: Should I get out of TIAA traditional annuity?

Post by ResearchMed » Tue Jan 10, 2017 4:01 pm

Kelly wrote:I'm aware of the vintages and this would be an initial investment in that account. There is currently no money in that TIAA traditional so no old vintages to give up.

I would not be trading fixed income for equities but would establish the 20% bond position in the total bond market index.

The TIAA account would not be annuitized.

The question is whether it's wise to give up the additional 0.15% of the TIAA account in order to get the 0.30% expected small value premium.

Many thanks!

Kelly
Your title question was "Should get out of TIAA traditional annuity?"

How can it be that there is "...currently no money in that TIAA traditional...", if you are asking whether you should get *out*?

I'm I'm not quite sure now how your money is currently invested, what you are considering, and what you are asking.

And don't forget, the TIAA Traditional has that guarantee (specific to which type of plan one is in), often with some small additional amount.

Equities have no guarantee at all.
For "small/value" - or any other equity type/subset - there is no guarantee that what happened in the past will continue or happen again in the future, and if so, how long it would be before that happens (and what type of potential loss before that).

From your initial post, "So, do I give up the 0.15% extra for the expected 0.3% premium? Small numbers, but I'm left wondering what others think", it does seem that you are asking about giving up the fixed income for some small/value premium.
But it wasn't quite clear.

RM
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House Blend
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Re: Should I get out of TIAA traditional annuity?

Post by House Blend » Tue Jan 10, 2017 4:10 pm

Kelly wrote:This appears to be favorable to the Total Bond Market Index with a 2.5% yield and 6 year duration. If I understand duration, if rates go up, I can still count on approximately 2.5% annualized return from that index over 6 years.
No. The SEC yield of a bond fund is the best estimate of the return from that fund assuming that interest rates don't change. If interest rates go up, then the immediate consequence is that you lose money in the short run (in amounts proportional to duration), but in the long run you'll earn more due to the higher yield. Also, while SEC yield may be the best estimate, that doesn't mean it is a particularly good one.

In any case, in the short run, your Traditional SRA account is paying a premium of ~0.75% over Total Bond, and will be a lot less volatile.

This premium is a lot more tangible IMO than the much more tenuous premium from Small Value over plan vanilla market weighted equity risk which is based only on past history that need not repeat.

But you also haven't really shown us what the constraints are that are forcing you to make this choice between Traditional or Small Value. For example, why haven't you been contributing to a traditional or Roth IRA or doing a backdoor Roth every year, and using it for Small Value?

Kelly
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Re: Should I get out of TIAA traditional annuity?

Post by Kelly » Tue Jan 10, 2017 4:32 pm

But you also haven't really shown us what the constraints are that are forcing you to make this choice between Traditional or Small Value. For example, why haven't you been contributing to a traditional or Roth IRA or doing a backdoor Roth every year, and using it for Small Value?
Yes, there is a Roth account which amounts to about 10% of the portfolio. That allows a slight small and value tilt. Moving the TIAA money would allow more of a tilt. I do agree with your good point that the small/value premium is not guaranteed while the TIAA extra is.

Thanks for your insight

Kelly

Levett
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Re: Should I get out of TIAA traditional annuity?

Post by Levett » Tue Jan 10, 2017 5:03 pm

Trade a "tilt" for a guarantee?

Hmm.

Lev

FBN2014
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Re: Should I get out of TIAA traditional annuity?

Post by FBN2014 » Tue Jan 10, 2017 5:33 pm

I would keep the 3.25% as an alternative to your bond allocation.
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Kelly
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Re: Should I get out of TIAA traditional annuity?

Post by Kelly » Tue Jan 10, 2017 5:54 pm

Thanks all. I was thinking the TIAA option was better than the tilt. I just needed some confirmation.

Many thanks!

Kelly

avalpert
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Re: Should I get out of TIAA traditional annuity?

Post by avalpert » Tue Jan 10, 2017 8:35 pm

Kelly wrote:Thanks all. I was thinking the TIAA option was better than the tilt. I just needed some confirmation.

Many thanks!

Kelly
You are still asking the wrong question. It isn't TIAA vs SV tilt, it is how much risk do I want to take in my portfolio - equity risk, size risk and value risk. Answer that first and then you can figure out what is the best way to get your risk exposure and the best way to get fixed income exposure.

If you need to take more risk to get higher returns then increasing your percentage in equities (and small/value in particular) may be the right move.

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Re: Should I get out of TIAA traditional annuity?

Post by sschullo » Wed Jan 11, 2017 11:20 am

The Wizard wrote:Keep the old TIAA plan. Trad beats bonds hands down right now...
+1 and you have principle guarantees and no surrender charges. Coming from the K-12 403(b) world, where high cost, surrender fee-laden annuities are EVERYWHERE, it's hard to believe this is a low-cost annuity.
Public School K-12 Educators: "Ask NOT what your annuity sales person can do for you, ask what you can do to be a Do-It-Yourselfer (DIY)."

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