How long will TIAA Trad (3.5%) stay ahead of the fixed income pack?

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b0B
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How long will TIAA Trad (3.5%) stay ahead of the fixed income pack?

Post by b0B » Sun Oct 21, 2018 5:57 pm

At the end of last year I stopped accumulating stocks (I'll hold what I've got) and started accumulating fixed income.

With rising interest rates, the "guaranteed" principle of TIAA Traditional and decent interest rate (I have the fully liquid RCP version at 3.5%) has been looking good, almost a "no-brainer", so that's mainly where I've been accumulating. (If contributions go to another account I can shuffle holdings to effectively "contribute" to that TIAA Trad.)

At the moment, "guaranteed" principle and 3.5% dominates most fixed income options (e.g. Total Bond Mkt, stable value, money mkt, -- just maybe some long term CDs and risky bonds yield more). But that could change. Any thoughts on what could happen? Obviously we don't know the future. It seems highly likely the Fed rate will exceed 3% in a year, and most bond yields will be somewhat more.

Even without a future bond yields crystal ball, we might still know how TIAA Trad yields might behave as other rates rise. For example, it seems that as rates rise, stable value funds (similar to TIAA Trad) rates barely budge, due to their structure (they hold back some of the increased interest to compensate for lost principle of underlying holdings), so maybe TIAA Trad is similar.

Could it be that Total Bond Mkt yield goes over 4% while TIAA Trad (RCP) stubbornly stays at 3.5%? (Perhaps even (ultra) short bonds and money mkts might eventually outyield TIAA Trad if its rate really is that stubborn.)

Of course I can shuffle my holdings around of that happens, but I wouldn't mind anticipating what will happen, as it affects asset location decisions now.

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alec
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Re: How long will TIAA Trad (3.5%) stay ahead of the fixed income pack?

Post by alec » Sun Oct 21, 2018 6:30 pm

b0B wrote:
Sun Oct 21, 2018 5:57 pm

Even without a future bond yields crystal ball, we might still know how TIAA Trad yields might behave as other rates rise. For example, it seems that as rates rise, stable value funds (similar to TIAA Trad) rates barely budge, due to their structure (they hold back some of the increased interest to compensate for lost principle of underlying holdings), so maybe TIAA Trad is similar.

Could it be that Total Bond Mkt yield goes over 4% while TIAA Trad (RCP) stubbornly stays at 3.5%? (Perhaps even (ultra) short bonds and money mkts might eventually outyield TIAA Trad if its rate really is that stubborn.)
Do you understand how the vintage system of TIAA works?
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair

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Re: How long will TIAA Trad (3.5%) stay ahead of the fixed income pack?

Post by bikechuck » Sun Oct 21, 2018 6:47 pm

alec wrote:
Sun Oct 21, 2018 6:30 pm
Do you understand how the vintage system of TIAA works?
I do not fully understand how it works but I would like to, I would appreciate it very much if you could explain it.

b0B
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Re: How long will TIAA Trad (3.5%) stay ahead of the fixed income pack?

Post by b0B » Sun Oct 21, 2018 6:53 pm

alec wrote:
Sun Oct 21, 2018 6:30 pm
Do you understand how the vintage system of TIAA works?
Vaguely. I know (now that you remind me) that the interest you get (on each contribution) depends on the time it went in, and the time now. I'd forgotten about that, so good point. My contributions are new. There is that 120 day rule.

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alec
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Re: How long will TIAA Trad (3.5%) stay ahead of the fixed income pack?

Post by alec » Sun Oct 21, 2018 7:28 pm

b0B wrote:
Sun Oct 21, 2018 6:53 pm
alec wrote:
Sun Oct 21, 2018 6:30 pm
Do you understand how the vintage system of TIAA works?
Vaguely. I know (now that you remind me) that the interest you get (on each contribution) depends on the time it went in, and the time now. I'd forgotten about that, so good point. My contributions are new. There is that 120 day rule.
bikechuck wrote:
Sun Oct 21, 2018 6:47 pm
alec wrote:
Sun Oct 21, 2018 6:30 pm
Do you understand how the vintage system of TIAA works?
I do not fully understand how it works but I would like to, I would appreciate it very much if you could explain it.
Here are the FAQ's on TIAA. It is quite good. - https://www.tiaa.org/public/pdf/TT_FAQ.pdf

The current crediting rate for contributions into TIAA RCP are here -https://www.tiaa.org/public/investment- ... r=47933638. Note the different crediting rates depending upon when contributions are made. When interest rates on high quality bonds were lower (e.g. 2012-2016), the crediting rate is lower.

-Alec
Last edited by alec on Sun Oct 21, 2018 7:35 pm, edited 1 time in total.
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aristotelian
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Re: How long will TIAA Trad (3.5%) stay ahead of the fixed income pack?

Post by aristotelian » Sun Oct 21, 2018 7:33 pm

alec wrote:
Sun Oct 21, 2018 7:28 pm

Here are the FAQ's on TIAA. It is quite good. - https://www.tiaa.org/public/pdf/TT_FAQ.pdf

The current crediting rate for contributions into TIAA RCP are here -https://www.tiaa.org/public/investment- ... r=47933638. Note the different crediting rates depending upon when contributions are made.

-Alec
I read those links and still don't see an answer to OP's question, just a lot of stuff about the discretion of the Board of Trustees. What am I missing?

stlrick
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Re: How long will TIAA Trad (3.5%) stay ahead of the fixed income pack?

Post by stlrick » Sun Oct 21, 2018 7:59 pm

I have been accumulating in TRAD since 1979. All I can give you are observations and impressions. In general, you can expect TRAD interest rates for new contributions to lag the market trend. When the trend is one of declining interest rates, TRAD will be higher, and go down more slowly. When interest rates are rising, TRAD will rise more slowly. If I remember correctly, in the early 1980's, when the 30 year bond reached something like 14%, I don't think TRAD got above 11%. Recent years have been highly influenced by the 3% guarantee in those contracts that have it. Obviously, for several years now, the TRAD rate did not follow interest rates all the way down, because of the 3% floor. TRAD is already paying 4% for new money in the TIAA contracts I have. I don't expect them to go up much until other rates get competitive, particularly because I think TRAD may have been paying more than TIAA would have really liked for several years now, when rates were close to zero.

All of this is further complicated by the vintage system, which appears to move more slowly than the rate for new money. It also varies with the type of contract in which you are accumulating, as do the restrictions on withdrawals. TRAD is a complicated version of a stable value fund, but one that has been at the core of my retirement planning and one that I have been very happy with.

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oldzey
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Re: How long will TIAA Trad (3.5%) stay ahead of the fixed income pack?

Post by oldzey » Sun Oct 21, 2018 9:33 pm

Here are some useful publications I've put in my Dropbox that can help you understand TIAA Traditional a little better:

TIAA Traditional FAQ

Financial Strength: The TIAA General Account (the account used by TIAA to guarantee TIAA Traditional contracts)

Calculating TIAA Traditional Annuity Earnings

And here's a good comparison between TIAA Traditional and bond funds:

Is TIAA Traditional a Good Deal? - The Accumulation Phase

P.S. I added one more item to my Dropbox:

The Intricacies of TIAA-Traditional
Last edited by oldzey on Tue Oct 23, 2018 12:43 am, edited 2 times in total.
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columbia
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Re: How long will TIAA Trad (3.5%) stay ahead of the fixed income pack?

Post by columbia » Sun Oct 21, 2018 9:39 pm

All of my TIAA account is in Trad (RC). I supppose it is possible that it would make sense to to put new “bond” purchases in that account, were the yields from the other options (Metropolitan West Total Return Bd M and Vanguard TBM) sufficiently higher....I have no idea what level that would have to be, for me to even consider such a (presumably temporary) change.

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Re: How long will TIAA Trad (3.5%) stay ahead of the fixed income pack?

Post by mariezzz » Sun Oct 21, 2018 10:03 pm

oldzey wrote:
Sun Oct 21, 2018 9:33 pm
And here's a good comparison between TIAA Traditional and bond funds:
Is TIAA Traditional a Good Deal? - The Accumulation Phase
Thanks for all the links, but in particular the one above. That was quite useful. I was suspicious about how TRAD did things, just like the author (although my suspicions weren't quite as sophisticated). Glad to see that the suspicions weren't borne out.

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willthrill81
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Re: How long will TIAA Trad (3.5%) stay ahead of the fixed income pack?

Post by willthrill81 » Sun Oct 21, 2018 10:13 pm

When I log into TIAA, it says that the current rates are 3.25% for the liquid version of TIAA Trad. and 4.0% for the illiquid version. Where is the 3.5% the OP is referring to?
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Re: How long will TIAA Trad (3.5%) stay ahead of the fixed income pack?

Post by oldzey » Sun Oct 21, 2018 10:30 pm

willthrill81 wrote:
Sun Oct 21, 2018 10:13 pm
When I log into TIAA, it says that the current rates are 3.25% for the liquid version of TIAA Trad. and 4.0% for the illiquid version. Where is the 3.5% the OP is referring to?
From http://socialize.morningstar.com/NewSoc ... px#3962798:

RC 4.25% https://www.tiaa.org/public/investment- ... r=47933637

RA 4% https://www.tiaa.org/public/investment- ... r=47933630

RCP 3.50% https://www.tiaa.org/public/investment- ... r=47933638

SRA 3.25% https://www.tiaa.org/public/investment- ... r=47933631

Newer IRAs 1.75% https://www.tiaa.org/public/investment- ... r=47933634
"The broker said the stock was 'poised to move.' Silly me, I thought he meant up." ― Randy Thurman

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willthrill81
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Re: How long will TIAA Trad (3.5%) stay ahead of the fixed income pack?

Post by willthrill81 » Sun Oct 21, 2018 11:20 pm

oldzey wrote:
Sun Oct 21, 2018 10:30 pm
willthrill81 wrote:
Sun Oct 21, 2018 10:13 pm
When I log into TIAA, it says that the current rates are 3.25% for the liquid version of TIAA Trad. and 4.0% for the illiquid version. Where is the 3.5% the OP is referring to?
From http://socialize.morningstar.com/NewSoc ... px#3962798:

RC 4.25% https://www.tiaa.org/public/investment- ... r=47933637

RA 4% https://www.tiaa.org/public/investment- ... r=47933630

RCP 3.50% https://www.tiaa.org/public/investment- ... r=47933638

SRA 3.25% https://www.tiaa.org/public/investment- ... r=47933631

Newer IRAs 1.75% https://www.tiaa.org/public/investment- ... r=47933634
Thanks!
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Re: How long will TIAA Trad (3.5%) stay ahead of the fixed income pack?

Post by jalbert » Sun Oct 21, 2018 11:30 pm

When comparing to bond yields keep in mind that the 3.5% is a crediting rate not an APR. Assuming it compounds monthly, the APR IS actually approximately 3.45% as that will compound over the year to a 3.5% crediting rate.

That is not a big deal and would not change the assessment of the investment, but it is the correct comparison to a ind yield or yield of a bond fund.
Risk is not a guarantor of return.

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oldzey
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Re: How long will TIAA Trad (3.5%) stay ahead of the fixed income pack?

Post by oldzey » Tue Oct 23, 2018 12:44 am

P.S. I added one more item to my Dropbox:

The Intricacies of TIAA-Traditional

Cheers! :beer
"The broker said the stock was 'poised to move.' Silly me, I thought he meant up." ― Randy Thurman

b0B
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Re: How long will TIAA Trad (3.5%) stay ahead of the fixed income pack?

Post by b0B » Tue Oct 23, 2018 8:33 pm

stlrick wrote:
Sun Oct 21, 2018 7:59 pm
I have been accumulating in TRAD since 1979. All I can give you are observations and impressions. In general, you can expect TRAD interest rates for new contributions to lag the market trend. When the trend is one of declining interest rates, TRAD will be higher, and go down more slowly. When interest rates are rising, TRAD will rise more slowly. If I remember correctly, in the early 1980's, when the 30 year bond reached something like 14%, I don't think TRAD got above 11%. Recent years have been highly influenced by the 3% guarantee in those contracts that have it. Obviously, for several years now, the TRAD rate did not follow interest rates all the way down, because of the 3% floor. TRAD is already paying 4% for new money in the TIAA contracts I have. I don't expect them to go up much until other rates get competitive, particularly because I think TRAD may have been paying more than TIAA would have really liked for several years now, when rates were close to zero.

All of this is further complicated by the vintage system, which appears to move more slowly than the rate for new money. It also varies with the type of contract in which you are accumulating, as do the restrictions on withdrawals. TRAD is a complicated version of a stable value fund, but one that has been at the core of my retirement planning and one that I have been very happy with.
I believe the underlined part holds true for stable value funds too (which TIAA Trad is similar to). That's why I'm guessing that TIAA Trad could stubbornly stay the same, and many bond yields could overtake it if they rise enough.

Interestingly, the RCP version of TIAA Trad has kept rates at least 3% (mostly 3.5%), even though the (floating) guaranteed rate has been barely over 1%, so it can't be that the guaranteed rates were the only thing stopping TIAA Trad rates dropping lower (though maybe there was and indirect effect from the other versions).

b0B
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Re: How long will TIAA Trad (3.5%) stay ahead of the fixed income pack?

Post by b0B » Tue Oct 23, 2018 8:56 pm

columbia wrote:
Sun Oct 21, 2018 9:39 pm
All of my TIAA account is in Trad (RC). I suppose it is possible that it would make sense to to put new “bond” purchases in that account, were the yields from the other options (Metropolitan West Total Return Bd M and Vanguard TBM) sufficiently higher....I have no idea what level that would have to be, for me to even consider such a (presumably temporary) change.
Me neither, but I'm thinking if TIAA Trad (RCP) stayed at 3.5% and TBM SEC yield reached 4%, I'd be switching, though it wouldn't be all or nothing.

There's actually a few questions I can think of about this.

What rate difference would be enough to switch from a guaranteed principle fund like TIAA Trad, to a TBM fund? (That's part of the bigger question of choosing from the whole fixed income menu.)

Another point is that some holding like TIAA Trad (or TIAA Real Estate) (or stable value funds) can only be held in certain types of accounts, and you can't get them in regular retail (IRA or taxable) accounts. So there's the question, if you leave your employer (e.g. retire), do you keep your 403b (or similar) account there just to maintain access to these "special" funds? That decision depends in part on how the "special" funds are then comparing to the publicly available ones, and on predictions of future comparisons.

Another thing in my case (too many details to spell out) is that if TIAA Trad stops being useful (i.e. rates aren't competitive), then that totally changes what holdings I would want in what accounts, including whether I want stocks in taxable, which is why I'd like a crystal ball for what will happen.

ResearchMed
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Re: How long will TIAA Trad (3.5%) stay ahead of the fixed income pack?

Post by ResearchMed » Tue Oct 23, 2018 9:01 pm

Does anyone have data on what the TIAA-CREF Trad Annuity was giving back in the early '80's when the interest rate (for everything from mortgages to money market accounts) were skyrocketing?

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Re: How long will TIAA Trad (3.5%) stay ahead of the fixed income pack?

Post by 22twain » Tue Oct 23, 2018 9:11 pm

I can't speak to the early 1980s, but in the late 1980s Trad gave me a bit over 9% in 1986, decreasing to about 8.4% in 1990, as estimated from my account balances during that period. This is for a combination of RA (illiquid) and GSRA (liquid).
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