TIAA Trad & today's interest rates

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Topic Author
Owl
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TIAA Trad & today's interest rates

Post by Owl » Tue Apr 30, 2013 10:04 pm

I'm trying to decide whether to annuitize my TIAA Trad at this time when prevailing interest rates are so low. I asked TC to explain the relationship between prevailing interest rates and Trad payouts. Their response wasn't too helpful: They just said there wasn't any correlation. I find this hard to believe: No correlation -- none at all?

I could annuitize all of my TIAA Trad now, or only part and annuitize more later. But I wonder if it's worth waiting since today's TC retirement income estimates suggest that I'd likely receive less total payouts by the end of a normal lifespan. Or, if prevailing interest rates do go up, as most think they eventually will, would I be better off annuitizing in pieces?

Any thoughts would be appreciated!

MN Finance
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Re: TIAA Trad & today's interest rates

Post by MN Finance » Wed May 01, 2013 9:34 am

Obviously today's rates greatly impact the payouts. Every month they publish a rate table which shows the payout rates for annuitization (like the accumulation vintage table). It goes up/down with rates > performance of the general account.

The "good" thing about annuitizing TIAA in a low rate environment is that if performance is positive for the general account, the payments will go up in the future. That doesn't happen with most other annuities (notwithstanding annuities with inflation riders). That said, there's no guarantee the payment will go up, just an expectation. However, it seems more? likely that annuitizing some money later at higher rates will indeed have a better payout. It's tough to know which will be better though (annuitize now and expect an increase or later at expected higher payouts). If you have multiple contracts and can isolate older money to annuitize, that might be another reason to just annuitize some money.

I don't think there's a good way to answer the question given the unknowns. But if low rate persist and they continue to find ways to change the structure, it might make a case for annuitizing money sooner if you are going to do it anyway. Again though, hard to say what the risks are.

(All this is assuming you *should* annuitize money, it's just a matter of when. If you *should* is an entirely different issue.)

colejr
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Re: TIAA Trad & today's interest rates

Post by colejr » Wed May 01, 2013 10:38 am

Many TIAA contracts have a guaranteed minimum payout interest rate of 2.5%, which is better than the current 2% rate used by the TSP annuity calculator. On the other hand, my understanding is that TIAA is very stingy on mortality credits.

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jjustice
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Re: TIAA Trad & today's interest rates

Post by jjustice » Wed May 01, 2013 10:39 am

Owl, I think that TIAA told you the truth. I'm about to annuitize Traditional myself and have done some investigating and thinking about it. Unless you are thinking about taking money from elsewhere to buy a Traditional annuity (making it a sort of SPIA), your payout rates are already set from the past rates paid by TIAA. These, or their residuals, are now vintage rates.

If you delay to try to improve the annuity, the rates you are now being paid will not have disappeared. They will be retained as vintages. Unless you have waited until the end to suddenly buy into Traditional, it really does not matter (from an interest-rate point of view) when you annuitize. Of course, it does matter how old you are, and which vintages you have.

So, I think that TIAA gave you the straight information.

John

Topic Author
Owl
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Re: TIAA Trad & today's interest rates

Post by Owl » Wed May 01, 2013 1:45 pm

jjustice and MN Finance -

Thanks very much for your thoughts, much appreciated. What you said helps me to weigh the pros and cons of annuitizing everything, or just a part of my Trad accumulation, now. I'm leaning toward annuitizing everything -- hopefully to "lock in" the present payout rate in case future changes to their methodology might have the effect of lowering future payouts, and also hopefully to benefit from rising interest rates (if this should be the case).

Thanks again for sharing your helpful thoughts.

MN Finance
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Re: TIAA Trad & today's interest rates

Post by MN Finance » Wed May 01, 2013 3:12 pm

jjustice wrote:Owl, I think that TIAA told you the truth. I'm about to annuitize Traditional myself and have done some investigating and thinking about it. Unless you are thinking about taking money from elsewhere to buy a Traditional annuity (making it a sort of SPIA), your payout rates are already set from the past rates paid by TIAA. These, or their residuals, are now vintage rates.

If you delay to try to improve the annuity, the rates you are now being paid will not have disappeared. They will be retained as vintages. Unless you have waited until the end to suddenly buy into Traditional, it really does not matter (from an interest-rate point of view) when you annuitize. Of course, it does matter how old you are, and which vintages you have.

So, I think that TIAA gave you the straight information.

John
Well, it does matter greatly when you annuitize and what prevailing rates are. For ex: Let's say you have a vintage that's 2000-2002 (no idea if that's an actual vintage tranche.) There may be a current payout rate on that of say 4%. The calculation is complex, but they take your current life expectancy, accumulation, and use that assumed payout rate to determine your monthly payment.

Ex: $100k, 25 yrs, 4% payout rate = $533/month. (lifetime payments = $160k)

That hypothetical payout rate of 4% changes every single month just like the accumulation interest rate tables for new money. A few years ago it was probably 6%.

Ex: $100k, 25 yrs, 6% payout rate = $652/month. (lifetime payments = $195k)

As rates go up and down the payments will follow. Of course delaying means your life expectancy is shorter, so even with no rate change, the payment goes up, but it should be actuarially neutral.

Like I said, it's much less of a concern when compared to conventional annuity payments because the payment can change / go up, but today's rates certainly impact the starting payment a lot.

ourbrooks
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Re: TIAA Trad & today's interest rates

Post by ourbrooks » Wed May 01, 2013 5:38 pm

In fact, the payout from past payments does not depend on current interest rates very much; it depends mostly on the rates at the time you contributed. TIAA makes very long term investments; for example, in the past they have directly owned real estate which they leased out on long term leases. That's the big determiner of the interest portion of payouts, what those long term investments are returning.

Current interest rates do impact those long term investments, but it's a slow process. Even though they're long term, some of the investments end and must be replaced by new investments which will, presumably, be at current rates. Yup, five years ago, what was a 6% rate may have fallen to a 4% rate, but it took five years to do that. Waiting a year or two isn't likely to make much of a difference, especially if interest rates stay level or, even, drop a bit more.

The biggest portion of your payout is, of course, due to "mortality credits" which rise as you age. They're approximately equal to 1 divided by your life expectancy. If you're life expectancy is 20 years, then you'll get a payout of at least 5% plus whatever your investments contribute.
Because of this, if you wait ten years, you'll get a much higher payout, even if interest rates continue to drop.

beardsworth
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Re: TIAA Trad & today's interest rates

Post by beardsworth » Wed May 01, 2013 5:56 pm

The OP here didn't say what kind of TIAA Traditional contract s/he has. During the accumulation (not yet annuitized) stage, the interest rates on Traditional have generally been lowest in personal IRAs (because TIAA Traditional there is "liquid" and be moved around) and highest in RA/GRA (Retirement Annuities/Group Retireement Annuities), because the ways in which Traditional can be gotten out of an RA/GRA are strictly defined. SRAs and GSRAs (Supplemental/Group Supplemental) Annuities are usually somewhere between RA and IRA, because they are employer plans with somewhat greater liquidity than the former but less than the latter.

However, the annuity payout rates for TIAA Traditional in all of these account types, once annuitized for lifetime income, have generally been the same or very close to the same.

Here's the rate chart for RA for life annuities purchased in May 2013. This is subject to change in any future month. Scroll down to "payout" rates to see the rates currently paid by various contribution-date-based vintages.

https://www.tiaa-cref.org/public/perfor ... /4001.html

And for personal IRAs:

http://www.tiaa-cref.org/public/perform ... /4020.html

Note: You can't choose which vintages to annuitize, e.g., decide to annuitize all the low-rate ones first and let the others continue to accumulate for another annuitization decision in the future. When you decide that you want to annuitize a particular portion of the overall accumulation, TIAA draws the money proportionally from all of the vintages on hand in your account.

Topic Author
Owl
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Re: TIAA Trad & today's interest rates

Post by Owl » Sat May 04, 2013 10:43 pm

Thanks all for the helpful reflections.

After thinking about this for too long, I decided to go ahead and annuitize all my accumulations, in part for the reasons I gave in my May 1st posting, and also because Colejr's comment about TC being very stingy on mortality credits seemed to be true, at least in my case:

I ran retirement income estimates for each successive year in the future (until I'd be forced to take RMDs), and then added up the total income I'd receive until age 90 for each starting year. Since I opt for the Standard payout method, I assumed the starting payout for each year would remain the same, realizing that it might go up or down.

Doing this does make TC seem very stingy on mortality credits: Even though TC's estimates show that the starting retirement income for each successive year does increase (very slightly), the total I would receive if I live to be 90 actually declines the longer I postpone annuitizing.

So, with my fingers crossed, and the reasons in my May 1st posting being the main ones for me, I'm planning to go ahead and annuitize all. And hopefully the future will take care of itself....

Again, thanks for the thoughtful responses.

DickBenson
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Re: TIAA Trad & today's interest rates

Post by DickBenson » Sun May 05, 2013 1:45 pm

Owl wrote: I ran retirement income estimates for each successive year in the future (until I'd be forced to take RMDs), and then added up the total income I'd receive until age 90 for each starting year. Since I opt for the Standard payout method, I assumed the starting payout for each year would remain the same, realizing that it might go up or down.

Doing this does make TC seem very stingy on mortality credits: Even though TC's estimates show that the starting retirement income for each successive year does increase (very slightly), the total I would receive if I live to be 90 actually declines the longer I postpone annuitizing.
If I understand the kind of calculation you are doing here, to determine total income you would receive at 90 under different starting dates, it appears that you are not considering the income you would receive from the funds during the period while postponing annuitization. For example, if you annuitize at 70, rather than at 60, you would have more funds available to annuitize. This would increase total income at 90.

Also, there have been posts that have advocated the advantages of forming a ladder of SPIAs, staring in your mid or late 70s (inflation and mortality issues, spreading risks over more than one company, etc.). TIAA's annuity can be considered as a "variable" SPIA, due not only to possible increases in payments, but perhaps more important due to the possible decrease in payments down to the guaranteed amount (which can be a decrease of as much as 20 or 30 percent).

Have you compared TIAA's "variable" SPIA with SPIAs from other companies?

Dick

Topic Author
Owl
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Re: TIAA Trad & today's interest rates

Post by Owl » Sun May 05, 2013 5:15 pm

DickBenson - Yes, I had the TC income estimator software take into account a projected growth of my total accumulation for each starting date; I tried different modest growth percentages (2-5%), and the result was as I posted -- confirming that, at least for me and my vintages, TC is stingy in the area of mortality credits.

One of my retirement goals is Thoreau's "simplicity, simplicity...." I thought of laddering chunks of my TIAA Traditional, but it's going to be enough tedium to manage other investments and to take RMDs each year from my wife's and my various IRA accounts.

About comparing TC "variable" annuities with those of other companies, I've read several threads about this if you'd like to do a search.

DickBenson
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Re: TIAA Trad & today's interest rates

Post by DickBenson » Mon May 06, 2013 2:36 am

Owl, when I asked if you had compared TIAA's "variable" SPIA with SPIAs from other companies, I was trying to see if you had compared the amount of income from an annuity offered by TIAA Traditional (which I consider to be a "variable" SPIA) with that of a similar "fixed" SPIA offered by other companies. For example, what would $100K buy?

I suspect you would find that, although both initial incomes would be in the same ball park, the guaranteed income amount from TIAA would be much lower.

Dick

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