TIAA Annuity Comparison

[ats5g]

I don't know how many people here use TIAA-CREF as their primary retirement vehicle, but patrick on the VD forums pointed this 1995 article out. It compares historical annuity payments [1970-1995] for the two payment methods when a person annuitizes money in TIAA:

The TIAA Graded Payment Method and the CPI

- Alec

[Coach]

Thanks, Alec. I'm in TIAA-CREF so I'll be interesting in looking it over.

Coach

[rocketdog]

Thanks for the article Alec! I'm also in TIAA_CREF, and so far have just scanned it. But it looks like the graded method is the way to go if you expect to live past 10 years of retirement. I wonder if the formula for the graded method is still the same? The article is a few years old.

[ats5g]

Quote:

Originally Posted by rocketdog I wonder if the formula for the graded method is still the same?

Which "formula" are you talking about.

The Graded Payment Method is just variably annuitizing the TIAA traditional account. Both methods use the same mortality assumptions, but the Standard Method uses the full interest/dividend rate of the TIAA account, while the Graded Payment Method uses a 4% assumed interest rate [AIR].

Every TIAA and CREF account uses the 4% AIR for variably annuitizing money. So, initial payments from the TIAA Graded Method or variably annuitizing any CREF account [assuming the same amount of money annuitized] should be exactly the same.

The formula to figure out the increases/decreases in payments for the Graded Method and other variably payout annuities is exactly the same:


[(1+r)/(1+AIR)] - 1

So, if TIAA's dividend rate was 7%, and the AIR was 4%, the increase in the Graded Method Payment would be:

[(1+.07]/(1+.04)] - 1 = 2.88%

- Alec

[rocketdog]

Alec--That was a very nice explanation, thank you.
I think I get it: Annuitizing (variable annuity) the same dollars in CREF or in the graded method for TIAA are going to pay out the same to begin with. But over time the graded payout from TIAA will eventually surpass the payout from CREF?

I guess I'll go play with their on-line calculator a bit more.

[ats5g]

[quote=rocketdog;542908]Alec--That was a very nice explanation, thank you.
I think I get it: Annuitizing (variable annuity) the same dollars in CREF or in the graded method for TIAA are going to pay out the same to begin with. But over time the graded payout from TIAA will eventually surpass the payout from CREF?quote]

I think you're a little confused.

There are two accounts that TIAA offers:

1) TIAA traditional/fixed [fixed annuity]
2) TIAA Real Estate [variable annuity]

There are several account CREF [College Retirement Equities Fund] offers:

1) CREF Stock [the original CREF variable annuity account started in 1952]
2) CREF Growth [variable annuity]
3) CREF Equity Index [variable annuity]
4) CREF Global Equities [variable annuity]
5) CREF Bond Market [variable annuity]
6) CREF Inflation Linked Bond [variable annuity]
7) CREF Money Market [variable annuity]

The increase/decrease in the payments from annuitizing money in either TIAA Graded Method or a CREF account will depend on the performance of the account. For example, if you annuitized money in CREF Stock and its return for the next year was 18%, your payment should probably increase by 13.46%. Likewise if its return was -18%, your payment should probably decrease by 21.15%. Same deal with TIAA graded method. If the interest/dividend for the following year is 7%, your payment should probably increase by 2.88%.

I think perhaps you mean that over time the payments from the TIAA graded method should surpass the payments from the TIAA standard payment method. The difference b/w the payments from the TIAA graded method and payments from a CREF account will depend on the relative performance between the two.

that clear anything up? :confused:

- Alec

[rocketdog]

Alec- yes, I downloaded a bunch of them last night. I've looked at them before--several years ago--and I remember being a little confused back then. But I think they will make more sense now.

[ats5g]

rocketdog,

This is my understanding of how variable payout annuities work.

TIAA-CREF takes your age [and corresponding assumed mortality for your age group] and an assumed interest rate [which is 4% for TIAA or CREF variable annuities], and then figures out how many "payout units" you're going to get each month/year.

Then you get the same # of payout units each month/year for your entire life, assuming you chose a payment option that pays for the rest of your life. The value of the payout units rise and fall with the performance of the underlying investments, and thus the $$ you get paid each month/year [see prior formula] rises and falls.

- Alec