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]

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]

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?

- Alec

 

[rocketdog]

Actually, it does clear it up considerably. Now I think I know what I am clueless about! I am clueless about annuitizing a CREF account!

I thought to annuitize a CREF account, you had to either roll it into a TIAA account, or it was treated like an immediate annuity. In the latter case, I wasn't sure how the payout would change with market fluctuations.
Good thing (?!) I'm not retiring tomorrow--I need to reread the benefits info at the TIAA-CREF website to make sure I understand.

 

[ats5g]

I think JohnEyles just annuitized some money in a CREF account. Perhaps he can shed some more light on this.

- Alec

 

[rocketdog]

I was just reading a thread "Should I fire my financial advisor", and someone mentioned that CREF is already some sort of annuity ?? Argh--now I'm completely confused again!!
I guess I'll search threads for "annuitize CREF account"...

 

[JohnEyles]

I think JohnEyles just annuitized some money in a CREF account. Perhaps he can shed some more light on this.

- Alec

Rocketdog, I did, and it's pretty bizarre. For one thing, I asked
them to annuitize 50% of my CREF, not realizing the non-CREF
accounts (the instituitonal mutual funds) would not be included.
So I didn't really annutiize as much as I though; evidently, you
have to transfer those funds to CREF (of TIAA) accounts in order
to annuitize them. But I didn't really care, I was just signing up
for a minimal monthly annuity to qualify for state retirees' free
health insurance (since I'm semi-retired and consulting).

But things REALLY get bizarre once you've annuitized, trying to
understand the "annuity units" and how to go about rebalancing.
You can NOT just specify a percentage amount in each account
and have them rebalance for you. No. You have to ask them
to move a certain number of these arcane annuity units from
one account to the other. And you have to do it by phone !
My advice is to balance everything the way you want it, with
the right percentages into each CREF account, BEFORE you
annuitize.

My impression also was that TIAA isn't a very good deal, graded
payout or not, and I am doing the 10-year process of moving all
my TIAA Traditional funds into CREF (the part of CREF I haven't
yet annuitized). Of course, I'll keep some reasoanble allocation
between the equity and bond accounts at CREF.

Hope this helps. There should be a support group somewhere
for TIAA-CREF people. And they ought to at least get their
website somewhere into the late 1990s, so you can, for example,
move money among the annuitized accounts online. Did I
mention you have to call on the phone to sell after-tax mutual
funds ?!?

 

[rocketdog]

JohnEyles--Thank you for sharing that information. Some of the things that have always kind of confused me about the TIAA-CREF accounts are suddenly making more sense. (not complete sense, mind you--

).
I know I really need to go to one of those pre-retirement TIAA-CREF sessions, or talk to someone on the phone, but I was too confused to even know what questions to ask.
Now I'm at least finding out what sorts of things to ask about. I have about 9 years before I'll be taking money out. It may take me that long to figure everything out.

 

[Tadpole]

My impression also was that TIAA isn't a very good deal, graded
payout or not, and I am doing the 10-year process of moving all
my TIAA Traditional funds into CREF (the part of CREF I haven't
yet annuitized). Of course, I'll keep some reasoanble allocation
between the equity and bond accounts at CREF.

How accurate are the on-line scenarios when compared to the actual results?

 

[ats5g]

rocketdog,

Have you read some of TC's Retirement Publications? That might be a start.

- 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