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Question about annuitization of TIAA
Old 02-08-2009, 07:06 AM   #1
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Question about annuitization of TIAA

Hi all-
I realize there is a large group here that dislikes annuities, so please do not state your opinion of annuities. I'd like some advice about whether to annuitize an annuity now. Here goes.

I just retired from high school teaching. I'm 62 and single. I have a rather large after tax annuity that I've been contributing to for many years. There was a time (last year) that if I annuitzed then, I'd have a very good annuity income. With interest rates falling dramatically, annuitizing now might be a mistake. Do you agree, or are you of the opinion that when you decide to retire, you can't time the retirement to interest rates? When it's time, it's time.

There is a "graded" option and a "standard" option with TIAA. Last year the graded showed a signinicant increase in yearly payouts over 25 years. Now the "graded" shows a measely increase over 25 years, AND it is much closer to the "standard" option in terms of monthly payouts. I've been told that TIAA has invested in long-term bonds and other investments with low interest rates, so that is why the "graded" shows a small increase. If I delayed annuitization for a year or two, and interest rates rose significantly, would that really affect my annuity income since TIAA has long term low interest investments?

If I did wait, I could take the "interest only" option, which would allow me to live off the interest from my annuity, and that yearly income on the interest currently is about $40,000. However, at the end of this month the interest rates are recalulated for the annuity vintages, and they could fall a lot, and so if did the "interest only" at the end of the month, that could fall by quite a lot. Neverthless, I'd be doing part-time teaching (something I do not mind doing at all),take the inerest only, and wait until interest rates rise. Question is- will they rise, or will the affect of these long term investments from TIAA prevent any large annuity payout increases for years to come?

Your advice, ideas, or suggestions would be appreciated, without your personal opinion on anuities. Thank you very much.

Regards, Rob
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Old 02-08-2009, 07:41 AM   #2
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A couple of thoughts:

- TIAA is a mutual and you account is participating. That means that you share in the gains and losses along the way with all the other annuity holders. The offset is that the conservative nature of the company and the way it is run mean that changes tend to be smoothed out overtime. So it is quite possible that TIAA's annuity payouts are based on falling/low interest rates for a year or two past when market rates turn up. So if you choose to take interest only it may be for a few years before things turn around. OTOH, you will find no more safe company to do business with (credit risk-wise), so whatever games you play they will not invole an element of credit risk.

- The question facing you is a little broader, I think. Regardless of which option you choose, you will be exposed to very significant risk if we enter a bout of high inflation, because even the graduated payments would not keep up. So regardless of the payout you choose, what other mitigants to inflation do you have? Own your own home? Plan to continue working for some time? Eligible for SS? Were I in your shoes, I would try to assemble an investment portfolio outside of TIAA that was entirely focussed on stuff that would produce outsized returns in times of high inflation, especially commodities, commodity producers, etc.
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Old 02-08-2009, 07:41 AM   #3
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I have a 403(b) from TIAA-CREF. TIAA gives me more options than the two that you have proposed. Have you talked to them extensively to figure out if any of these other options are available to you? I believe you can even engineer a mix of options, so you don't have to do a an either/or thing.

I think you have described effectively a single premium immediate annuity or SPIA.
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Old 02-08-2009, 07:59 AM   #4
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Reply to Brewer and LOL

Most of my money with TIAA-CREF are self-remitters. The only 403(b) I have is from a school I taught a in the early 1980's. Therefore, the options you have I clearly do not have. I will not elaborate here, but suffice to say, I am limited. Period.

I will get social security, I have a considerable amount in my CREF portion of TIAA-CREF which will not be touched until I am past 70, and part-time teaching or even full time teaching for short periods overseas is a distinct possibility. My question is if it is worth playing games and doing the "interest only" for a year or two only to find out that the annuity payouts have not changed much over two years due to TIAA investing in long term low interest investments. I would think that would limit what TIAA can pay out EVEN if interest rates rise dramatically.

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Old 02-08-2009, 08:19 AM   #5
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We are at record low interest rates. This seems like an obvious time to not lock yourself in for the rest of your life. You don't say how much difference there is between the different annuity choices and the current floating interest rate. You could easily do an IRR calculation with a nominal 85 year lifespan to see what the annuity is truly paying. If it isn't significantly greater than the interest only, I don't see any advantage to locking in the payment for life.
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Old 02-24-2009, 05:26 PM   #6
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I have a lump of money in TIAA Traditional that I'm taking interest only. I'm also concerned about future inflation, but the graph below does provide some comfort. It shows that even in the high inflation years of the early 1980s TIAA managed to stay significantly ahead of inflation. You can also see what brewer refers to, the smoothing out of TIAA returns vs inflation or the T-bond rates, though TIAA may have a bit of a lag. You can find this chart and other good information in a recent white paper TIAA published about their Traditional, which doesn't have a lot of transparency, here:

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Old 02-26-2009, 02:15 PM   #7
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Originally Posted by Rob View Post
Most of my money with TIAA-CREF are self-remitters. The only 403(b) I have is from a school I taught a in the early 1980's. Therefore, the options you have I clearly do not have. I will not elaborate here, but suffice to say, I am limited. Period.

I will get social security,

You may want to consider drawing on your funds directly and postponing social security. IIRC it goes up by 8% per year when you don't take it and acts as an inflation protected annuity

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