Learn How TIAA's Traditional Annuity Works
Most people working in the public education system have access to TIAA-CREF investment options within their employer-sponsored plan. Many upcoming retirees who have TIAA-CREF encounter confusion about how the TIAA Traditional Annuity option works, and in particular, how it works when you want to take your money out.
To clear up this confusion, it's helpful to explain the annuity as two different phases, with the first being the investment's accumulation phase and the second as the payout phase.
The Annuity's Accumulation Phase
The TIAA Traditional Annuity works differently when you are contributing money during the accumulation phase than it does when you switch over to taking your money out, termed the payout phase.
In the accumulation phase, the annuity guarantees the protection of your principal, and you earn a guaranteed minimum interest rate, and you can also earn additional interest. This additional interest amount is determined each year by the TIAA Board of Trustees, and every year since 1948 TIAA has paid some amount of additional interest on top of its guaranteed minimum interest rate.
The actual amount of interest you earn on your TIAA Traditional Annuity depends on when you make contributions, as the company groups funds together into what they refer to as vintages. Each group might have a different interest rate, and the interest rate on each vintage can change over time. You can find details on the interest rate crediting process in TIAA-CREF’s Retirement Investments & IRAs Interest Rates page.
Limitations on transferring money out: Unlike many other investment options in employer plans where you can transfer money between choices at any time, once you elect the TIAA Traditional Annuity, you cannot transfer your money back out all at once.
To move your money out, you must use something called a transfer payout annuity where a portion of your balance gets transferred out, into some other investment you choose, each year over ten years. A few TIAA annuities offer different transfer time periods, but most are ten years. This means when you select the TIAA Traditional Annuity option, you’ll want to understand up front how well it fits in with your retirement planning since you will be subject to this transfer restriction.
This limitation on outgoing transfers has important ramifications to TIAA’s success as it allows TIAA to have control over the total funds managed so it can invest for the long-term. This helps the company towards its goal of paying an attractive interest rate while also guaranteeing the principal in each investor's annuity account.
The following takes you through what happens when you want to withdraw money as income from your TIAA Traditional Annuity during the payout phase.
During the payout phase, you have three main options, which can seem slightly confusing. You'll have the following choices:
1. Receive interest income from the traditional annuity: This allows you to withdraw only the interest earned from your TIAA Traditional Annuity. With this option, you get an applicable guaranteed minimum interest rate that determines the contractually-guaranteed minimum amount of interest your annuity earns.
This option does not require you to annuitize your contract. You are only withdrawing the interest you've earned. As in the accumulation phase, this minimum-interest amount may also be supplemented with additional interest amounts as declared by TIAA on a year-by-year basis.
2. Life annuity guaranteed payout options: This option provides guaranteed income for as long as you live. You choose the annuity term such as life only, joint survivor, or life with a guaranteed period certain. With this option, you must request an annuity quote to see what your monthly income will be.
You should not use the guaranteed interest rate discussed above to determine your payout rate. Interest rate and payout rate are not the same, and many TIAA participants misunderstand this and thus miscalculate the monthly income they may be able to receive.
Your payout rate is a customized number determined by your age, the time you request the quote, and the payout term you choose. Your payout rate uses a guaranteed minimum interest rate in the formula, which is a different rate than the one used in the accumulation phase, to determine your payout amount.
The guaranteed minimum interest rate is not your payout rate, it simply represents one component of a formula. With an annuity payout, each payment you receive includes interest and a return of some of your principal. Just like in the accumulation phase, you may receive additional interest amounts paid by TIAA on top of your guaranteed lifetime income during the payout phase.
These additional amounts occur when the company has excess reserves. In the TIAA Traditional Annuity overview, the company states that “It is important to note that if TIAA were a typical stock insurance company, unneeded reserves could be used for the benefit of its stockholders rather than its participants.” Luckily for TIAA participants, the company pays out additional reserves to them. In addition to the payout term you select, you can choose between a graded method, where you get less initially but your income increases each year, or a standard method, that provides a fixed monthly amount.
3. Receive income from a variable annuity: This option provides lifetime monthly income that will vary depending on the performance of the underlying investment options. With this option, like option two above, you are annuitizing your contract and choosing the term of your annuity.
TIAA CREF’s Lifetime Retirement Income brochure lays out the three options in detail and provides a side-by-side sample illustration of monthly income from each option. This sample provides an example but does not reflect the actual monthly income you may get.
You must request a personalized illustration to see your numbers. However, this illustration does show you the difference between the contractually- guaranteed payout under option two above, and the potential payout including additional interest payment amounts that may be granted each year by TIAA's board.
TIAA’s Online Retirement Planning Tool
TIAA offers a great online retirement planning tool that you can use after logging in to the TIAA site, which allows you to model out potential transfers to the TIAA Traditional Annuity options. To run this model within the tool, you have to make a hypothetical transfer to the Traditional Annuity. Some participants get concerned that doing so will actually transfer money, but within the tool, it is only for modeling purposes and no actual transfers occur.
Not all TIAA-CREF customer service reps have in-depth knowledge of all the nuances of the income and distribution options, so you may want to enlist the help of a financial planner. Be patient and diligent in your research and you will be able to accurately assess and model out your options.