Most people working in the public education system have access to TIAA investment options within their employer-sponsored plan. Many upcoming retirees who have TIAA 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 issue, it's helpful to explain the annuity as two separate phases, with the first being the investment's accumulation phase and the second as the payout phase.
The Accumulation Phase
The TIAA Traditional Annuity works differently when you contribute money during the accumulation phase than when you switch over to taking your money out, which is termed the payout phase.
In the accumulation phase, the annuity guarantees the protection of your principal, and you earn a guaranteed minimum interest rate while also earning additional interest. This additional interest amount is determined each year by the TIAA Board of Trustees. 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. Each group might have a different interest rate, and the interest rate in each group can change over time.
Limitations on Transferring Money Out
Unlike 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 once per year over 10 years or 84 monthly installments. This means that when you select the TIAA Traditional Annuity option, you’ll want to understand upfront how well it fits in with your retirement planning since you'll be subject to this transfer restriction.
This limitation on outgoing transfers is needed because 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. Note that a transfer payout annuity can be used to facilitate distributions either to be reinvested into another CREF fund with no liquidity restrictions, transfer out to another tax deferred account, or taken in cash (but as a taxable distribution.)
During the payout phase, also known as the retirement income phase, you have two main options:
Receive Interest Income From the Traditional Annuity
This allows you to withdraw only the interest earned from your TIAA Traditional Annuity. 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.
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. Life only means you receive income for the rest of your life. Joint survivor means that the annuity will be paid for as long as you or your partner lives. Life with guaranteed period certain means either life or a set period like 10 years, whichever comes last. For example, if you receive income for five years and then die, your beneficiary would receive your income for the last five years. With these payout options, you must request an annuity quote to see what your monthly income will be.
You shouldn't use the guaranteed interest rate to determine your payout rate. Interest rate and payout rate are not the same, and many TIAA participants misunderstand this and 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.
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 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.
TIAA also offers variable annuities. These may earn more during the accumulation period since they're tied to the market, but there's also the risk of losing principal. These don't have any surrender charges on withdrawals or transfers.
TIAA’s Online Retirement Planning Tool
TIAA offers a great online retirement planning tool that you can use on 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 transfer money, but within the tool, it is only for modeling purposes and no actual transfers occur.
Not all TIAA 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'll be able to accurately assess and model your options.