Learn How TIAA's Traditional Annuity Works
Most people who work 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 go to take money out. To clear up this confusion, let’s take a look at the accumulation phase compared to the payout phase.
The TIAA Traditional Annuity works differently when you are saving money (what is called the accumulation phase) than it does when you switch over to taking money out (the payout phase).
In the accumulation phase, your principal is guaranteed and you earn a guaranteed minimum interest rate. There can also be additional interest earned. This additional interest amount is determined annually by the TIAA Board of Trustees and every year since 1948 TIAA has paid some amount of additional interest on top of the guaranteed minimum interest rate.
The actual amount of interest you earn on your TIAA Traditional Annuity will depend on when you are making contributions, as funds are grouped together into what they refer to as “vintages”. Each group of money may 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 go online and transfer money between choices at any time, once you elect the TIAA Traditional Annuity, you cannot simply transfer money back out all at once.
The fastest pace you can move money out is by choosing what is called a “transfer payout annuity” where a portion of your balance will be transferred out 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 how it fits in with your plan as changing your mind isn’t so easy.
This limitation on outgoing transfers is important to TIAA’s success as it allows TIAA to have control over the total funds managed so they can invest for the long term and accomplish their goal of providing a high level of interest while also guaranteeing the principal. Now let’s look at what happens when you want to take income from your TIAA Traditional Annuity – what I am calling the “payout phase”.
During the payout phase, you have three main options. This is where I see a lot of confusion. Your choices are:
- Income from the traditional annuity – this allows you to withdraw only the interest earned from the TIAA Traditional Annuity. With this option, there is an applicable guaranteed minimum interest rate that determines the contractually guaranteed minimum amount of interest you will earn. This option does not require you to annuitize your contract – you are only withdrawing the interest earned. As in the accumulation phase, this minimum interest amount may also be supplemented with additional amounts as declared 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. 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 (a different rate than in the accumulation phase) that determines your payout amount – but the guaranteed minimum interest rate is not your payout rate – it is simply 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, there are additional amounts that may be paid on top of your guaranteed lifetime income in the payout phase. These additional amounts occur if/when the company has excess reserves. In the TIAA Traditional Annuity overview, they state 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, additional reserves are used for them. In addition to the payout term you choose, 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.
- 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 does a great job of laying out the three options and at the end, it provides a side by side sample illustration of monthly income from each option. This is only a sample and is not reflective of the monthly income you may get. You must request a personalized illustration to see your numbers. This illustration does show you the difference between the contractually guaranteed payout under option two above, and the potential payout including additional amounts that may be granted each year by the board.
TIAA’s Online Retirement Planning Tool
TIAA offers a great online retirement planning tool (you must log in to use it) that allows you to model out potential transfers to the TIAA Traditional Annuity options. In order to run this model within the tool, you have to make a fake transfer to the Traditional Annuity. Some participants get concerned that doing so was actually transferring money – but within the tool, it is only for modeling purposes – no actual transfers are occurring.
We have found that not all TIAA-CREF customer service reps are familiar with all the nuances of the income and distribution options. Remember, many customer service reps are only a few years out of school. You, on the other hand, have years of experience. Be patient and diligent in your research and you will be able to accurately assess and model out your options.
Conclusion: if you want a guaranteed outcome, and have access to a TIAA Traditional Annuity, it is a great choice.