Ask TIAA-CREF

I participate in TIAA-CREF through the retirement plan at the school where I work. For 25 years I have invested half of my contributions in the TIAA Traditional Annuity and half in the CREF Stock Account. I'm now three to five years away from retirement, and an independent financial adviser has suggested moving the money out of TIAA. He says the rate of return is low, and the account doesn't give me the right to withdraw a lump sum upon retirement. What does TIAA-CREF say?

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Too bad the financial adviser who told you that doesn't know more about TIAA Traditional Annuity and that annuity's potential to help you save for retirement and provide guaranteed lifetime income.

The TIAA Traditional Annuity Offers Very Competitive Returns

First let's examine the rate of return.

The TIAA Traditional Annuity is a guaranteed annuity backed by the financial strength and claims-paying ability of TIAA. It's an insurance product, and a unique one, but for purposes of comparison you may want to evaluate its interest rate against the returns on fixed income investments – not with stocks, for example.

If you purchased the TIAA Traditional Annuity over a twenty-five year period that ended on September 30, 2007, and you had annual salary increases of 5% per year, the Account returned an average of 7.21% per year. (Over 30 years the return was 7.60%.)

If someone can show you a fixed-income investment that achieved that return over the past quarter century and guarantees both principal and interest, we'd like to know about it!

While TIAA's historical returns compare favorably with long-term bond funds, even that comparison doesn't tell the whole story. Here's why: bond funds can fluctuate significantly in value as market conditions change. But the TIAA Traditional Annuity fully guarantees your principal and a 3% minimum annual interest rate, regardless of market conditions, plus it offers the opportunity for additional amounts in excess of the guaranteed rate. These additional amounts, when declared by the TIAA Board of Trustees, remain in effect for the "declaration year" that begins each March 1. TIAA has credited additional amounts of interest every year since 1948. And TIAA Traditional is backed by the claims paying ability of TIAA, one of just three U.S. insurance companies to receive the highest rating from all major rating agencies, which means that the amounts you allocate to the TIAA Traditional Annuity and the interest on those amounts will be there to help you through retirement.¹

When You Retire

Next, let's look at your ability to convert your TIAA Traditional Account balance to cash or roll the balance into an investment such as a mutual fund when you retire. A TIAA Traditional Retirement Annuity such as the one you have limits you to withdrawing the balance in 10 installments over nine years. This restriction ensures that TIAA can never be subject to liquidity concerns (i.e., a "run on the bank"), allowing TIAA to invest in a wide range of long-term, sometimes illiquid investments. These investments generally seek higher rates of return, which may result in higher credited rates of interest for the TIAA Traditional.

One question is whether to keep your money in TIAA Traditional or withdraw the money over nine years. The financial adviser who suggested you withdraw your money over nine years may not know that TIAA offers varied payout options designed to help you pursue your goals for financial security during retirement. These include:

Life Annuity – A life annuity provides income that lasts as long as you live. If you choose, it can provide income that lasts as long as either you or your spouse (or other named annuity partner) are alive.

You can also choose to elect a guaranteed period of 10, 15 or 20 years; payments would continue during such guaranteed period whether you live or die, and would continue for the rest of your life if you live beyond the guaranteed period.

Payments from TIAA Traditional annuities may be calculated in one of two ways. The Standard Payment Method bases your initial income on a guaranteed interest rate (generally 2.5%) and provides for the full payment each year of annuity dividends as declared in advance by TIAA. The Graded Payment Method reinvests the portion of the annuity dividend that is based on an interest rate in excess of 4%; the reinvested portion would increase future guaranteed payments.

Interest-Only Option – For participants who want to protect principal, or would like to postpone taking a life annuity, TIAA offers an interest-only option that provides for payment of TIAA interest earnings (without any return of principal). Individuals can take this option beginning at age 55, with payments continuing until the individual converts to a life annuity or a nine-year fixed period payout, or begins receiving minimum distribution payments, as required by law, beginning at age 70 1/2. The interest-only option may be a good choice for individuals in poor health, who may not expect to live long enough to receive a reasonable amount of life annuity income. In that case, we suggest the person elect the interest-only option until age 70 1/2. If the individual reaches that age and still thinks he or she is in relatively poor health, we'd suggest the person convert to the Minimum Distribution Option (see below).

Minimum Distribution Option - Internal Revenue Service rules require individuals to begin Minimum Distribution payments of any principal amounts that have not been converted to annuity income by April 1 following their turning 70 1/2. Minimum Distribution payments are set by IRS tables and offer less income than would be available to an individual who converts their TIAA Traditional Account to a life annuity.

You'll want to study your personal TIAA-CREF income illustrations, which can show you how much your initial monthly income would be under your varied options and reflect your unique needs and preferences.

Check Your Plan

Finally, we're assuming you have a TIAA Traditional Annuity that cannot be converted to cash in one lump sum. Today many TIAA-CREF retirement plans provide participants with Group Retirement Annuities, which permit participants to receive a lump sum distribution from their TIAA Traditional Annuity within 120 days of retirement (subject to a 2.5% withdrawal charge). Many participants also participate in supplemental retirement plans funded with TIAA-CREF Supplemental Retirement Annuity and GSRA contracts, which are fully convertible to cash when you separate from service.

To Learn More

As the financial world sharpens its focus on lifetime income, advisers may start to pay more attention to the strengths of TIAA Traditional, which has provided guaranteed lifetime income since 1918 and is still going strong.

To learn more about TIAA Traditional and your retirement income options, call your TIAA Advisor or any of our consultants.

You can reach TIAA-CREF by phone at 1 800 842-2776, from Monday through Friday from 8 a.m. - 10 p.m. Eastern, and Saturday from 9 a.m. - 6 p.m. Eastern. We're here to answer your questions and help meet your evolving financial needs.