While visiting the parents, I was also asked to provide some input on their retirement savings. I don’t want to invade their privacy, but I’m sure they share common concerns with others out there. My father, who is in the non-profit/education sector, has much of his retirement money with TIAA-CREF (Teachers Insurance and Annuity Association – College Retirement Equities Fund). They are one of the biggest financial services companies in the U.S., and are operated on a non-profit basis.
As you might guess from their name, a very popular option for members is the TIAA Traditional Annuity, holding over $163 billion. I was not at all familiar with this beast, so I decided to learn more about it. Here’s a quick rundown from the website:
A guaranteed annuity backed by TIAA’s claims-paying ability, TIAA Traditional guarantees your principal and a minimum interest rate, plus it offers the opportunity for additional amounts in excess of the guaranteed rate. TIAA has credited additional amounts of interest every year since 1948.
The annuity primarily invests in publicly traded bonds, commercial mortgages, direct loans to business, and real estate. It has no loads, no surrender charges, no maintenance fees, and very low annual operation expense ratios of about 0.25%. (Sources: SURS, Dixie State Univ. )
So you invest in this annuity, your account value will never decrease as long as TIAA is around. In fact, it will go up in value by at least 3% every single year, and most likely more depending on market conditions. Think of the savings on antacids during the next stock bubble! There are two tiers of performance – From what I understand, the higher paying tier is for money that is contributed directly by the employing company or group, whereas the lower paying tier is for voluntary contributions from the individual. Here are the historical returns:
For comparison, the venerable Vanguard S&P 500 Index Fund (VFINX) has a 10-year trailing return of 7.05%, and the Vanguard Total Stock Market Index Fund (VTSMX) has a 10-year return of 7.60%. The Vanguard Total Bond Market Index Fund (VBMFX) has a 10-year return of 5.74%.
When you reach retirement and are ready to start take money out of your annuity, you have a variety of options. There are one-lifetime income options, two-lifetime income options, fixed-period (ex. 10-year) income options, interest-only payments, and also a few others involving taking a lump-sum or just the required minimum distributions.
Of course, all annuities are simply a promise, not a 100.00% guarantee. In this regard, TIAA does have the highest possible credit ratings from all the major agencies: A++ by A.M. Best, AAA by Fitch, Aaa by Moody’s, and AAA by S&P.
Overall, it was very interesting learning about this additional investment option. Here were my tentative opinions:
- There is an expected trade-off of lower long-term performance in exchange for a guaranteed minimum return if you purchase this annuity. For those with longer time horizons and the discipline to ride out the market’s ups and downs, it may be better to invest in low-cost stock/bond mutual funds or ETFs instead. Those that are very risk-averse will love this investment.
- The lifetime income options are nice and reliable, but you could also do the same with a portion or all of any retirement portfolio. Just cash out your stocks and bonds, and go buy an immediate annuity with a lifetime payout option.
- Still, if you’re going to buy such an annuity, TIAA-CREF offers some of the best and safest returns along with the lowest fees available in the annuity marketplace.
- As my father is nearing retirement and I think the safety of this investment is very comforting to him, I think this option will work adequately for him. The majority of his annuity holdings are also in the higher-paying tier. I am, however, providing him some guidance in the rest of his portfolio to provide some diversification, as well as telling him what questions to ask his group’s financial advisor.