Is TIAA Traditional a good deal? - The Payout Phase

The accumulation in any retirement investment is only as good as the income it buys. TIAA Traditional with the 3% guaranteed interest rate does not permit lump sum withdrawal of the accumulation – it has to be done over a period of nine years. According to a recent TIAA-CREF testimony about one third of retirees annuitize their accumulations, i.e. turn the accumulations into a stream of lifetime income. Is this income a good deal? Would one do better withdrawing the money and buying an annuity from another provider?

There are several difficulties in comparing TIAA’s annuity payments to alternatives. First, annuities come in thousands of varieties. This makes apples to apples comparisons difficult. TIAA Traditional in the annuity pay-out phase, like the accumulation phase, also has the capacity to pay additional amounts of interest, and the income payments you receive may fluctuate though never below the guaranteed amount. Historically, these fluctuations were almost always up but it has happened that payments went down. In the last 10-years or so payments were mostly flat. There is a guaranteed floor but it appears so conservative that the benefits have always been above this floor.

Another complication in comparing TIAA Traditional payments to alternatives is that TIAA payments depend on how long you have been accumulating money within TIAA. The longer you have been with TIAA, the higher the payment. The difference comes from a gradual payout of what TIAA calls “unneeded contingency reserves.” In one example, being with TIAA for 30 years lead to a 5% increase in the initial payment. Of course, there is no telling what difference this will make in the future.

Keeping in mind the difficulties in making valid comparisons, TIAA payments appear quite competitive – especially for women. A study from the year 2000 compares annuity payments from TIAA to a large number of insurers and finds TIAA payments slightly higher for men and quite dramatically higher (about 15%) for women. More recently I compared TIAA Traditional quotes to Berkshire Hathaway and MetLife’s fixed annuities. The TIAA payments purchased using recent vintages were a bit lower, but payments purchased using pre-1990 accumulations were more than 10% higher. However, TIAA payments can go up while fixed annuities from Berkshire or MetLife will not. Moreover, TIAA payments are unisex, i.e. men and women get the same payment. Other insurers pay women less than men because women are expected to live longer. This means that if there is any advantage of going with TIAA it is certainly higher for women than men.

A major issue with purchasing a fixed annuity is that inflation will eat the purchasing power of the payments. An ideal solution is inflation indexed annuities, but the market for these seems small and not very competitive. Given TIAA-CREF’s non-profit status, and that its TIAA Traditional annuities have potential for additional amounts, it is quite likely that TIAA would pass any gains associated with high inflation to its annuitants. Any other annuity issuer would pass these gains to its shareholders. TIAA annuities are certainly far from an inflation hedge, but I speculate that in this respect they beat other insurers.