I recently turned 65 and although I am continuing to work part time (I am a free lance writer and consultant) I am starting to draw on my retirement income too. I recently applied for and started to receive Social Security. It’s a little before my full retirement age but due to the nature of my work its nice to have a predictable source of income. I fall below the income level to have to take a penalty on my SS benefits by taking them before full retirement age.
I also have a TIAA-CREF retirement account (TIAA Traditional and CREF Stock, divided about 40/60) from when I had a salaried job which I have not done anything with as yet. It appears that if I take it as a lifetime annuity I would get around $700/month. I believe I can also take cash disbursements but haven’t explored the details of that yet.
I also have a substantial mutual funds account which gives good returns. I own my own apartment. I am in good health, single, and have no dependents.
Between them, Social Security and a TIAA-CREF annuity would cover all my basic living expenses (apartment maintenance, taxes, utilities, food, car expenses, etc), which are not very large here in Panama, with some disposable income for beer, travel etc. My work income and earnings from the mutual funds would be a bonus.
So what are my considerations in deciding whether to take the annuity now vs some other strategy? I intend to consult with financial advisers at TIAA-CREF and my bank before making a final decision. But I’d like to get other perspectives as well. Sometimes before discussing things with a professional it’s useful to find out what questions to ask.
I consolidated all my retirement accounts into TIAA a few years ago but have not yet addressed the annuity issue. I will make that decision when I am older.
TIAA is the best with annuities, so you have that going for you. There is a lot of information on the TIAA site, I would research that first.
If you have mutual funds in an external IRA/401k, it would be worth seeing if you can roll them into TIAA as a GSRA. I was allowed to do so by my old employer and gained access to some very, very low fee Vanguard funds. In addition, I can invest in the TIAA Traditional (stable value) fund at 3.25% that is fully liquid. I also was able diversify from stocks & bonds with TIAA Real Estate. Both of those can also be annuitized if I so choose.
TIAA is very good about doing annuities. Unlike the majority of annuities sold out there.
The main point is that most people putting money in TIAA are doing tax-deferred savings. For normal stuff (IRAs and such), once you hit 70 1/2 you have to take RMDs which can have tax implications. I.e., you’d be taking out more early on and less when you’re older so some of the RMD might be taxed at a higher rate.
Annuities smooth this out.
If the savings are post-tax, this reason is gone. Still might be a good idea, but the tax situation works out differently.
While it might seem scary that you’re seemingly not leaving money to the kids, keep in mind: You can bank some of the payments and that’s the inheritance. You can also specify a minimum term like 10 or 20 years to ensure that you can a minimum out and therefore can build up post-tax savings. It really does add up fast, trust me.
Various forms of TIAA annuities are designed to cope with inflation differently. Some don’t deal with it, but you get more early on. Some do so your payments will grow better with inflation (if it occurs). And you can do a mix.
Keep researching.
(BTW: They’ve dropped the “CREF” from their name. But there are still CREF funds.)
I’ve been reading the info on the TIAA site, but as you say there is a lot of it. The various options in fact prompted me to open this thread. This may help me sort through it better.
My mutual funds are not in a retirement account. TIAA-CREF is the only retirement account I have.
I actually never put any of my own money into it. It was entirely employer contributions. And as I mentioned it was from a while back and nothing has been put into it recently. The total amount now is about $118,000, which is about four times the employer contributions that went into it.
I would have to check on that one.
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While it might seem scary that you’re seemingly not leaving money to the kids, keep in mind: You can bank some of the payments and that’s the inheritance. You can also specify a minimum term like 10 or 20 years to ensure that you can a minimum out and therefore can build up post-tax savings. It really does add up fast, trust me.
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[QUOTE=Jonathan Chance]
2. Is there any life insurance function - and it is a tax free one - should you pass off this mortal coil before taking out the amount you put in?
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I am single and have no children. I have nieces and nephews but they should be taken care of by my siblings, most of whom are reasonably well off. My five siblings will be my beneficiaries, but I’m not particularly concerned with leaving a significant inheritance.
Good question. I’ll have to check. As a resident of Panama, I take the Foreign Income Exclusion which means I don’t pay income tax on my earnings (but I do pay a self-employment tax. Social Security and pension payments are not excluded however.
Since the money was put in by the employer it’s likely that it’s pre-tax. So all of the money taken out will be taxable. But check on this via old pay stubs or whatever. (If it was after-tax money, you only pay money on the gains.)
(TIAA is open to everyone for standard investing. Anyone can buy into their mutual funds, get an IRA, etc. But the special part is the schools/colleges arrangement where the school and teacher can put in pre-tax money. Like an IRA but without the annual cap on contributions. It’s intended to be the entire retirement fund for many of them. Hence the annuity focus.)
As to life insurance/lump sum. I don’t think so. But I could be wrong.
If you have any annuity and suddenly need a lot of cash, the standard option is to sell it. Unfortunately, the companies that specialize in this are generally sleazy and ripoffs. Not sure how to best do it.
If you are really uneasy about annuities, then just leave it in and take out money as you need it. Subject to RMDs of course. Here’s a handy tool/table for guesstimating how much that might be. (Note the default is 6% growth without inflation adjustment. Fairly generous, IMHO.)
My mutual funds provide me a cushion for accessible cash if I need it. I don’t anticipate having to dip into the TIAA account barring some total disaster.
Based on present information, my inclination is to just take the annuity now. As I mentioned, between Social Security and that it will provide secure coverage for my basic living expenses plus some discretionary spending. On top of that I will have my employment income plus my mutual funds.
Annuities are perfectly legitimate ways to transform a lump sum of savings into a steady income stream. It is a gamble, of sorts, that you will live at least as long as the actuary tables predict. If you live longer, you keep pulling the monthly income. But receiving 7.1% (which is what your $700/month payment equates to, based on $118,000) significantly exceeds the normal recommended withdrawal rate of 4%. Since you aren’t worried about passing money to heirs, you might as well take the annuity. Of course, if you don’t need the monthly income, every year you wait will result in a higher annuity payout amount.
I’d be willing to bet there’s no life insurance function if there’s a 7.1% withdrawal rate. That’s very high. So if you take the $700/month for one year then die - sorry - the annuity firm keeps the balance. I’d be looking for that sort of joker in the deck. I won’t sell an annuity without a life insurance rider that at least gets the balance of the initial contribution out. I like my clients to be made whole.
An annuity rate of 7.1% on a 65 year old in today’s economy is super! Run, not walk to get it. When I retired on the last day of 1999, I got an annuity at 8.5% at age 63, which was a crazy rate and it was going down significantly the next day. The change had been announced some months earlier (an inducement to early retirement) and my university is taking a bath on it. But that was in an era of relatively high interest. In today’s economy, 7.1% is really good.
A cranky annuity foe on a different website I read would contend that for the first 14 years or so (7001412 ~= $118,000), the annuity isn’t actually doing anything beyond returning your original investment. Got a feel for you life expectancy?
Now, TIAA is taking on the investment risk for you, so that is worth something (and possibly a lot). But if you assume some growth of the underlying investments that you currently have, you should at least consider running your own ‘annuity’ and just have TIAA send you $700 every month.
This becomes a trickier matter. If one wants to invest the money and withdraw the $700/month ($8400 annually) that’s fine. But unless you want to deplete the principle - and therefore either adjust the withdrawal or increase the % withdrawn - you need to feel confident that you can grow your money at least 7.118644% annually. That can be a heavy lift.
Yes, I know the S&P has grown ~10% since inception and index funds are out there. Well and good. But recall that’s an average. Here’s the last 10 years returns on the S&P:
That looks good, but there’s a lot of ‘recovery’ in there. Toss in the fact that the fed did everything it could to make the market appreciate - something it’s in the process of ending - and that 3 of the years the market didn’t get to the 7.1% return and there’s a bit of uncertainty in there.
Honestly, I’d ask the questions I laid out above about the annuity. But if they’re answered to your satisfaction then it might be best to just turn on the money spigot and forget about it for the rest of your life.
Then there is the question as to whether the current economy can survive a full dose of supply side. I wouldn’t want the headache of worrying about it, but of course, YMMV. The second best investment I ever made was getting that annuity (I could have taken the money and run). The best was buying this house, which has quadrupled in value even in constant dollars.
The best way to figure this out is to determine what your, specific, alternative is. In other words, if this option were not available to you, how would you withdraw this money? If you think you won’t live another 6 years, and withdraw at 20%/year, the annuity is no use to you. If you use the oft quoted 4% number, and given that you don’t need to leave it as inheritance, you should be all over the annuity. The only wrinkle is if you expect a high-inflation period in the future: if your payment isn’t indexed, its buying power could dwindle fast, and keeping the money invested is more likely to maintain your buying power.
Also, I agree 7.1% is very good at present.