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I get a guaranteed 3% on my traditional TIAA account. If I leave it there, I have to start withdrawing at about age 70, which would cause me tax problems at that time.
I had always planned to take the fixed lifetime income option when I retired.
BTW - it would be kind of a neat trick for bond funds to outperform their underlying holdings - i.e., bonds (except for closed end funds which can trade at various premiums/discounts to NAV). Can you explain how you think that works to me (because it doesn't work that way)? Robyn
Is it a trick that a stock price can have little relationship to the ability of the company to grow revenue or to pay dividends? It is my understanding that the price of a bond mutual fund is partly dependent on demand. The demand is not entirely dependent on the component bond payouts. Maybe I am wrong but prices seem to work in that fashion. This past year there seemed to be a lot of interest in bond Plus funds; i.e., bond funds which contain a portion of higher risk, higher yield junk and/or foreign bonds. It is my understanding that my 6% return is due partially to investor demand. I would be very surprised if a fund which is still highly investment grade would somehow suddenly return 6%. If my understanding is incorrect, please explain so someone with my limited knowledge can understand. I understand this same phenomenon applies to even high grade funds. I have been seeing 3-4% for those funds which seems well beyond the component bond yields.
I get a guaranteed 3% on my traditional TIAA account. If I leave it there, I have to start withdrawing at about age 70, which would cause me tax problems at that time.
I had always planned to take the fixed lifetime income option when I retired.
Not sure why you would want to give up the guaranteed 3%, which is better than any CD today.
And not sure what sort of tax problem you are referring to? If you are using the money to live on you will be pulling it out and reporting it as income no matter what. Or maybe I'm missing something here?
TIAA guarantees the rate of return for the TIAA traditional plan. The returns are guaranteed based on the mix of "vintages." For example if US treasuries and investment grade corporate bonds have a high yield when the investor puts money into the fund, then the return for that vintage will be high. If the investor buys in at a time when returns are low, the rate of return for that money will be low. This greatly reduces the long term volatility.
I am almost cashed out of the small amount of traditional that I owned so I have only a basic understanding. I do believe that TIAA has a base guarantee and also annually makes adjustments based on the overall financials for all of the moneys in this fund. I believe the OP was complaining about this annual review and wants an absolutely fixed return. That can certainly happen when the account is annuitized for final distribution. I believe even that is rare and most holders would want a variable annuity. That is especially true now with very low rates.
Not sure why you would want to give up the guaranteed 3%, which is better than any CD today.
And not sure what sort of tax problem you are referring to? If you are using the money to live on you will be pulling it out and reporting it as income no matter what. Or maybe I'm missing something here?
Agreed.
Also, seems like the age 70 thing is probably really 70.5 at which time everyone who has income which has been tax deferred has to start taking required minimum distributions and cough up the taxes. That's an IRS rule that the financial institution has no control over.
Additionally, as I believe the OP already knows, if she converts it to an annuity she will still have to pay taxes on those payments.
Not sure why you would want to give up the guaranteed 3%, which is better than any CD today.
And not sure what sort of tax problem you are referring to? If you are using the money to live on you will be pulling it out and reporting it as income no matter what. Or maybe I'm missing something here?
There are forced withdrawals at around age 70. I think that would be a problem.
The guaranteed 6.18% for fixed lifetime income would be better than 3%. But the 6.18 unfortunately is not guaranteed. There is microscopic invisible print somewhere that tells you that. TIAA frames it like you are getting an added on gift, because they love you. The real guaranteed rate is either 4.9% or 2.5%, depending on which TIAA consultant you believe.
There are forced withdrawals at around age 70. I think that would be a problem.
The guaranteed 6.18% for fixed lifetime income would be better than 3%. But the 6.18 unfortunately is not guaranteed. There is microscopic invisible print somewhere that tells you that. TIAA frames it like you are getting an added on gift, because they love you. The real guaranteed rate is either 4.9% or 2.5%, depending on which TIAA consultant you believe.
I have to say I'm a bit confused. I'm not in the TIAA system so I'm not familiar with their products.
Nonetheless, getting to the point on taxes... I thought your desire was to use the assets to pay bills during retirement. If true, then withdrawals are inevitable and so is any tax on said withdrawals. Most deferred accounts will force the owners to take minimum distributions at age 70.5, and so you may be forced to take a bit more than you like. Oh well, that's the law.
I have to say I'm a bit confused. I'm not in the TIAA system so I'm not familiar with their products.
Nonetheless, getting to the point on taxes... I thought your desire was to use the assets to pay bills during retirement. If true, then withdrawals are inevitable and so is any tax on said withdrawals. Most deferred accounts will force the owners to take minimum distributions at age 70.5, and so you may be forced to take a bit more than you like. Oh well, that's the law.
As I keep saying, I was counting on the fixed lifetime payouts.
As I keep saying, I was counting on the fixed lifetime payouts.
OK but could you just humor the rest of us by saying that you understand that however you withdraw this tax deferred money you will have to pay taxes on it?
Also, unless you annuitize it, like everyone else who has tax deferred money, you will be required to withdraw the Required Minimum Distribution(RMD) per IRS regulations or incur a huge IRS penalty at age 70.5...I believe its 50% of the amount you are required to withdraw.
Is it a trick that a stock price can have little relationship to the ability of the company to grow revenue or to pay dividends? It is my understanding that the price of a bond mutual fund is partly dependent on demand. The demand is not entirely dependent on the component bond payouts. Maybe I am wrong but prices seem to work in that fashion. This past year there seemed to be a lot of interest in bond Plus funds; i.e., bond funds which contain a portion of higher risk, higher yield junk and/or foreign bonds. It is my understanding that my 6% return is due partially to investor demand. I would be very surprised if a fund which is still highly investment grade would somehow suddenly return 6%. If my understanding is incorrect, please explain so someone with my limited knowledge can understand. I understand this same phenomenon applies to even high grade funds. I have been seeing 3-4% for those funds which seems well beyond the component bond yields.
You are most definitely wrong when it comes to the kind of funds you're talking about - which are open end mutual funds. Open end mutual funds are priced at NET ASSET VALUE (NAV)* - i.e. the price of their underlying assets - usually once at the end of the day. If there is more demand for the shares of a particular fund - the managers create new shares (and they go out and buy the underlying assets to back up the shares). If there are net redemptions - managers usually keep some cash on hand for that. But - if the net redemptions exceed the cash reserves - the managers have to go out and sell the underlying assets. Which - in the case of bond funds - is bonds.
ETFs work pretty much the same way. Although - with ETFs - since they trade actively during market hours - there is no way to fix the price of the ETF exactly to NAV. Therefore - the most actively traded ETFs tend - during normal market times - to trade either at small discounts or premiums to NAV (not normal market times is a different story).
Then there is a third category of fund - closed end funds. Closed end funds have a set number of shares - usually traded on exchanges - which trade at whatever market participants care to pay for them. They can trade at NAV or (often substantial) discounts/premiums to NAV.
Bonds (and bond funds) have 2 components when it comes to total return. One is the interest payments on the bonds - and the other is price fluctuations (either up or down). If you're more familiar with stocks than bonds - you can think of it as fluctuations in share prices (up or down) plus dividends (although there are major differences). When interest rates go down - bond prices go up - and vice versa. Most of the return in bonds and bond funds (open end funds and ETFs in particular) the last year or so have been the result of declining interest rates - and higher bond prices. Not interest payments.
Let's take a closer look at the particular fund you mentioned. TCBPX. It calls itself a "Bond Plus" fund. Frankly - I had never heard of the term before. It seems to invest about 70% of its assets in higher grade stuff. Including US Treasuries. And about 30% in lower grade stuff. I cannot 100% understand why its return is only 6% this year. Maybe it has too much in the way of shorter term holdings. Or mortgage backed securities (about which I know next to nothing). Shorter term bonds and MBS securities don't do as well in a declining interest rate environment as longer term bonds. I just don't know. Whatever - I can assure you that most of that return has been the result of increases in bond prices - not interest (the current SEC yield - the interest you get - is only 2.6% or so).
My primary concern with a fund like this is mixing apples and oranges - high quality holdings with low quality holdings - and marketing it to an investor base that is pretty much clueless. I don't think junk is an appropriate core holding for most investors. Indeed - I limit my junk to perhaps 5% of my total bond holdings - and I trade it actively through ETFs. When we get the next downturn in junk - and there will be a next one (especially if the price of oil keeps falling - the energy sector of the junk bond market is challenged) - what will happen to the NAV of a fund like this? Say the 30% that is junk goes down by a modest 10%. That is more than a year's worth of interest yield. The same would apply if there's an uptick in terms of interest rates - even on the good stuff (although I consider that less likely than a downturn in junk).
Also - I don't know how "sticky" the TIAA-CREF money is. If even 20% isn't sticky during a junk bond/other bond market downturn - the fund only has 11% in cash. It would have to liquidate another 9% or more of its assets to pay off redemptions. It wouldn't be able to sell off its junk bonds at reasonable prices (the junk bond market is very illiquid). So it would probably sell off the good stuff first (there's an old market saying - you sell what you can sell - not what you want to sell). So the remaining "buy and hold" sticky money would be left with a portfolio that was considerably dented in terms of quality.
I guess a lot depends on you. Do you plan to trade this position - and harvest your capital gains? Or do you plan to buy and hold forever? If the latter - I can think of better places to invest money than a fund that only has a yield of 2.6%. Like 10 year brokered CDs yielding 2.3%. Robyn
P.S. Net asset value pricing isn't carved into stone. It's pretty easy when it comes to the US Treasury market - which is extremely liquid and actively traded. When it comes to other fixed income things - including most municipal and junk bonds that trade by appointment only - mutual funds and brokerage firms and the like generally rely on computer models.
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