5 TIAA Mistakes I See DIY Investors Make
I’ve helped physicians navigate the treacherous waters of TIAA for 25yrs. I’m a financial / investment advisor. More times than not, I see physicians creating and making irrevocable decisions; unbeknownst to them. Accumulation phase is easy – pick low-cost investments inside your retirement plan and let the markets do their thing. I can make a strong argument that you don’t need to pay for investment advice in the accumulation phase. However, if you’re with TIAA, I can make a stronger argument that you should pay someone to help put the TIAA puzzle together for the income phase. You don’t know what you don’t know…..and not realizing that will cost you in retirement given all the TIAA nuances.
TIAA is the dominant retirement plan vendor in the healthcare system. In fact, as of the date of this writing, TIAA administers approximately 1,380 in healthcare / hospital retirement plans and represents more than $85 billion of assets in those plans.
I’ve found that many folks in the healthcare system make so many mistakes navigating TIAA into retirement that I totally revamped my firm and now I only help those with TIAA – yes, it’s that big of a problem.
The problem isn’t knowledge of the investment world or knowing the differences between certain investments. People, in general, are afforded more info at their fingertips today than ever before and are becoming more informed about what investments they hold in their portfolios. The problem, as I’ve seen and experienced, is not knowing all the tangents one can take with TIAA’s various contracts and how to put together the most advantageous income plan once retired.
The issues all surround Traditional (guarantee investment). Did you know that one of the illiquid contracts for Traditional has 6 different strategies to choose from and one of them can only be implemented if you’re within 120 days from separation of service? Did you know there are many states that are exempt from state taxes if you choose to take income from TIAA (assuming approved vendor)?
Again, the problem isn’t lack of intelligence on your side, it’s the fact that you don’t know what you don’t know.
I had a client frame it in a great analogy – I turned it into one of my YouTube videos. He likened it to your “average Joe or Jane” working under the hood of their car. You see, this client is an experienced car mechanic and knows all the things about the stuff in cars (you see where my knowledge lies). He tells me he gets phone calls / facetime calls all the time to go over certain things that are wrong with their car. They tell him, “I’ve seen this on YouTube and spent a lot of time gathering info, but it’s still not working, can you help me out.” He tells me that most of the time they’re actually in the middle of their “car project.” So, he gladly gives out advice to the best of his ability through the phone but always ends with “You most definitely need to run this into a shop to make sure all is good.” Of course, these car owners don’t, and my client is just amazed that these folks are going to fix the “car problem” and then put their kids in the backseat of that same car and dive 70mph down the highway the next day. This client tells me that I’m dealing with the same issues, in a round-about way. Folks have done all the legwork through YouTube and other various mediums, they in-turn, try and implement what they think is a good plan, only to find out either they can’t do what they were going to do or find out later they made a mistake that happens to be irrevocable.
Sound familiar? I’m going to share with you some mistakes I’ve seen over the years to hopefully help you avoid.
First though, let’s clear up what Traditional is. This is an investment through TIAA’s platform that one can transition into a fixed annuity. Funds allocated to Traditional earn a minimum interest rate, plus the potential of additional interest declared by TIAA’s Board. Traditional is backed by TIAA’s general account and their claims-paying ability rather than an investment portfolio. All mention of annuities in this article is of the fixed kind. I’m not referencing variable annuities.
Access to these funds held in Traditional are determined by which contract holds your Traditional monies. Regarding the extraction of the funds accumulated in Traditional, these monies can be liquid or illiquid. The illiquid aspect is where folks really get turned around. A lot of TIAA participants I speak to didn’t find out about the illiquidity of their money until they were close to retirement and started asking questions – again, you don’t know what you don’t know.
Mistake #1 – Not Knowing How Much Lifetime Income to Take, if ANY at all.
Lifetime Income is just that, it’s money you transition from Traditional into income for life. This article’s intention isn’t to educate you around the nuances of lifetime income (I have plenty of YouTube videos on that), it’s to help you identify where / how TIAA participants are falling short around this enigma. After speaking to many TIAA participants, I recognized this as such an ongoing problem, I created a plug-and-play calculator to help those dealing with this to identify how much lifetime income would be appropriate. Trust me, there is no “one size fits all.” Might sound like a cliché, but each scenario lends itself to different outcomes. I’d say the overwhelming mistake I come across with those initiating lifetime income is taking WAY too much of the fixed annuity. They get caught up around the words “guaranteed” and “lifetime income” and fail to take the time to find out what mathematically would be the best path. But again, I’ll go back to the point that most TIAA participants don’t have these financial calculators at their fingertips, and they don’t know what they don’t know.
There are many factors that come into play like…. age of participant, payout rate, married / single, estate planning, current Traditional crediting rates, liquid or illiquid, state tax free income, held in Roth account, and the list goes on….
You must weigh the opportunity cost (through very customized financial calculators) of extracting the Traditional monies given the extraction options afforded to the specific contract, and either take those payments as income (less likely) or transfer those monies systematically to IRA (Roth or Traditional), invest those monies in income producing investments and then extract from that IRA for income as needed.
Trust me, you can’t figure that out in your head. I’ve seen many try and many fail.
Usually, I’m dealing with folks that have been with TIAA for 20+ years, and the end result comes down to taking income from lifetime income (not always though), social security, and income from outside accounts (Roth, Traditional, non-qualified). Layered on top of that would be if any Roth conversions make sense and the timing of social security.
Even if we decide to take lifetime income, the dollar amount that we’re transitioning to lifetime income may not be 100% of the monies that are currently held in Traditional. The key is to find that monetary “sweet spot” and then strategize as to what to do with the rest of the Traditional money.
Mistake #2 – Ignoring Required Minimum Distribution Planning (RMD’s)
This mistake is the most complicated and least understood. Again, this article isn’t to go over all the strategies (I have plenty of YouTube videos on topic) it’s to convey the fact that if you fail to plan, your plan will fail.
I can’t tell you how many times TIAA participants reach out to me telling me the same issue, just worded differently. They’ll have these monies tied up in Traditional and they’re about to hit RMD age. “What do I do?” They’ve read the most recent ruling on SECURE ACT 2.0 and THINK they know…. but they don’t. TIAA beats to a different drum in this regard. The silver lining though is that even the IRS gets turned around on this topic. I have literally been on the phone with the IRS talking to them about this issue and they didn’t have a clue what I’m talking about. What I learned from that conversation(s) is that you better err on the side of caution and try not to get too creative around RMD issues. The IRS doesn’t care about your personal rationale or how YOU interpreted certain IRS rulings. Plan ahead or this topic could back up on you.
I’ve seen where TIAA participants have built up $2mill+ in Traditional and just ignored it for the most part because it’s earning over 4% and they didn’t need the income. They thought they could aggregate RMD’s with their IRAs at Schwab or Fidelity when the time came, only to find out that’s not the way it works. They thought they could initiate 5yr fixed from a GRA contract to an outside IRA at Schwab only to find out that TIAA will automatically redirect all those payments to you as income if you reach RMD age prior to those 5yrs exhausting. Suddenly, these TIAA participants have A LOT of taxable income they weren’t planning on. They didn’t know what they didn’t know….
Given the restrictions around Traditional held in certain contracts, one must coordinate distributions from various contracts as to not get sideways with the IRS. Most folks just ignore this until it’s too late….
Mistake #3 – Assuming Your Financial Advisor Understands TIAA
I’m somewhat sympathetic to this topic because this used to be me and this is why I’ve revamped my whole firm. Let me shed a little light here. Most, not all, but most advisors will “advise” TIAA participants to extract the monies out of TIAA the quickest way possible and get those monies over to an IRA (in most cases). Why is that? Two main reasons. One – they don’t have all the info necessary to give you an informed recommendation, and Two – THEY CAN’T GET PAID. Let’s expand on this….
Couple years ago I went to a financial advisor conference in Colorado Springs and, like all conferences, folks ask me how I operate my firm….blah, blah, blah, blah… you know the deal. When I tell them I specialize in helping folks in TIAA retirement plans, the overwhelming response / question is, “Why? How do you get paid?” They roll their eyes and tell me, “I have clients with TIAA and I don’t understand what’s going on, you mind if I call you?” I always tell them “Yes,” but I think one person has taken me up on that. You see, the reason why most financial advisors stray away from TIAA is that they can’t deduct their fees directly from the accounts, thus not being able to get paid. So why would they take the time to educate themselves on the never-ending nuances associated with TIAA when they’re not interested in having any TIAA participants as clients. This is why most advisors are trying to transfer your TIAA assets to their program, under their purview, so they can get PAID. I don’t believe there’s financial malicious intent behind the recommendation, they just don’t know what they don’t know. TIAA requires a different kind of specialty than what most advisors possess.
Mistake #4 - Using the Retirement Income Illustrator Incorrectly
TIAA has a very valuable tool, available through your portal, but commonly misused. This tool is an income illustrator designed to provide you with information necessary to help construct and optimize your financial path. It will allow TIAA participants to model for various scenarios. This part of the article is not intended to educate you on the actual tool itself, but to inform you of how it’s commonly misused.
One issue I see all the time is the default setting to Single Life Annuity option. I get emails constantly from TIAA participants asking me if they should initiate Lifetime Income where their payout rate is 9.8%. My first question is are you married and, if so, did you account for your spouse as joint survivor? “huh, not sure what you’re talking about,” is a pretty common response. If you’re modeling the scenario for your spouse, you’ll want to choose the appropriate joint survivor benefit structure because the illustrator does default to Single Life, which most married couples wouldn’t choose. However, there are specific scenarios where choosing Single Life with Guaranteed Option may work instead – there is no “one size fits all.”
You must know what variables to input into the illustrator to get the most accurate read on the estimated income provided. Without this knowledge, or failure to input correct variables, you’re just leaving one of the most important financial decisions you have to make to chance. Let’s just hope you get it right. Once that lifetime income is initiated, there’s no going back….irrevocable.
To that end, little off topic here, it never ceases to amaze me that a lot of TIAA participants choose to go in this alone, thinking “I got this.” Most of you don’t. Most TIAA participants have done a great job in the accumulation phase. Been very diligent and disciplined in saving / investing the money – that’s the easy part. But here comes the income phase- totally different.
Again, it blows me away when I encounter TIAA participants that are about to make some of the most important financial decisions that will navigate their future retired selves, and they don’t know what they’re doing. Some of them even admit this candidly. How do I know this? Because I talk to these folks weekly. I try to educate them in the allotted time we have, but I know the decisions they’ll ultimately make are the wrong ones. They either don’t want to pay someone to help them or are too stubborn to admit that the countless hours they’ve spent on various social media channels was all for not.
Mistake #5 – Not Understanding the Liquidity Rules of Each Contract
This mistake is probably the easiest to rectify. There’s a lot of info that goes into this topic, but it’s all public information and can be found easily. However, how is one even to know this exists if they’ve never been told?
Case in point – just spoke with a TIAA participant last week. After speaking with his TIAA rep, he was convinced to transfer $500,000 into Traditional because the rate was so attractive. RA Contract. Two things at play here. First, he got 6.2% on those newly deposited monies – phenomenal. I told him that’s the silver lining here, at least we have that in your back pocket. Second, he was never told this would be illiquid. Just like many others, he found out the hard way – few months prior to retirement. He was furious when he found out. Luckily, he had that 6.2% we could game plan around. However, I’ve seen many cases similar to this where we’re dealing with sub-4% on Traditional – now we got a problem.
I encourage you to educate yourself on the different extraction options afforded to you, given the specific contract(s) that hold Traditional. Remember this as well, each contract that holds Traditional will have a different payout rate associated with it if transitioned into lifetime income. This is where some of that planning comes into play when deciding which, if any, contracts that hold Traditional should be transitioned into lifetime income.
Final Thoughts
One of the reasons I enjoy working with those in the medical field is that they’re typically critical thinkers. I enjoy the back-and-forth regarding different TIAA strategies. Even though I’ve dealt with TIAA scenarios for 25yrs, I learn something new quite often. It’s just a big puzzle that I enjoy putting together. I encounter DIY investors all the time, which is fine, but even the most intelligent DIY’er can’t put together the most optimal plan without all the information.
I’ll leave you with one piece of advice – humble yourself. If / when you get help regarding TIAA income, it’s not a matter of if you can do this on your own, because you probably can. It’s the matter of not having all the information to make an informed decision – you don’t know what you don’t know.