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Subject:  Re: TIAA Traditional Date:  4/18/2006  8:55 PM
Author:  Lokicious Number:  27 of 58

Hi Ken,

Got your message. Need to get one of those anonymous email accounts so I feel more comfortable just replying, or else just reply to people, like you, I know are safe.

Anyway, probably better for general consumption.

I haven't yet figured out (or tried to) how TIAA-Traditional does its payouts after you start taking money out. It may be different for the regular retirement, where you are restricted as to how much a year, and Supplemental which I believe is unrestricted. During your accumulation phase, once you stick money into TIAA-Traditional in the regular retirement account, you can't move it out. In Supplemental, you can use TIAA-Traditional like a money market or stock or bond fund and move in and out at will. I presume that is why it consistently has a much lower interest rate (as I recall anywhere from .5% to 1.5%) than the regular retirement TIAA-Traditional. It seems to correlate with the yield curve, so when short rates were very, very low, the differential was high, since the yield curve was steep and long rates much higher. I'm guessing, because people can move money around, the Supplemental version uses mostly short term instruments.

My view of TIAA-Traditional is that it is a fixed-income/bond asset. If you are interested in rebalancing, it is useless in the regular retirement account (except if you permanently want to cash out of some portion of stocks, but you can't move money back into stocks). However, if you've reached the point, as I have, where you want a strong fixed-income allocation in tax-advantaged accounts (most of my stock holdings are now in taxable, except the pittance in Roths), TIAA-Traditional in the regular retirement account tends to be competitive with 5-year CDs, which aren't an option.

TIAA-Traditional in the Supplemental account is not competitive with what you could get for a fixed-income ladder in a taxable account (or IRA/Roth). What comes closer in yields is the Cref Bond fund. (Since I want to defer taxes on income, I'll take what I can get in the Supplemental rather than a taxable account.) TIAA-Traditional is not subject to interest rate risk: it pays you your interest and compounds it. The bond fund, like all bond funds, gets a return based on the value of its bonds plus its dividends. It's kind of invisible, because they get lumped into the NAV, unlike Vanguard's Total Bond Index Fund (same benchmark, lower expense ratio), where you can see the dividends and what happens to bond values as the NAV goes up and down. The reason the bond fund has been down this year is because interest rates are up. When interest rates are going up, even the low return on the Supplemental TIAA-Traditional will beat the total return on the bond fund. When interest rates hold steady or go down, the bond fund wins. This is why I am trying to "market time" when to switch money to the bond fund, by trying to understand inflection points. (I'll probably try a mix of the two and rebalance.)

Even if you're doing stocks and bonds and rebalancing in Supplemental, you still want to be in TIAA-Traditional for the bond allocation when interest rates are rising. I wish I had a crystal ball to tell you when rates will peak: my latest inflection point guess is 6% on 10-year Treasuries, but I'll probably change my mind tomorrow.
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