Estate Planning Benefit for Retirement Account
The only way to pass a TIAA-CREF account beyond the current generation requires that you elect not to annuitize. You must instead elect the Minimum Distribution Option, because that avoids the conversion of the account into a premium. The first benefit, assuming that this comports with your values and resources, is that you will have responsibility for your own financial destiny. To underline the point, you have rejected the safety net of a lifetime annuity and have chosen instead to take distributions at your own pace, subject to the governmentally prescribed minimum. You cannot decrease the amount of the Minimum Distribution Option; but you can increase it, either through Systematic Withdrawals from your TIAA-CREF account, if allowed by your employer’s plan, or by hitting other retirement or non-retirement assets.
If you are not disciplined or possessed of a large amount of assets in the seven figures, you do run the risk of outliving your assets. Everyone choosing the MDO should be setting something aside in case that one or both of you, whether married or not, enjoys extraordinary longevity. If you have not saved against that eventuality, the MDO may reduce you to poverty in your extreme old age. The MDO carries that risk, and you will have to manage your finances accordingly.
The flexibility afforded by the MDO has, on the other hand, a number of advantages like estate planning benefit. If one assumes a modest amount of growth in your account, say 7% annually, then the amount of the MDO will increase every year. For the first several years of retirement, assuming a married couple, each aged 70, your account will grow because you are taking out less than 7% of the account’s value annually. The MDO is calculated by dividing the size of your account annually by the applicable period of life expectancy. If you have twenty years of life expectancy, then the minimum distribution rules only mandate that you received a 5% distribution. If we posit a 7% long-term growth rate, the account will grow. In fact, the numerator, the size of your account, will increase until, using 7% as a benchmark, your remaining life expectancy falls below fourteen years. The magic of fourteen years stems from the mathematical fact that you will then begin drawing slightly more than 7% of your account out every year.
That percentage will increase over time, but there are strategies for slowing that outflow. Your income will, as a matter of law, increase and enable you to keep pace with inflation more easily than if you were, for example, on a fixed annuity. If you retain a portion of your account in CREF investments, your account and therefore your income have the potential to grow significantly. If the market retreats in any year, your income may decrease, depending on how large the downward movement has been and whether you have other assets to tide you over.
The critical point remains that you have control over your destiny by changing the mix of investments and electing how much income to take each year. If you are able to live comfortably on the MDO alone, subject to the caveat that one is supposed to enjoy, not endure, retirement, the economic benefit will reach its maximum potential. We have set forth three hypothetical fact patterns, all assuming that a couple retires at age 70, and then showing the payout for an account of $500,000, $1 million, and $1.5 million. The math always works out the same in terms of the total paid versus the retirement benefit. The difference arises from the obvious fact that one can live more easily on an income three times the size of the baseline example of $500,000.
But even if you only have a TIAA-CREF account of $500,000, use of the MDO may remain feasible. Your spouse may have a retirement accumulation as well, you and/or your spouse may continue working in a part-time capacity, or you may have other income-producing assets that will make up any shortfall between needs and means. Such people do exist, and we have worked with them. To take a case that comes to mind, the couple had $600,000 in TIAA-CREF, the slightly younger wife was still working, their house was paid for, and the wife had $200,000 or so in Individual Retirement Accounts. The husband had retired at age 65, was working part time, and was letting the account grow until he reached age 70 and his wife had also retired.
Some number exists below which estate planning benefit for a TIAA-CREF account becomes unrealistic. What that floor equals we do not know. Obviously, the smaller the account, the lower the odds that the MDO will work to provide enough income for a couple or even a single retiree to live comfortably, and the first priority in any financial planning has to be a sufficient income stream to provide for you and your spouse or partner.
If, on the other hand, one survives the cut, so to speak, then the account can work its tax-deferred magic for the benefit of two and possibly three generations. As will be discussed later, attendant costs arising out of the federal estate tax will require attention and funding.
Finally, being able to pass on one’s TIAA-CREF account to one’s family produces enormous satisfaction for those who pursue this alternative. Your work and sacrifice have unexpectedly led to financial security and well-being for your family. Your children and grandchildren will have a range of career and other options that might otherwise have proven unavailable. And all because you planned and took the right steps at the right time.