Why TDA Isn't Part Of $160M UFT Deal

Q.: I invest in the Tax-Deferred Annuity Program of the Teachers' Retirement System. Why doesn't the $160-million settlement entered into with the United Federation of Teachers include the TDA? B.G.

A.: Being an investment/savings plan, TDA Program participants receive 100 percent of all investment gains and losses their investment accounts generate. They are never shortchanged.

This is not the case with the Annuity Savings accounts of members of Tier 1 Plan A and Tier 2 Plan C. These Annuity Savings accounts are used to help fund the employee's "required minimum accumulation" under the Defined Benefit law. With four-percent interest, the member's "required minimum accumulation" will generate 12.5 percent of the 20th-year salary payable when the employee would have completed 25 years of service or age 55, whichever is later. Any declared interest rate in excess of the four percent (there were a few) was to be used to fund an annual annuity income greater than the 12.5 percent of the 20th-year salary. The UFT complaint alleges that the declared rates above four percent were used to fund just the 12.5-percent amount. Thus, the alleged short-change. The four Public Members of the sevenmember Teachers' Retirement Board finally agreed that the participants were, indeed, short-changed and the parties negotiated the $160-million settlement.

Q.: Why doesn't the recent $160-million dollar settlement entered into by the UFT and the TRS apply to all members of the Teachers' Retirement System? All of us contribute to the system. J. F.

A.: Unlike the four-percent interest rate for members of Tier 1 Plan A and Tier 2 Plan C, the statutory five-percent interest rate for members of Tiers 3-4 has never changed. So, there is no wrongdoing on the part of the TRS Trustees.

Q.: I am a retired member of the TRS and have about $600,000 in the TDA. I will soon be 74 and had enough (I mean it) of the stock market. I want to sleep, literally. I am seriously thinking of annuitizing this balance with the TRS. I value your opinion. C.F.

A.: At age 74, the TRS will guarantee a fixed-annuity income of $123.10 per $1,000 annuitized. This is an annuity income rate of 12.31 percent. This is obviously a very handsome rate of return. But it is not the investment rate of return, which is 7 percent. The rest of the return, or 5.31 percent, is a return of the amount you invested in the annuity—a partial return of your $600,000 principal.

Having said that, let's apply the above to your $600,000. Seven percent times $600,000 equals $42,000. 5.31 percent times $600,000 equals $31,860. Should you annuitize with the TRS, you will receive $73,860 per year for life with all payments ceasing upon your death. There is no provision for a beneficiary. You cannot make additional withdrawals of principal because you have transferred your title to the $600,000 to the TRS. You no longer own the $600,000. You are only entitled to receive $73,860 annually for life.

I enthusiastically advise you against annuitizing your TDA balance. In my view you should transfer the entire amount to the Fixed Return Fund currently guaranteeing an 8.25- percent investment return. At your age you are subject to Required Minimum Distributions (RMD). Your current RMD is $25,210 ($600,000 divided by 23.8). See IRS Uniform Lifetime Table. This represents a withdrawal rate of 4.202 percent ($25,210 divided by $600,000). In order to match the TRS annuity income amount of $73,860, you need to make an additional withdrawal of $48,650. This represents a withdrawal rate of 8.108 percent ($48,650 divided by $600,000). Together these amounts represent a withdrawal rate of 12.31 percent, identical to the TRS annuity income rate of 12.31 percent. In my opinion it would be a terrible mistake for you to annuitize your $600,000.

Of Note: The RMD of $25,210 is mandatory. The additional, voluntary withdrawal of $48,650 was used to show that you do not need to annuitize the $600,000 in order to conservatively generate $73,860 of annual retirement income. First see if the $25,210 satisfies your income needs. If not, make additional withdrawals first from taxable savings/investment accounts and then from pre-tax retirement savings/investment accounts like your TDA account.

Mr. Frank is a fee-only Retirement Financial Planner and a retired city high school Teacher of Accounting. He can be reached by telephone at (732) 536-9472, or via e-mail at rollover@optonline.net.