403b Plans

Urmas Lupkin Vice President Sales & Marketing
Although no one becomes a teacher with thoughts of becoming a millionaire, teachers can still retire comfortably after their chosen life of service. Teachers typically relied on state-run pension plans to provide a large portion of their retirement income. Although this is a great benefit that most people in the private sector would love to have, teachers should not depend on this solely to provide the same retirement lifestyle yesterday’s teachers enjoyed. It’s now more important than ever that teachers plan to supplement their pensions with their own savings.

WHY A 403B?
The most popular option for teachers to save for retirement is through a 403(b). Like a private sector 401k, contributions are automatically deducted pre-tax from the teachers’ pay, and their money grows tax-deferred until it’s withdrawn in retirement. It is superior to an IRA in that there are no income limits and the contribution limits are much higher at $18,500/year or $24,500/year for those over the age of 50. Also for those looking to retire early, it can serve as a bridge to social security in that you can draw on it penalty free beginning at age 55 if you are separated from service.

403(b) plans are a great idea for any teacher looking to supplement their retirement savings. Generally speaking you have a choice between insurance based products such as annuities and variable annuities or mutual fund based products. Let’s start with insurance based products. At first glance, these options can seem like a good idea. Many offer guarantees to provide an income for life at retirement and certain death benefit options. But like anything else these guarantees come with a price—as much as $3.75 per year for every $100 invested in one 403(b) annuity option. High fees can make a big difference over time as they cut into the rate of return on your investments. Many also carry surrender charges should you decide to take the money out or move it to another investment before the end of the contract terms. Mutual funds, on the other hand, don’t have any guarantees of income or death benefits. Without the guarantees, their fees are significantly lower and as such you keep more of your money, thus over time, you have higher potential for growth. Most growth stock mutual funds’ fees are a fraction of even the least expensive annuities’ costs. Although some firms can only offer a very limited choice of mutual fund families and funds, working with an “independent” firm you have access to a wide variety of choices and are offered full transparency in regards to fees, so you know what you are paying. So regardless of which type of plan you decide is best for you, be sure to ask how much in fees am I paying for this product?

The ideal starting point is to begin from a debt free position with at least a three month “emergency” fund set aside. Once you have that, a great goal is to invest 15% of your income for retirement if you can afford to. That may sound like a lot, but this may be enough to help you reach your retirement savings goals while still allowing for a healthy standard of living. Budgeting is the key. If you can’t do 15%, start with what you can afford and be sure to increase your contributions as your pay increases. Also the earlier you start the better. This allows you to take advantage of the power of compound interest.

Although, theoretically, one could take the time and effort to wade through the maze of 403b options themselves, but how do you know what type of plan and which investments are best for you? For an extra layer of confidence, work with an experienced, independent financial professional who will not only help you get it right, but can teach you about investing and educate you in the best ways to save for retirement. You can rely on your advisor to help develop your retirement investing plan and keep you on track for the long-term; one of the most important factors in the success of your plan. Ask your advisor to show you all of your options and how they work together to give you a secure future. Whether for travel, visiting family or even volunteering your time to continue training young minds, choose a retirement that’s right for you by starting your plan now.

Disclaimer: Guarantees are backed by the claims paying ability of the issuing insurance company. Investing in mutual funds involves risk, including loss of principal. Mutual funds and variable annuities are offered and sold by prospectus only. You should carefully consider the investment objectives, risks, expenses and charges of the investment company before you invest.

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