A 403(b) is a tax-advantaged retirement package. These plans are generally offered to employees of learning institutions and tax-exempt organizations like charities and churches.
A 403(b) plan can help you build a sustainable nest egg to provide you with income during retirement. This article takes a look at tips for 403(b) investing to help ensure a comfortable retirement.
Start Contributing Early
Even if you are five years away from retirement, it is still worth your while to start paying attention to your 403(b) contributions. However, the earlier you start, the more you will have saved by the time you want to retire.
If you are at the start of your career and have a lot of household expenses, start with small contributions that you can increase as your income grows. To afford these contributions, you may have to postpone most lifestyle upgrades.
Decide When You Want to Pay Tax
With 403(b) plans, you are taxed when you withdraw the funds for use in retirement. Tax liability is something that catches many retirees off-guard when they withdraw their funds, so it is essential to plan for this expense.
You can also opt for a Roth option, which means that your contributions are taxed as you save and your withdrawals are tax-free. If you expect your income to grow in the future, the Roth option may be ideal for ensuring tax-free savings for your retirement.
Optimize Your Match
While some companies don’t contribute to their employees’ 403(b) plans, others match as high as 8% of the employee’s contribution.
If your employer offers to match a part of your contribution to your 403(b) plan, you should do what it takes to contribute as much as possible to maximize this match. Your company’s match is free money that can benefit you significantly when you retire.
Maximizing a company’s match is one of the easiest and most effective ways to grow your retirement savings.
Decide How You Want to Manage Your 403(b)
Like learning any type of investing, managing your retirement portfolio is going to take some time and research ability to do it right. If you are all about the research, then managing it yourself is your best bet.
However, if that is not your favorite way to spend your time, you have a couple of options for managing your 403(b).
Blooom is a robo-advisor that specializes in helping people with their employer-provided accounts.
Instead of you having to figure out the investments, Blooom will do it for you. To get started, you fill out a questionnaire, they determine your tolerance for risk, analyze your investment options, and make recommendations as to how you should invest your 403(b). They do a free analysis, and if you want them to manage your investments, it is only $10 per month.
Target Date Funds
Target date funds are designed to get more conservative the closer you get to the designated date of retirement. So if you want to retire in 30 years, you choose a year 30 years in the future and the fund will invest very aggressively at first and then less so as you age.
Diversify Your Portfolio
Diversifying your portfolio is essential to mitigate your risks. When selecting investments for your plan, be sure to include US stocks, international stocks, emerging markets, and bonds. You should also include index funds, which typically have the lowest expense ratios.
Your percentage allocation depends on the funds that your company offers, but also your retirement goals and risk tolerance. If you still have thirty years or more before retiring, you can afford to be more aggressive with your selections. The better option would be to put the majority of your money in stocks, while focusing less on short-term bonds.
Eliminate Employer Stock
Employees who work for publicly traded companies often have the option to invest in their employers’ stock with their 403(b) plan. Allocating a large percentage of your plan to your company’s stock is not advisable, however, as it will limit your portfolio’s diversity.
If you are an executive, you may also be required to hold a percentage of your salary in company stock. This means that, if your employing company experiences financial problems, it can put your income as well as your retirement savings at risk.
Avoid Loans and Withdrawals
Your 403(b) plan is there to take care of you when you retire. Since most plans allow you to borrow a portion of your balance, it may be tempting to use the loan for a car or household expenses. When you withdraw money from your plan, however, you are losing a significant amount of growth in terms of compound interest.
Set up an emergency fund that you can use to pay unforeseen expenses, and avoid borrowing from your plan to pay for luxuries. The rule of thumb should be to never borrow from your plan before you retire.
Pay Attention to Fees
Minimizing your fees is an effective way to optimize your 403(b) savings. You can keep your costs as low as possible by selecting low-fee funds or by asking your company to provide you with low-fee choices in your plan.
Many people make the mistake of underestimating the effect that fees can have on their savings. A seemingly low fee can have a significant impact on your retirement savings over the long run. Index funds generally have the lowest costs and are worth considering for maximum growth.
Don’t Invest in 403(b) Annuities
Many 403(b) plans offer annuities in addition to mutual funds. Investing in these are not recommended, however, as they often charge high fees, which limits their investment performance. With annuities, you may also have to pay surrender charges if you transfer assets out of the annuity before the end of the investment period.
403(b) annuities are also considered complex investments, and if the annuity is variable, you can end up losing money.
Aim for Contribution Limits
The contribution limits for 401(k) and 403(b) plans are the same and set at $19,000 for 2019. If you are fifty or older, you can also make catch-up contributions of up $6,000, for a total of $25k in investments each year. Aiming for these limits can boost your retirement savings significantly.
Many people only work to maximize their employers’ matches, but your contributions don’t have to stop there. If you have been contributing to your 403(b) plan for at least fifteen years, you are also eligible to make catch-up contributions of up to $3,000 per year with a lifetime limit of $15,000. You don’t have to be older than 50 to make these catch-up contributions.
Consult with a Professional
Laypeople often have difficulty making investment selections for their 403(b) retirement plans. If you don’t have sufficient investment experience, you may not know how to allocate your percentages so that you can meet your retirement goals. Consult with a professional financial advisor who can provide you with targeted investment advice.
Rebalance Twice per Year
Some 403(b) plans will ask if you want an automatic re-balance of your account at an additional fee of up to 0.7%. Another option you have is to write down the initial investments and percentage allocations you used and sending those allocations to your representative twice per year to rebalance your account.
For example, let’s say you started off with a $20,000 investment that was split evenly between four different mutual funds. These funds will not all grow at the same rate. So every six months you should move money to re-balance the funds to be 25% of your portfolio.
I didn’t do this for a long time and one of my funds took off for 9 months straight. Before I knew it my $100k of investments was almost 50% in one place that was primed for a bit of a correction. I was able to re-balance and be rewarded by my other funds working at a nice steady pace while the one that had taken off slumped for a few months.
Follow a Long-Term Approach
Many people are hesitant about putting money into stocks. However, despite its volatility, the stock market has historically always recovered from declines and consistently show growth over the long-run. To see growth with stock market investment, consider following a long-term investment approach.
Maximize Social Security Benefits
By optimizing your social security benefits, you can increase your 403(b) contributions. If you are behind on your retirement safety contributions, these bonuses can help you catch up and retire in comfort.
Since a 403(b) is only available to certain employees, it is not as popular as the 401(k) plan. This plan has a lot to offer, especially if you take full advantage of its benefits.