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ccincis

Retirement Diversification - To 403b or not to 403b

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Okay, so here's my current situation: I am 31 years old, and I have been working in education for three years now. Fortunately for me, I just paid off ALL of my student loans (WOOHOO!). Now that I've paid off my student loans, I would like to invest this money towards retirement. I have NOT opened a 403b or a retirement account within my school district (AVUHSD); however, I did open a personal Roth IRA with Vanguard a few years ago, and I continue to max it out each year. I chose to first go with a Roth IRA because it is a post-tax contribution, which would help to balance my pre-tax pension when it comes to retirement. 

Today I was told by a "retirement adviser" that if I were to continue to work in education and retire at the age of 65 I will receive 91% of my salary in retirement. After hearing that I had a Roth IRA, he then made it sound like I should open a retirement vehicle that mimicked the S&P 500 and that would guarantee me a certain return in order to avoid having all of my retirement vehicles be attached to the stock market. I'm not going to do this because I did some research and it sounds like that's a terrible idea. However, I'm not sure what else to do beyond my Roth IRA.

Should I open a 403b with Fidelity or Vanguard through my employer's providers? Should I try to invest in another way outside of the stock market (i.e., real estate, other retirement vehicles that I don't know about, etc.)? Is it okay to have both a 403b and a Roth IRA both being invested in the stock market? What happens if the market were to crash as I go to retire with both of these vehicles being attached to it?

I appreciate anyone's time for being willing to answer my questions! Thank you!

-Craig

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Congrats on paying off your student loans.  That's a great step towards your future.  Also a Roth IRA invested in broadly diversified low cost index funds is a great idea in your lower income, early years of teaching.  This is because your tax bracket will likely be higher in the future than it is now, especially if it is true that your pension will be 91% of your highest salary.

Who was the "retirement adviser" that spoke to you?  If he came into your school he was probably an insurance salesman trying to sell you some type of terrible annuity product.  I would verify from reliable sources anything that he told you about your pension.  Talk to senior coworkers or call your state pension office to get more detailed information.  91% of highest salary is much better than normal for a defined benefit pension.  Even if that amount is accurate, do you really want to teach until you are 65?  I would get estimates of pension amounts at younger ages like 57-60.  If the pension amount isn't as much as you were lead to believe, that the tax deferred 403(b) will likely be a better option as your wages go up and move into a higher tax bracket.

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22 hours ago, ccincis said:

I did open a personal Roth IRA with Vanguard a few years ago, and I continue to max it out each year.

What are you invested in here?

 

22 hours ago, ccincis said:

After hearing that I had a Roth IRA, he then made it sound like I should open a retirement vehicle that mimicked the S&P 500 and that would guarantee me a certain return in order to avoid having all of my retirement vehicles be attached to the stock market.

This advice makes no sense because the S&P 500 is all stock companies. What an I missing?  Sounds like an annuity pitch to me. Be careful.

 

Craig.

Welcome to the board.

Nothing wrong with investing in a Roth IRA. Nothing wrong with adding a 403b and investing even more in Fidelity Index Funds or Vanguard in general as long as you can diversify. Are those  Vanguard/Fidelity options available to you in a 403b? 403b's have a higher investment limit than an IRA so more can be saved. Please provide us with the list of choices in your 403b plan.

I would IMHO treat your educational pension separately from your supplemental retirement plans because its  payout amount is not a certainty until you actually retire. Who knows you might leave or be forced to leave the profession. The future is unknown to most of us. We can only guess and hope that it pans out the way we want. The pension might be altered and benefits reduced.

What you need is diversification across all your  supplemental investments. Here we usually advise  that you own a Total Stock  index market fund, a Total International Fund, and a Total bond index fund. A Vanguard target fund  based on or close to your retirement date would be a very easy way to get this done because it includes those funds mentioned and are automatically diversified for you on an on going basis.  You could open a target fund in your 403b and also transfer your Roth IRA to the same fund outside of the 403b and you would be totally , appropriately diversified on an ongoing basis And without ever worrying about rebalancing or modifying your investments. Your job would to only invest the money.

At your age and level of investing  (beginning) it's a very smart move to go target fund  but not through an annuity. Only through a Vanguard Target fund.

Hope I've helped.

 

Tony

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Congratulations on your maxing your Roth IRA, and for being student loan free! If you contribute to a 403b plan, you will lower your taxable income by the amount of your contributions. This will postpone the income tax until your retirement when your income tax bracket will likely be lower. If Vanguard and Fidelity are on your district’s 403b vendor list, you are fortunate as they are excellent low-cost vendors. I agree with the other posters that a target retirement fund is an excellent choice for your 403b account. Neither of those vendors will have a local rep to “advise” you, although you will have phone access for administration concerns. 

Here’s a link to a 403bwise article on 403b plans and how target retirement funds work: https://403bwise.org/education/investment

As mentioned above, a pension that is 90% of your final working salary is very unusual. About 60% is more common. I believe that a majority of teachers do not work long enough to get a full pension, for a variety of reasons. Adding a 403b account to supplement your pension is a very prudent move! 

What state are you in? Some states have excellent low-cost 457 plans available to K-12 employees that are worth considering. After leaving your employer, you can take distributions from a 457 without the 10% penalty that the 403b has until age 59.5. There are exceptions to the age 59.5 rule.

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I would get your exact pension numbers from your union rep or from the .gov website of whatever state you work for.  You’re 20 - 30 years away from retirement but it’s still good to know what you’re working towards.  
If you get 91% of your salary that’s pretty amazing.  Here in NJ our formula is:

Years of Service \ 55 Final Average (3yrs.) Salary

Along with this there’s different rules for how old you need to be to get the full pension benefit.  These rules differ depending on when you started teaching.  New teachers might have to work till they’re 65 to get the full benefit while someone who started in 2010 may have to only work to 62 etc.

 

Edited by jebjebitz
Typo

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Thank you all for responding to my post! 

For clarification, I live in California, and my Roth IRA is invested in a 2055 Target Retirement Date with Vanguard. I definitely need the tax break from enrolling in a pre-tax retirement vehicle.

My question is now whether it’s stupid to open a 403b and invest in another target retirement date mutual fund. If the market were to crash, it would negatively impact both of these retirement vehicles. 
 

I guess I’m not sure what other 403b options are available to me that would be safe yet still result in a similar ROI like my Roth IRA, which is currently at a 10%+ return rate since its inception. 

Here are the options available to me through our 403b vendors:

CalSTRS Pensión 2

AIG: Portfolio Director Choice Series 5 Fixed and Variable Annuity

Nationwide: Kern Schools Federal Credit Union 457(b) 403(b) 401(a) Retirement Program

Vanguard

USAA Mutual FundS: Victory Capital Management, Inc.

Fidelity 

And more...but those are the cheapest plans available. Recommendations, please!

-Craig

 

 

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No, it is not stupid to invest in Vanguard’s Target Retirement 2055 fund in a 403b plan. It’s an excellent choice for both your Roth IRA and your 403b. The reason is that it is a completely diversified fund. It includes stocks and bonds, from both the US and internationally. Yes, the fund  will loose value when the stock market takes a dip, but that is expected. The loss is short-term. Markets recover from losses. You have decades before you retire, and decades after that, where you want your retirement investments to be a source of your support. You should consider that your are investing for the long haul and try to ignore the noise of the market’s ups and downs.

A salesperson will try to mislead you into buying a product called an equity index annuity. They will claim that it will grow like the S&P 500 Index, but will not loose money. Don’t believe it! It is very expensive. The salesperson gets a very big commission. Your balance will NOT have the full growth of the S&P 500 Index. You will loose money from the high fees. There will be a large surrender fee if you decide you want to move your balance to another product.

I suggest you do some reading on investing. Dan Otter has written a very readable small book on investing for teachers. He has been working to improve the 403b world for teachers for 2 decades. There’s lots of information on why an annuity 403b plan is not a good choice for investing for retirement.  https://teachandretirerich.com

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On 12/11/2019 at 1:05 AM, ccincis said:

I did open a personal Roth IRA with Vanguard a few years ago, and I continue to max it out each year. I chose to first go with a Roth IRA because it is a post-tax contribution, which would help to balance my pre-tax pension when it comes to retirement. 

Today I was told by a "retirement adviser" that if I were to continue to work in education and retire at the age of 65 I will receive 91% of my salary in retirement...he then made it sound like I should open a retirement vehicle that mimicked the S&P 500 and that would guarantee me a certain return in order to avoid having all of my retirement vehicles be attached to the stock market.

Should I open a 403b with Fidelity or Vanguard through my employer's providers? Should I try to invest in another way outside of the stock market (i.e., real estate, other retirement vehicles that I don't know about, etc.)? Is it okay to have both a 403b and a Roth IRA both being invested in the stock market? What happens if the market were to crash as I go to retire with both of these vehicles being attached to it?

I'll save the discussion on Roth vs Traditional (you're right that having a pre-tax pension is one factor that favors Roth investing). However, one thing a lot of fans of Roth IRAs seem to overlook is the fact that you're often able to contribute to 403b and 457b plans with a Roth as well. Just wanted to throw that out there.

I'm assuming this pension prediction (91% of your salary) is based on the current state of the pension fund? A lot can change in 30+ years, but let's assume his assumption is gospel. In retirement the typical person is free of several expenses (kids, large house, retirement savings, etc) and then you can add SS income on top of that savings (although some teachers don't get SS). If I were guaranteed those savings and that income , I'd feel entirely comfortable living on just that. Therefore, my ability to take risk in my other accounts would skyrocket, but the advisor is acting as if the opposite is true. The logic just doesn't add up.

Yes you should open a 403b or 457b with Fidelity or Vanguard. I documented the Vanguard plan here and the Fidelity plan here.

You should pick an asset allocation (split between stocks and bonds) that you can live with, you should max out all of your tax advantaged accounts if possible (IRA, 403b, 457b, HSA, etc), and then you should invest in a taxable account. You don't need to do anything fancy, in fact doing so will probably hurt you. You can read my Investing 101 page here.

If the market crashes when you go to retire then that's fine (clearly suboptimal, but fine) because you shouldn't be retiring until you have enough money to sustain such an event. Depending on how soon you retire and your preferred asset allocation, I'd personally feel comfortable with somewhere around 25x-33x annual expenses (and I won't be getting a pension). Of course people will tell you that by the time you're getting ready to retire you should shift to hold more bonds, which would offset a potential stock market drop...of course the other side of that coin is that switching to more bonds decreases your expected returns, which means you'll have to save up a larger portfolio before retiring, which means you'll have to work longer (the exact thing you're afraid of if the market crashes with a stock heavy portfolio right before retirement).

16 hours ago, ccincis said:

My question is now whether it’s stupid to open a 403b and invest in another target retirement date mutual fund. If the market were to crash, it would negatively impact both of these retirement vehicles. 

Krow addressed this well already, but let me add a couple points:

  1. People fall into a logical fallacy where they imagine their money in boxes (IRA vs 403b) and then they treat those boxes differently. In reality, you should think of your entire portfolio as a single unit. Do all of the pieces add up to match your risk tolerance? If the target date fund matches your risk tolerance then great, you're good to go in both accounts.
  2. People often confuse complexity with effectiveness/diversification. The target date fund basically owns all of the publicly traded stocks and bonds (minor exceptions of course). Don't let the fact that it is a single fund obscure the fact that a target date fund is fully diversified. Don't let the fact that there are all of these exotic investments that you/everybody probably can't fully understand obscure the fact that a target date fund is incredibly effective.
  3. Advisers like to make you believe they can save you from the down side and capture the up side. It is pure fantasy. When the stock market crashes, we all suffer. When the stock market soars, we all celebrate. An adviser will however use your fear to put money into their pockets. Pick a bond allocation that will allow you to live through (sleep well, not make foolish decisions like selling or stopping contributions, etc) the several stock market crashes you'll face in life.

 

 

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Low-cost index funds are supposed to be the ticket for getting rich slowly. If you own a target date fund with Vanguard your money is spread across like 11,000 companies and like 20,000 bonds... I would say that's safer than putting your money most other places. 

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agreed!!  and the risk is reduced over time. 

1 hour ago, ScottO said:

Low-cost index funds are supposed to be the ticket for getting rich slowly. If you own a target date fund with Vanguard your money is spread across like 11,000 companies and like 20,000 bonds... I would say that's safe than putting your money most other places. 

agreed!!  and the risk is reduced over time in a target index fund over time. No timing the market just age appropriate reduction in risk.

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