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Marian

Total newbie with fee and vendor questions

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Which is the greater amount?

A.  Your salary this year.

B.  Your annual pension income + 4% of your estimated 403B balance when you retire.

If A is greater, you are likely better deferring taxes in a traditional 403B, so that you will pay taxes at a lower rate.  If B is expected to be greater put the investments in some type of Roth account and pay the taxes this year.  If A and B are too close to call, do half of each.

This might be overly simplified, but I think it a good general guideline.  

PS:  If you do work until age 75, you could probably take out more than 4% every year and never run out of money.

 

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Marian

I'm late to this discussion so I will give you my two cents quickly and briefly. I don't want to add confusion as these discussions can sometimes get more intense than they need to be although,  the advice is  always very good if you can dig through all of it.

I usually recommend the Roth for most folks. I see much higher taxes  in the future based on what I am seeing in politics. In your case Marion I think it's not so much which you choose at your age although I think a Traditional is best for you in your circumstances. What matters now more than anything at your age is saving as much as you possibly can-lights out!! , especially since you say you have a meager pension. Fees, Fund choices, Roth vs Traditional are all important considerations but saving like crazy is what you need to do now. and yes, a Vanguard Target Fund 2040 is a good choice. You don't want too conservative of a target fund  mix since you are trying to grow your account.

Well not as brief as I wanted to be -sorry

 Oh one more thing-stay away from these 403b salespeople. They will hurt you more than help you in achieving your goals as contradictory as that may seem.

Tony

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17 hours ago, Marian said:

It looks like a choice between the Vanguard Target 2035 and Target 2040 would be the best option for me. It looks like the choice would be in how long I put off the move away from stocks in the fund. Is that right?

As I think you know, the further away the date, the higher the percentage of stocks.  You can go on the Vanguard site and see exactly what the percentages are for the underlying portfolio in each Target Date fund if you are interested.  More stocks = higher expected return but also more volatility (i.e., the value of your nest egg could decline abruptly if you hold a lot of stocks).  You can pick any of the funds--you are basically choosing the level of risk you are able to accept for the promise of better returns over the long haul.  In every case, the target date fund has a "glide path," which means that it will slowly become more conservative (less stocks, more bonds) over the years.

Pick one you think you can stick with and get started now.  If upon further research you later decide you want to shift to a more conservative or more aggressive fund, you can do so without any cost.  (But only do that after deliberate consideration when things seem stable--the worst thing you can do is sell in a panic when the market drops precipitously, which it will do from time to time.)  If you have trouble deciding, pick the one closest to your expected retirement date, that should do the job.

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3 hours ago, tony said:

What matters now more than anything at your age is saving as much as you possibly can-lights out!! , especially since you say you have a meager pension. Fees, Fund choices, Roth vs Traditional are all important considerations but saving like crazy is what you need to do now.

Marian, Tony put his finger on the main issue: your first priority should be to invest as much money as possible.  The traditional 403b will make that easier, because you are investing pre-tax dollars (your annual tax bill will be lowered and your take-home pay will be reduced less than the full amount of your contribution).  That means aiming for the max contribution to the 403b--$26,000/year.  Don't be discouraged if that sounds unattainable: start where you can, and keep ratcheting it up toward that goal.

Once you get to that max, you could consider opening a regular Roth account at Vanguard.  This would permit you to put in up to $7000/yr (in addition to your 403b contributions) and there are no added administrator fees.  (There are income limits that you need to meet to be able to contribute to the Roth, so if this is ever something you consider, be sure that you are under the income cap.) 

If, as I think is very likely, the tax-deductible 403b will allow you to contribute more than you would to a Roth 403b, I would definitely pick the traditional.  Taxes in retirement are a much smaller issue than income in retirement.

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2 hours ago, whyme said:

You can pick any of the funds--you are basically choosing the level of risk you are able to accept for the promise of better returns over the long haul.  In every case, the target date fund has a "glide path," which means that it will slowly become more conservative (less stocks, more bonds) over the years.

This is kinda  the hard part  to decide.,which target fund would be best for her. I think slightly more aggressive might be best with hopes the market stays on her side. I am worried about our economy short term. Too much politics is in the air as well as this virus's impact on the economy. So far though the market seems to be saying DAMN The Torpedoes. The election results might deflate  or spark the market depending on the outcome. 

I'm glad Whyme is back with us.

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2 hours ago, tony said:

[...] which target fund would be best for her. I think slightly more aggressive might be best with hopes the market stays on her side. 

I don't think it will make a huge difference, so long as she can stay the course and consistently contributes a big percentage of her income.  Target Date funds never go below 30% or so in stocks--even the 2020 fund is at 50%--so there will be some growth.  If she's counting on this as the largest part of her retirement income, Marian may want to minimize volatility even though it means lower returns. 

One also has to be realistic about the fact that people who plan to work until 75 or older often find they can't stay in the workforce that long for health, family or employer-related reasons.  So Marian should probably build the possibility that she may need to begin drawing on this portfolio sooner, maybe in 5 to 10 years, into her plan.  If it all works out and she keeps teaching for another 20, that'll be all to the good.

Thanks for the kind words, Tony.  I'm here procrastinating on very daunting online class preparations.  If I drift away from the forum again, take it as a good sign that I'm actually doing my job.

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Well, it's a wrap. I went with the Vanguard 2045 for the ever-so-slightly-larger-but-still-tolerable risk and chose Roth contributions. I may change that later after I have time to calculate how much larger my contribution can be with the traditional plan or if I decide to change to a lower risk fund. I understand about not moving funds due to panic. I won't do that.

The process of opening an account is so convoluted. First, the third party administrator account enrollment is only automatic if we choose the 457 plan. If you want the 403b, you have to open the TPA account on your own and manually populate the fields and know the secret codes. Second, you can open the Vanguard account online but there's a three day wait to get the okay to enroll for online access and choose your fund(s). Also, you have to call the TPA before setting up the Vanguard account to find out the account number for your school district. Both the TPA and Vanguard say to go ahead during the waiting period and designate the amount you want to contribute, so I did that. When I received the email today, I enrolled. It's so complex - no wonder the insurance company reps lurk in the teachers' lounge and say they'll make it easy. BTW, their newest tactic in my school is to help teachers with student loan repayment options. Do they have expertise in that?

I did read one place that there are some tax issues about Roth v. traditional to consider for the heirs to a 403b, so I plan to call the accountant and find that out. Does anyone know anything about that?

I am paying attention to your save-save-save advice. I will meet that goal. I'm on it.

But first, I'm off to create online lessons. I cannot thank you enough for the advice and sharing of opinions on this forum.

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On 8/13/2020 at 9:33 AM, Marian said:

Well, it's a wrap.

Kudos, Marian!  Do look into the traditional accounts and their relative impact on your take-home pay: if you could manage it, you can actually double the contribution limit by putting more funds into a 457 as well as the 403b (plus that personal Roth account!).  Since you are or will shortly be of the age to roll your money into a "regular" (not inside an employer plan) IRA without penalty, the fees can be temporary and well worth putting up with to build the tax-deferred accounts.

I don't know much about inherited IRAs, but I think that the inheritor has to pay tax (over a number of years) on withdrawals from a traditional account, whereas there isn't any tax on the Roth. 

FWIW, I encourage you to focus on building a good retirement income for yourself: don't let issues about possible future taxes and bequests stand in the way of your own security.

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On 8/13/2020 at 9:33 AM, Marian said:

I did read one place that there are some tax issues about Roth v. traditional to consider for the heirs to a 403b, so I plan to call the accountant and find that out. Does anyone know anything about that?

I don't know of issues with 403b specifically, as far as taxes and heirs are concerned. Almost everyone transfers their 403b balances into an IRA after retirement, or should. The rules for inheriting any retirement account (403b, 457, 401k, IRA etc.) were changed recently. A non-spouse beneficiary may no longer stretch the taking of distributions over their lifetime. Instead of having Required Minimum Distributions every year, the beneficiary has 10 years to empty the inherited account. It doesn't matter when during those 10 years, it just has to be empty at the end. If the account is a traditional account, the beneficiary needs to consider when it's best to take the tax hit. An inherited Roth account doesn’t have any tax due on distribution, but still needs to be empty at the end of 10 years. https://www.nerdwallet.com/blog/investing/inherited-a-roth-ira-heres-what-to-do-now/ 

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