The Million Dollars
Sorry, that title was too promising but my marketing friends tell me this is how you produce a best seller. Actually, I will tell you how to get to $2.5 million by retirement. I am going to assume that just like me, you are 33 years old. If you are not, sorry, you will just have to settle for $2 million.
I am also going to start with no money in my retirement account because really, who in their 20s saves for retirement? After reading this post and becoming super motivated, you will go and open a retirement account and start savings the 18k per year that the IRS lets you save tax free. Assuming a pretty realistic return of 7%, 34 years from now, I am looking at $2.5 million. Now that I solved your millionaire problems, we can all get back to our daily tasks.
Seriously though, your options for getting to the millions of dollars at work are: a 401(k) thrift plan, a 403(b) plan or a 457 plan. Not every job will have the 3 options available. Are you supposed to choose the 401(k) thrift, the 457 or the 403(b) plan? What’s a better choice, Fidelity or TIAA-CREF? Here is some information that you might want to consider as you are making this choice.
A few weeks ago, I talked to a reported about the differences between 403(b) and 457 plans. The article touches on some of the basic differences between the two plans. (http://www.investopedia.com/articles/personal-finance/111615/457-plans-and-403b-plans-comparison.asp). Although I think this is a good start, I also feel that we need some more knowledge to make that choice here, at our job.
There are two main dimensions to consider: one is the difference between the plans at a big level (IRS level) and the second is the difference in investment choices. As much as I want to have a structured progression and describe these 2 dimensions separately, I really can’t because the investment choices available within each plan forced me to dismiss a few of these options from the start.
Can you save more than the standard 18k per year? If you are on the older side (actually if you are 50 or older), you should really take a look at the 457, especially if you are looking to find more ways to save pre-tax. The 457 plan has higher catch-up limits. Obviously, if you are not maxing out the $18k per year, this extra opportunity to save is irrelevant.
When can you take your money out without penalties?
For the 457plan- only if you retired. If you are 65 years old and still teaching, can’t take the money with no penalties unless you are working somewhere else. If you switched jobs, you can take your money any time you want. This is a great rule. This is one way to get access to your money before 59 ½.
Do you have to take the money out? Yes, usually the plans (driven by the IRS) force you to start taking money out at 70 ½.
Do I only have to choose one plan? No! Actually the 457 is fantastic because it doesn’t count against your 403(b) or 401(k) plan limits. In other words, you could potentially contribute $18k to a 403(b)/401(k) and another $18k to a 457 for a total deferral of $36k per year. If I could find that extra $18k per year to save, I could go from $2.5 to $5 million in retirement savings… but that’s just not happening on my Cal State salary and living in LA. You cannot, however, defer $18k into the 403(b) and another $18k into the 401(k). Just remember, only 457= savings magic.
Do I have a Roth option? Maybe, depends on your plan but ask HR if this is an option. If bleeding $$$ to taxes is not your problem and if it’s available, then you can go for the Roth.
I really like Fidelity or TIAA-CREF (or whichever provider you are familiar with from a previous job), shouldn’t I just choose that one? And this is where I am going to go into the 3rd learning objective of the day and talk a little bit about investments. I used to be the biggest fan of Fidelity and TIAA-CREF because the investment options available through those 2 plans at my previous job were fantastic. My enthusiastic bias towards Fidelity (because I also have my IRA with them) was so strong, I was convinced I was going to enroll in a 403(b) with them when I moved to my current job. However, when I looked at the investment options, I wanted to cry because they were so expensive compared to another provider. I had no choice but to go with someone else.
What would I recommend you choose? Sorry but I can’t tell you that. We are all different and I am not going to give you any individualized advice without first understanding your plan but if you have any questions or would like to learn more, feel free to sign up for the free, step by step retirement guide.