#2: 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. Which one do you choose? Why? Where do you start? That’s the topic for today.  

Here is the plan:

• We start with where to find the resources and how to sign up for these plans. 
• Then, we figure out the big differences between the 3 options so you can make a choice. Should you go for a 401 (k), 403(b) or 457? 
• Finally,   I will just touch on the investment options as they relate to choosing a plan. I know many of you really want to discuss those investment choices but we will save that for next time. I am already at 2,000+ words.   

Before we start the “lecture of the day”, please do me a favor and answer the following 2-4 questions. This has not been IRB approved so I promise I am not going to use it for any of my research. I just want to get a feel for where everyone is, to better direct future posts. https://csunbusiness.co1.qualtrics.com/SE/?SID=SV_0P8ImL8NVSjqgjH

Thank you very much for playing along, now we can start.

Here is the easy part, what is available to you? 

1. The 401 (k) though Savings Plus: https://www.savingsplusnow.com/
2. The 457 though Savings Plus: https://www.savingsplusnow.com/
3. The 403(b) though 5 different sources (this is what I will be referring to as providers):
1. Fidelity: https://nb.fidelity.com/public/nb/atwork/home
2. MetLife: https://www.metlife.com/csu/index.html
3. Voya (used to be ING and in full disclose, I used to work there before my Ph.D.): https://csu.beready2retire.com/
4. TIAA-CREF: http://www1.tiaa-cref.org/tcm/csu/
5. Valic: https://www.valic.com/plan-details_633_433090.html

I hope we are all clear that as you are pondering the voluntary retirement plans, you need to make 2 separate decisions. The first choice is which of the 3 PLANS you want (401k, 457 or 403b) and the second choice is, which of the 5 providers do you want for the 403(b)? If you don’t chose the 403(b) then there is nothing to decide on! I even have a nice picture for you to make it easier: https://drive.google.com/file/d/0B9YzYGqtXNeiTGdWbDFkb2dTbzQ/view?usp=sharing 

How to enroll

• The 403(b) plan is a pre-tax (or tax deferred) account. This means, you will be minimizing your taxable income by the amount of your contribution (pay less in taxes this year). The max you can defer is $18,000 in 2015. To start, go to this centralized website https://www.myretirementmanager.com/MYRM/, create a profile with your SSN and decide how much you would like to contribute from each of your paychecks. You can start with as little as $15. One of the steps you will need to decide on is which of the 5 providers to go with. 
• The 457 and the 401(k) plans are both administered though Savings Plus.  This is where all the magic happens: https://www.savingsplusnow.com/

That’s great and all but what in the world is the difference between the 3 plans?

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.

As far as the big picture differences, here is some really good bedtime reading for tonight. Whoever at the Cal State Taj Mahal put this together deserves a raise. http://www.calstate.edu/benefits/carrier.materials/2015TSAComparison.pdf

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. 

Here is what else I would like to mention or clarify: 

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 401(k) or 403(b): if you are 55 AND retired OR if you are 59 ½, retired or not

For the 457: 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?  Yes. If bleeding $$$ to taxes is not your problem, then you can go for the Roth. The Roth option is available for the 401(k) and 457, but it doesn’t look like it’s available in the 403(b)[1].

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 3^rd 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 here. However, when I looked at the investment options, I wanted to cry because they were so expensive compared to the Savings Plus options.  I had no choice but to go with Savings Plus.

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, but I will walk you through my logic when I was deciding on my own choices in September.  Here are the steps I went through:

First, I looked at my investment choices. I figured out fast that the 401(k) and 457 are exactly the same (thank God, one less plan to compare) and the 403(b) came with 5 choices, so really, I was looking at comparing 6 providers. 

• I downloaded all the choices from each provider and compared their fees and past performance (btw, past performance is irrelevant, I just wanted to make sure there is no clear loser in that bunch of choices). 
• I also wanted to see what’s inside all those choices so I looked at the fund sheets to get a general idea (I am certainly not going to read the 50 page prospectus for each of those funds). 
• You also need to understand my investment philosophy because it drives how I make investment choices. I strongly believe that a large cap fund offered by one provider is in essence no different from a large cap fund offered by another provider. Obviously, they are not 100% identical, but if you compare what is in them, it is really not that much of a difference.  And I believe that the way to keep more money for myself is to pay less to the fund manager in fees. 
• Thus, the fees were central to my decision- making process. I quickly figured that the 401(k)/457 options were cost superior to any of the options from the 403(b) plans and I mean, from any of the 5 providers[2]. So, I settled on Savings Plus as the winner.  Look, I am making it really simple here but that’s the main point.

Next, I had to decide again. Well, if I am going to go with Savings Plus, should it be the 401(k) or the 457 plan?  

• The bottom line is that it didn’t matter to me whatsoever given that I have 35 years to go to retirement and no idea where my life will be in 15, let alone in 35 years. 
• Will I need to take money out while still working at Cal State? I wasn’t sure but in order to avoid this potential problem, I decided to stay away from the 457 for right now (remember if you have a 457, you can’t take the money at 59 ½ if you are still working for the same employer).  
• Why not go for both the 401(k) and 457?  I am not a big fan of complexity and rather than splitting my money between 2 plans, I decided to only go for one right now. I fully intend to enroll into the 457 a few years down the road. Don’t get me wrong. 457 is a good plan, it’s a great plan and one day, I would like to get to the point where I contribute an extra $18k to it, but that day is not today. I am going to wait until I become an Associate Professor and when get whatever pay increase comes with that change, I will send that raise straight to the 457 plan. Eventually, I will get to saving the $36k, but for now, I am going to settle for the $18k in the 401(k). 

Look, I know this reading wasn’t that much fun and there is still homework to do but understanding what your choices are and investing in the most cost efficient ones is very important. And I don’t know about you- but I like to keep the money I earn.  So here is the homework:

1. If you are not contributing to a plan, think about starting. Is there any money you could afford to contribute? Just think about this, even if it’s only $15.
2. If you are contributing, please go back and figure out where your money is currently invested because next time, we will be going over those investments. 
3. Please ask questions. This was a lot of info and there is much I have not touched on. I will answer as many as I can and I will ask HR (or the providers) for the ones that I don’t know.  

Next time, we build the investment spreadsheet with the actual funds.

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[1]  I didn’t choose the 403(b) and I am not interested in Roth contributions so I didn’t try very hard to verify this info.

[2 ] With the exception of Fidelity’s large cap fund (which was 0.05%, just like it should be). However, I couldn’t make the portfolio I wanted out of one S&P 500 fund, so sorry, Fidelity, I had to move on to the next provider. 

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#1. The Pot of Gold

One day you will retire, sip prosecco on the Amalfi coast, and enjoy your old age without any students asking if 88 is an A-....  It will look just like this:

There is only one thing we need to figure out to make it happen: where exactly is the pot of gold to finance such dreams going to come from? If you have a rich grandmother who will leave you gazillions of dollars, forget about the next 2 pages, you are already set. For everyone else, here is the plan. There are 3 main retirement sources available to Cal State employees: [1]

1.      Source #1 Social Security (aka the US Government’s attempt to pay for my prosecco).

For all the talk surrounding the disappearance of social security benefits, no worries, it is not going away. Obviously I can’t promise you that but from following the evolution of the benefits for the last 10 years, I am pretty sure I shouldn’t be too concerned. There will certainly be changes; we do have the problem of running out of money but it is very hard to believe that it will go away completely. A few tweaks to how it currently works and it will be viable for another 50 years. One of the things I am pretty sure about though is that by the time I retire, the normal retirement age will no longer be 67. It will probably go up, but given that we will all be living to 100 pretty soon, I guess that’s ok. 

Now, if you have no idea how social security works and whether you are even eligible for such benefits, a good way to start is by going to www.ssa.gov and creating an account. Once logged in, you will be able to figure out 2 things: (1) if you were to become disabled tomorrow, would you be eligible for a paycheck and how much would that be? and (2) have you worked long enough to be eligible for retirement benefits and if you do, approximately how much will you (or your spouse) get at retirement?

Generally, you have to work for about 10 years to be eligible for retirement benefits. How much will you get? It depends on how long you worked, your salary, and a few other things but, as of right now, the best case scenario for the max retirement benefit at  normal retirement age is $2,660 per month and the top benefit (if you were to wait to retire till 70) is $3,501 per month. That’s all I am going to say for now but please log in and assess the current situation.  Then, come back once a year and look at the progress of your benefits.

2.      Source #2 The CALPERS pension (aka the State of CA attempts to pay for my drinks). 

This was a “big deal selling point” during my campus visit. Listening to everyone, I thought this pension was going to make me super rich, which, let’s be serious, is not true unless you stay here for a while. How does this thing work and how much will you get? If nothing else is going to happen today, promise me you will log into your CALPERS account. If you don’t have one yet, please register. This is the place where all your pension information is housed. You want to have access to this: mycalpers.ca.gov

Here are a few things to know:

a.       How much will I get? Who knows! I don’t think even the CALPERS employees who put that spreadsheet together can read it. How much you will get will depend on 3 things: (1) the age at which you retire, (3) how long you have worked in the Cal State system and (3) your final average salary (different definitions for different people, depending on when you were hired). The bottom line is: the bigger those 3 numbers, the more you get.

You do need to know your “benefit formula” to be able to figure out what’s going on. If you were hired:

·         Before 1/15/2011, you are what’s known as 2%@55

·         On 1/15/2011 or after, you are 2%@60. I imagine these are the people hired after 1/15/2011 but before 1/1/2013, but that’s really not clear. I, along with every HR in the system has copied the language from the CALPERS chart (see link below). If you were hired in that period or have more knowledge about this to clarify, please let us know this is actually true!

·         On or after 1/1/2013, you are a 2%@62.

Here is the magical chart (in the middle of the page) to visualize the rules: http://www.calstate.edu/hrs/benefits/retirement/  This table is good and the details below it are even better!

  There are 2 good ways to figure out how much you will get:

                                                              i.      Log into your CALPERS account and run an estimation. Once you logged in, go to Active Members/Retirement Benefits/Service & Disability Retirement/ Retirement Estimate Calculator. Answer about 100 questions and you will get an estimate. Obviously, if you are 40 years away from retirement, your inputs are guesses, but give it a try.

                                                            ii.      Read this stuff: https://www.calpers.ca.gov/docs/forms-publications/state-misc-industrial-benefits.pdf  Find your table. Mine is on page 33 because I am a 2%@62 (see, that number is important). Estimate how many years you will work in the Cal State system and what age you want to retire at. Find that number. Here is an example:  Let’s say I am going to be in the system for 10 years and retire at 67+. I estimate my final salary to be 100k. This means, I would get 100k*25% at retirement per year. Why 25%? Because that’s the magic number in the box for 10 years of service and retiring at 67+. Too much work? Log into your CALPERS account and let it do the calculation for you. (see i. right above this).

b.      Do I have to retire? I am a college professor, I don’t work “that” much after all (that’s obviously a joke, please don’t sue me). The good thing is that you can work until you die; there is no mandatory retirement age.

I want to make a point right about now. I talked to a few employees now who are under the impression that as long as they work for 5 years and are vested, they will be rolling in gold. The picture below? That’s definitely not happening with 5 years of service.

Let’s say that after 6 years I get tenure but decide that life in CA is not for me, I pack my bags and move to FL (financially that would make way more sense than living in CA). In that case, I will get a little bit less than 15% of my salary at retirement (assuming I retire at 67+). I am certainly not going to get it at 39 when I leave this job, but one day, when I retire, I will have a few thousand dollars per year (just enough to feed my cat) and that amount will come from my CALPERS pension. However, if I decide to stay here longer and retire in 35 years with that many years of service, I am looking at about 87.50% of my final pay, which obviously, is way better than 15%. Taking the 87k and moving to Jacksonville, FL (my dream place), I am instantly going to become 27% richer, and that doesn’t even include the state tax. How do I know? Here you go, go have big dreams! http://money.cnn.com/calculator/pf/cost-of-living/

3.      Source #3: My own effort to save for retirement (aka, forget about the prosecco, I am so good at this saving thing, I am only drinking Veuve Clicquot when I retire). I don’t know about you but somehow $2,500 per month from social security and who knows how much from the pension (after all, I have no idea whether I will work here for 5 or 40 years), makes me a little uneasy. The last part that will complete my pot of gold is the only part I actually have control over, and that is the money I save on top of the pension. You can do it through an IRA or a Roth IRA (some of us can, but not everyone. It depends on your salary; If you have a working spouse, you may be above the threshold for a Roth IRA). However why would you, when you have choices right here at work and those choices let you save a lot more per year?  

Those choices are: (1) a 403(b) plan, (2) a 401(k) thrift and (3) a 457 plan.  You can save into a traditional (also called pre-tax) account = you pay less in taxes now or you can save into Roth account (post-tax) =you pay the taxes now but whatever you accumulate is tax free when you retire.  We will argue which plan is the most appropriate next time but for now, I really want to drive down the point: this is something we should probably/definitely???? be doing. Unless you know you are going to die before retirement or manage to marry/remarry rich, a little bit of savings will go a very long way, especially if you start in your 30s or 40s. How do you actually sign up for one of these plans? If you want a 403 (b) account, you will need to choose one of the 5 providers (like Fidelity, Met Life, etc.) and enroll directly with them. If you want a 401(k) or a 457 plan, you will enroll through Savings Plus. Next time, when we discuss these choices, I will include the actual links but for now, this is probably enough. It’s time to go watch some House Hunters and eat some cake. You deserve a reward for reading this till the end.

Homework:

1.      Register for a www.ssa.gov account to figure out what’s going on with your social security. Add the log in you just created/already have to your central account password repository system.

2.      Make sure you know how to log into your CALPERS account: mycalpers.ca.gov. If you have never been there, register and take a look. The important stuff is on the first page. Again, add it to your “central logins hub”

3.      Bonus homework: Finally, if you don’t have a central logins hub, please set one up. I don’t care if it is a word document, spreadsheet, a fancy online system like LastPass, or a sticky note, just have one. If you pulled a Gone Girl tomorrow, would you husband/partner/kids/parents/cat be able to figure out how to log into all your stuff and get that money? If not, it’s time to organize all those logins and passwords and tell your significant (or not so significant) other how to find it.

Next time, we talk about the difference between 403(b)/457/ and 401(k) accounts available right here, at work.

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[1] There are always exceptions. For example, you might have amassed a crazy amount of rental properties which you plan to sell in order to finance retirement but for many employees in the system, the 3 sources above are pretty much it. 

#0. Does the world really need another blog?

Six weeks ago, I became a Cal State professor. That would be bargaining Unit 3 in my communist motherland (not a criticism, just the reality).  For the last few months (or since December, when I accepted this position) I logged in many hours trying to understand the system’s retirement options, benefits, union situation, and other things that deal specifically with Cal State. Although there is a lot of information (trust me, it’s there, you just have to find it), much of it I had, and still have to look up by either making phone calls or doing extensive online research. In a moment of clarity, while exchanging some emails with the Fidelity rep, I realized that if you don’t know what to ask the rep, you probably won’t even initiate the contact. And this is where I come in; I will initiate that contact for you and find the answers to questions you didn’t even know you had.

You see, I really care about retirement options; making spreadsheets with 403(b) investment choices is what I do while watching Game of Thrones. There are 23 campuses and 47,000 employees in this system. Although not everything is the same, a lot of what I will be talking about applies to many full time employees throughout the system.

Who is this blog for? This brings me to the creation of this blog. Why not try to gather the information in one place, present it in an easy way, and offer some opinions (and there will be plenty of opinions) for the people who have to make the same choices I do? The idea is to make this blog as useful as I can for new and existing employees. Whether you have been around for 3 weeks or 13 years, I will strive to make the topics relevant to all of us.

Why am I writing this blog? Because I am a money person and it pains me to see how we don’t take full advantage of the benefits we have. 

Who are you, lady?  

• I currently teach finance and financial planning in the Cal State system. I am also a CERTIFIED FINANCIAL PLANNER™.
• I obsess about retirement choices like you probably never will. You do not want to know the number of hours I spent on analyzing the investment options in the 403(b), 457/401(k) plans. And yes, I do have multiple spreadsheets I am sure you can’t wait to get your hands on.
• I wake up in the morning and before drinking coffee, I check my account aggregation app for a financial update (and no, I did not become rich overnight, not yet, at least). Even with all this, I recently realized that the information I was looking for is not always accessible and if you didn’t know where to look and who to call, you might just give up and roll with whatever was most convenient and easiest. And come on, we are better than that.
• As a side note, I also do research in the field of retirement planning and financial decision making.  Seems like this area could use some improvement in our lives so why not try to do my little part?  
• Oh yeah, and in another life, I spent 5 years in benefits administration.   

Disclaimer: Before we go on, I want to make it clear that everything, and I mean everything, I write on this blog is my personal opinion; these are only my opinions and they do not represent any official Cal State position. This is general information.  If you have any questions that refer to your specific situation, please call HR, just like I do.  

So what is the point of my blog anyway? Here is the sales pitch: I will be covering a specific topic that deals with money, benefits, union, retirement, and occasionally life as a Cal State professor. I promise to break it down so that everyone can understand it. Although once in a while you may see a “lifestyle blog”, the majority of the posts will deal with money related topics. For example, I plan to simplify topics such as:

• “What is that 403(b)/ 457/401(k) they mentioned in my benefits orientation?”
• “Why do I even care about those plans if I am getting a pension anyways?”
• “And what is the difference between 403(b), 457, and 401(k) after all?”
• “Fine, you convinced me that I need “one of those” but which of the 5 (five!) Providers for the 403 (b) should I choose and why?” Personally, I’d say none, but more on this another time.

I am sure by now you are oozing with excitement and I probably need to make a stronger case to compete with all the cat videos on YouTube. Here is a cat video, just for fun. https://www.youtube.com/watch?v=QAgy9r331v0 But really, here are two reasons I hope will convince you to keep coming back:

1. This is my attempt to scare you: These topics affect your life. That choice between 403(b) providers could potentially cost you hundreds of thousands of dollars by the time you retire. We did a fast calculation last week in my MBA class that showed that you could end up with $200,000 less at retirement if you invest your optional retirement hard-earned-dollars in a particular way (probably not a good way). Do you really want to lose all that money because you don’t care about boring money stuff?

 2. This is my attempt to change the world, one university professor at a time: I want all of us to be more educated about our own money. Many of us are professors, most of us have Ph.Ds. and many of us know very little about money, retirement, and how to eliminate the stress of money. For some reason, we just don’t talk about money. Research shows that Americans are more willing to talk about their sex lives than about their finances. Why not get a little better at this “money thing” and in the process, make ourselves happier and less stressed?

I hope by now I convinced you that this is an important topic and it is worth 15 minutes of your time once every 3 weeks (or at least that’s how often I hope to address a new topic). Occasionally, I will also “assign” homework for people who want to make some changes. If you have any questions, I am always here (inga.chira@gmail.com). Please sign up for the blog updates on the right and if you like what you read, consider forwarding it to another employee who could benefit from the same information.  I hope you find this useful in some small way and let me know if you would like to see a specific topic.