Saturday, November 21, 2015

#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 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 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.

[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.