Building Your Financial Literacy and Retirement Preparedness
Published in the September 2024 issue of the ISHA Voice.
By Lyn Edwards, a member of the School Affairs Committee
When you first started as an SLP in an Illinois school system, you may have thought to yourself, I don’t need to contribute to a 403B, or a 457, or an IRA because I will have a Teacher Retirement System (TRS) pension. But, maybe you are a tier one SLP who is into your career and is starting to wonder if you will make it to the maximum retirement age and years of service and are wondering what you could do to retire early, or maybe you are a tier 2 or tier 3 SLP and based on the unrealistic age requirements, you know you will never make it to full retirement age and are wondering, how you can retire before the TRS age requirement. However, once you’ve decided you need supplementary retirement savings, you’re not sure what to do or where to invest. Today I’m going to give you a few key bits of information and empower you with some resources to learn more so that you can begin on a journey toward financial literacy and retirement preparedness.
First, let’s talk about what some of your choices are to contribute money for your retirement. At first, it all sounds like a numeric alphabet soup, but with just a little bit of guidance, you will start to understand the basics. P.S. This article is not investment advice, it is meant to be informative with resources for you to further expand your financial literacy.
403b
A 403b is a retirement plan that is for public school employees and others who work for nonprofit organizations. 403bs can also be referred to as a Tax-Sheltered Annuity (TSA). They are similar to the 401k plans that most for-profit companies offer to their employees. Each district has a company or companies that they have agreements with, and employees of that district can contribute money that will be taken out of their check and put into the employee’s 403b account with the company. Vanguard, Fidelity Investments, Horace Mann, Equitable, AXA, and Corebridge are examples of companies that offer 403b plans. (Spoiler Alert: All companies who offer 403b plans are NOT created equally and you will want to be careful about which company you select. We will get to more about that later in the article.). If you have a “traditional 403b”, the money that is taken out of your check is before taxes. After you retire and withdraw money from a traditional 403b, you will pay taxes on the withdrawals. Putting money into a traditional 403b account will reduce the amount you owe in taxes now, but you will pay taxes on the money later. In addition to a traditional 403b, there is also a “Roth 403b”. Contributions to a Roth 403b are taken out of your check AFTER taxes are taken out, however, the advantage is when you withdraw that money after you retire you do not pay taxes on it. Some people recommend contributing to a traditional 403b because you get the tax savings now while you may be paying a higher tax rate, assuming that in retirement your income will go down and you will be in a lower tax bracket. However, if the money you contribute will be in the account for many years, it may be a bigger tax advantage to pay the tax now and put the money in a Roth 403b so that the money you put in AND the interest it makes over the years are not taxed when you take it out when you retire. Let me illustrate this in an example: For 2024, there are 7 different income tax rates (10%, 12%, 22%, 24%, 32%, 35% and 37%). For illustrative purposes, let’s say you are in the 35% tax rate. If you have $2,000 to invest and you put that into a traditional 403b, you will save roughly $700 in taxes. If you start investing early and that $2,000 grows for 30 years at about 6% each year (this amount can only be predicted, but is based off of a realistic rate of return for investing in index funds with low fees and expense ratios… more on index funds and expense ratios later), in 30 years, that $2,000 will grow to be about $11,487. Even if you are in a lower tax bracket (e.g., 12%) the tax on the $11,487 when you withdraw it is approximately $1,378. In this example, you saved $700 dollars in taxes when you put it in, but paid $1,378 in taxes when you took it out. If you had put that same $2,000 in a Roth 403b rather than a traditional 403b, you would have paid the tax on the $2,000 now, but when it grew to $11,487 in 30 years, you would not pay tax on the $10,787 that it grew over those 30 years. If you are going to be in roughly the same tax bracket in retirement then it may be more advantageous to contribute to a Roth and pay the tax now on only the amount of your contribution rather than paying tax later on that same amount plus all the compounded interest you have earned on that initial contribution. For 2024, you can contribute $23,000, and if you are 50 years old or older, you can contribute an extra $7,500 for a total of $30,500 per year. For either a traditional or Roth 403b you need to be 59½ to withdraw money without paying a penalty.
457b
A 457b is a retirement plan that is for public service employees. It is similar to the 403b in that you can choose a traditional (pre-tax) or Roth (after-tax) plan and the maximum contribution is $23,000. It also allows the extra $7,500 catch-up contribution if you are over 50 years-old. One significant and meaningful difference is if you leave your employer, you can withdraw money from a traditional 457 before you are 59½. You pay taxes on the withdrawal because it was contributed with pre-tax money but you won’t pay a penalty for being under 59½ (but this is not true of the Roth 457 which defaults to Roth rules). This might be an option for SLPs who want to retire before the age of 59½ and want to delay taking their TRS pension, but they need an income source until they reach 60 years-old.
The bonus is having access to both 403b and 457 plans
Although many may not have enough extra income to be able to do it, you are eligible to contribute the maximum to both a 403b and 457, meaning that you could contribute up to $46,000 a year ($23,000 in a 403b and $23,000 in a 457).
TRS recently started offering the TRS Supplemental Savings Plan (SSP) which is a 457 plan. Many Illinois school districts are participating in this program, so there is a good chance it is an option for you at your district. If you would like to find out more about the TRS SSP 457 you can look here: https://www.trsil.org/Supplemental-Savings-Plan
IRAs
An Individual retirement account (IRA) is another type of retirement savings account that you could contribute to for your retirement. There are both traditional and Roth IRAs. This is a really great post about Roth IRAs https://www.personalfinanceclub.com/what-is-a-roth-ira/ (the numbers are for 2023 and have gone up for 2024). IRAs have different rules for contributing compared to the 403b and 457 plans. They could potentially be used in place of, or in addition to 403b and 457 plans offered by your employer. An IRA may become a good choice if your school district does not partner with a company that offers a low fee 403b or 457 option. You set these accounts up on your own so the money you contribute does not come directly out of your paycheck like it does for employer-sponsored 403b or 457 plans. It is not difficult to make the contributions on your own, but some people prefer the “set it and forget it” model of an employer-sponsored 403b or 457 because they never notice the money that is going into their retirement account because it is taken directly out of their check. IRAs do give you more choice of who you invest with which allows you to pick companies that charge lower fees and offer funds that have low expense ratios so that you retain more of your savings and lose as little to fees as possible. One drawback, however, is the amount you can contribute to an IRA is much less than 403b and 457s.
Now that we have covered the different types of plans and accounts you can use to save for retirement, let’s cover a few important things to know when you are choosing a company and enrolling in a plan to make contributions.
Which company should I choose to start my 403b and/or 457?
One of the most important pieces of information that you need is: not all 403b and 457 companies are the same. I cannot say this loud enough… you need to make sure the company that you choose to open up your retirement account with is one with low fees so that you get to keep more of your hard-earned invested dollars. A former educator and the spouse of an educator were so appalled when they found out how poor some of the choices were for k-12 educators, they started a nonprofit to educate and advocate for public school employees to stop them from being taken advantage of and losing their precious retirement dollars to fees. The organization they created is called 403bwise (https://403bwise.org/). They also have a Facebook group with members helping members learn about and make better retirement investment choices. On the website, Dan and Scott have a database of most of the districts across the country and the companies they partner with to offer 403b and 457 plans to their employees. They rate each of the companies as green, yellow, or red based on the fees they charge. They then gave each district a grade (A through F) based on the companies that they offer to their employees. It is a good idea to look up the companies your district uses and choose a company that charges lower fees.
Why 1% is not actually a low fee
There are a couple of different types of fees that you typically pay when you have a 403b or 457 account. One is a fee to the company who administers the account and the other fee is to the fund(s) that you invest in within your account. The fee that you pay to the fund is typically called an expense ratio. When I first started a 403b account, I didn’t know that it made a difference which company you chose to start your account but, thankfully, I stumbled onto the 403bwise podcast, which led me to the 403bwise Facebook group, which led me to a book called, The Simple Path to Wealth by JL Collins. JL Collins wrote the book based on blog posts he wrote when he was attempting to archive financial literacy information he was trying to pass down to his daughter when she was young. He explains in easy-to-understand examples what index funds are, what expense ratio fees are, and how to invest money based on how much risk you are comfortable with. When I first heard that some companies were charging fees of 1% on 403b accounts, I thought that 1% sounded like a low fee. I didn’t understand the impact that fees have on your money and how much that can cost you long term. This article has a good visual showing the large impact that a 1% fee has on your investment over a long term: https://www.personalfinanceclub.com/how-much-of-your-investment-is-getting-lost-to-fees/.
In short, you have multiple options for investing to either retire earlier or increase your income during retirement. If you can start with just $100 per paycheck and increase that amount each year until you are maxing out your contributions, that money will have many years to compound. There is an informative compound interest calculator at investor.gov (https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator) that can help you project how much your money can grow over time. For example, if you get two paychecks a month and invest $100 from each paycheck, or $200 a month for 30 years at a realistic (but projected, because we cannot foretell the future market returns) you will have $189,740 in 30 years. If you add just $50 per month the next school year, so you are contributing $125 per check or $250 a month, you will have approximately $233,923 at the end. If you add another $50 per month the next year, your total at the end goes up to $275,039. See the power of compounding interest? And the sooner that you start, the more years your money has to compound. And the sooner that your money compounds, the sooner you feel in control of your financial outlook and then you have some retirement options.
Lyn is an SLP with 23 years of experience in the public schools. After she discovered the nonprofit 403bwise and learned that the high fee 403b she was contributing to had literally cost her thousands in retirement income, it became her mission to help other school system employees avoid the same mistakes and maximize their retirement potential.
References:
https://www.trsil.org/Supplemental-Savings-Plan
The Simple Path to Wealth by JL Collins
https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator
DISCLAIMER: This is article is informative only and does not serve as investment or financial advice. ISHA does not endorse any of the resources mentioned by the author.
