The 403(b) Lifecycle FINDing Financial Independence

August 16, 2022

In my book, Flipping a Switch, I coined a new acronym for post-work life and suggested replacing FIRE (Financial Independence, Retire Early) with FIND (Financial Independence, New Directions). By avoiding references to the “R word” (retirement), FIND encompasses many possible later life options and does not necessarily imply a complete work stoppage. This is especially important for teachers with pensions, who may stop teaching in their late 50s and will be seeking other meaningful pursuits (i.e., new directions).

The “FI” of FIND, Financial Independence, refers to the peace of mind that occurs when individuals have sufficient guaranteed income (e.g., pension, Social Security) and wealth (e.g., 403(b)s and other retirement savings) to pay living expenses for the remainder of their lives without needing to work or be dependent on others. Five key “finds” can help 403(b) participants along the path to FI.

This post describes 1. Finding money to invest in a 403(b), 2. Finding a low-cost plan vendor, 3. Finding 403(b) plan investments for a target asset allocation, 4. Finding help from financial advisors, and 5. Finding 403(b) and retirement planning resources. Research results, three “need to know” facts, and six take-away action steps conclude this discussion.

Finding Money to Invest

By definition, starting a 403(b) account, or increasing your current level of savings, requires a cash flow adjustment to compensate for the cut in take-home pay. For example, 5% of a $52,000 salary is $2,600 or $100 per bi-weekly paycheck, adjusted for tax withholding. To “find” $100 requires increased income and/or decreased expenses. Below are some ways to “find” money:

• Save Spare Change — Place loose change in a jar at the end of each day or use an app to round up purchases to the nearest dollar and “save the change” electronically.
   
• Complete a Savings Challenge- Follow the challenge format to save a certain amount of money daily or weekly to accumulate amounts ranging from $100 per month to $2,500 per year.
   
• Continue Loan Payments — Make loan “payments” to yourself after a car loan ends. This same strategy can also be used for other former household expenses such as childcare.
   
• Break Costly Habits — Consider the weekly/monthly cost of habits like meals and beverages purchased away from home, lottery tickets, and smoking and how much money could be saved by cutting back.
   
• Bank a Windfall — Save or part of money received on a one-time or limited basis. For example, retroactive pay after a contract settlement, an award, prize winnings, and an income tax refund.
   
• Save “Extra” Paychecks — Set aside money from the third paycheck received during two months of every year, depending on the calendar and the day of the week on which you are paid.
   
• Pay Off Debt — Accelerate debt repayment so monthly payments can be transitioned to savings. Use PowerPay to create a debt repayment calendar for extra money using the snowball (smallest debts first) or avalanche (highest interest rate first) method.

Finding a Low-Cost 403(b) Vendor

Many school district 403(b)s, unfortunately, offer only vendors that sell high-cost, commission-based variable annuities. Compared to low-cost index funds, these accounts perform poorly as earnings are eroded by fees. Over a 35-year teaching career, this can add up to over a $100,00 difference in account balances between average index funds with 0.07% fees and average variable annuities charging fees of 3%.

Fortunately, there are some positive trends. First, more teachers are learning about the high fees (e.g., administrative costs, commissions, surrender charges) buried in the fine print of their 403(b) contracts. They are banding together and lobbying their employers to add vendors with low-cost investment options (e.g., index funds). Second, better options with companies like Fidelity, TIAA, T. Rowe Price, and Vanguard are increasingly being added to school district vendor lists.

A third positive trend is assessment tools developed by 403bwise, including a rating system for school district 403(b) plan vendors with three color-coded categories: green (good), yellow (be careful), and red (avoid). There is also a 403bwise Vendor Search tool for plan participants to check if their employer is offering at least one high-quality 403(b) vendor.

Teachers with poor 403(b) vendor and investment choices may decide to skip them entirely and direct their savings dollars to alternative retirement savings plans including 457(b) plans, traditional and/or Roth individual retirement accounts (IRAs), health savings accounts (HSAs), taxable accounts, and a simplified employee pension (SEP) if they have self-employment income.

Finding 403(b) Investments

Once you find money to invest and a high-quality vendor, follow these steps to select investment products:

• Develop an “Investor’s Mindset” — Long-term investors in retirement savings plans must accept a potential loss of principal. That said, consider how much loss (e.g., 20% of account balance) you could stand without losing sleep. Never put money in investments that you don’t understand or feel comfortable with.  Use this online Investment Risk Tolerance Assessment to analyze your personal preferences.
   
• Learn About Investments — Stocks are an “ownership” investment. They provide an opportunity to own a piece of a company and to profit from an increase in value. Bonds, on the other hand, are a “loanership” investment without any opportunity for long-term growth. Learn more about investment products by reviewing this basic online investing course.
   
• Index Your Portfolio — A good way to diversify investments is to buy shares of mutual funds that contain many different securities. Index funds, especially, contain a broad cross-section of securities that comprise a market index. They attempt to match the investment performance of the index that they are tracking and are known for their simplicity and low average expense ratios (i.e., expenses as a percentage of fund assets).
   
• Consider a Target-Date Fund — Another attractive investment option for 403(b)s is mutual funds with a future date in their title, such as “2040 Fund.” Called target-date (or lifecycle) funds, they use a retirement age-based asset allocation and automatically becomes more conservative (i.e., less stock in the fund portfolio) as plan participants get older.
   
• Try to Beat Inflation- Along with investment expenses, inflation and taxes can seriously erode investment returns. What counts is what you keep. Consider stock-based investments (e.g., growth mutual funds) over the long term to earn a higher return than inflation and taxes eat away.

Finding a Financial Advisor

State and local government (public) employers that offer 403(b) plans are exempt from requirements of the Employee Retirement Income Security Act (ERISA), including fiduciary responsibilities for entities that manage retirement plan assets. Fiduciaries are bound to put the interests of their clients ahead of their own.

Therefore, so-called “financial advisors” who show up at schools hawking high-cost, poorly performing investment products are commissioned salespeople. Period. They are not fiduciaries. Not only do they sell 403(b) contracts with unconscionable fees, but some try to sell other high-cost investments also.

Where can 403(b) participants go for unbiased financial advice? Follow these three steps:

Find Local Advisors — The following websites have a "search" feature to locate names, office addresses, and data about local financial advisors:

• Certified Financial Planner® Board of Standards, Inc. (CFP® Board); for names of CFP® licensees
• Financial Planning Association (FPA); for FPA members with a variety of compensation models
• Garrett Planning Network; for hourly-based financial planning with fee-only planners
• National Association of Personal Financial Advisors (NAPFA); for fee-only financial planners
• XY Planning Network (XYPN); for fee-only financial planners who serve primarily young adults

Check Credentials — A high-quality financial advisor should hold one or more professional designations with education, exam, and ethics requirements. Look for specialized training in financial planning such as a Certified Financial Planner® (CFP®) license, the accounting field’s financial planning specialization, CPA/PFS, and the Chartered Financial Consultant (ChFC) designation.

Consider Experience and Compensation — Seek advisors who have worked with clients for a period of time. CFP® licensees, for example, must have at least three years of experience. Then ask how an advisor is compensated. Financial planners are typically paid by fees (hourly, annual, assets under management, or flat fees for a specific service), commissions for products sold (e.g., annuities, mutual funds, or insurance policies), or a combination of fees and commissions, often referred to as "fee-based."

Finding Retirement Planning Resources

Books

• Millionaire Teacher: The Nine Rules of Wealth You Should Have (Hallam, 2017)
• Teachers Can Be Financially Fit: Economists’ Advice for Educators (Ferrarini et al., 2021).
• The Simple Path to Wealth: Your Road Map to Financial Independence and a Rich, Free Life (Collins, 2016)

Online Calculators

• Compound Interest Calculator (U.S. Securities and Exchange Commission)
• 403(b) Savings Calculator (Bankrate)
• FIRE Retirement Calculator (Playing With FIRE documentary)
• Retirement Calculator (FINRA)

Research Results

Two resources that can help 403(b) participants achieve FI are low-expense investments (e.g., index funds) and time spent investing. The latter includes “hanging tough” during market downturns and not panic selling.

The investment research firm, Dalbar Inc., studied investor performance for 30 years between 1/1/92 and 12/31/21 and found inflation averaged 2.36%, average equity fund investors earned 7.13%, and the S&P 500 index earned 10.65%. In dollar terms, with an initial $100,000 investment, average investors accumulated $789,465 and the S&P, $2,082,296.

One take-away is the futility of attempting to “chase performance” or time market highs and lows. Reacting to market volatility lowers long-term returns while patience can be rewarded with superior performance. Low-cost investments that track market indexes help investors retain their investment earnings.

Three (More) Things

1. Financial independence provides the ability to make choices and enjoy life on your terms. It is the reward for decades of hard work, prudent spending, and consistent investing.
2. Money invested early in life will grow the most with decades of compound interest. Late savers need to save more to catch up because compound interest is not retroactive.
3. Research has found defined benefit pensions have a positive impact on the well-being of retirees. Retirees with predictable income that covers living costs may consider investing more aggressively.

Six Smart Strategies

No. 1: Focus on the Future — Use the 403b Savings Calculator to determine results achieved from small steps. Example: saving 5% of a $50,000 salary from age 25 to 60 with a 6% return and 2% annual salary increases would produce $366,836.

No. 2: Fund Financial Goals Concurrently — Save for retirement along with other financial goals (e.g., paying off student loans or home-buying) instead of in a series of sequential steps.

No. 3: Reallocate Spending to Saving — Prune discretionary expenses to free up money to save. Examples include memberships/subscriptions you don’t use, vending machine snacks, and beverages. Also inquire about cell phone and insurance discounts.

No. 4: Keep Making Small Changes — Start small and kick savings up a notch or two (e.g., 3% of pay to 5%) whenever income increases or expenses are reduced or cease (e.g., childcare and loan payments).

No. 5: Tweak Popular Savings Benchmarks — Age-based milestones developed by Fidelity Investments suggest saving 1x your income by age 30, 3x by 40, 6x by 50, and 8x by 60. However, they assume people do not have guaranteed income such as a pension.

No. 6: Think Yourself FI — Remember this: what people think about, they bring about, so develop a FI mindset. You don’t need wealthy parents or a six-figure income. The majority of people with a net worth of $1 million built it on their own.

In Summary

With a combination of “finds,” 403(b) participants can build wealth, achieve financial independence, and FIND themselves achieving happiness and financial security in later life. As Morgan Housel, the author of The Psychology of Money, notes: “The ability to do what you want, when you want, with who[m] you want, for as long as you want to, pays the highest dividend that exists in finance.”

This post provides general personal finance information and does not address all the variables that apply to an individual’s unique situation. It should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

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Dr. O'Neill is the owner/CEO of Money Talk: Financial Planning Seminars and Publications where she writes, speaks, and reviews content about personal finance. She is a Distinguished Professor Emeritus at Rutgers University and a long-time 403(b) plan participant.

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