Give Yourself a 403(b) Plan Checkup
March 12, 2024
By Barbara O'Neill, CFP®, AFC®
Many people have regular physical exams with a doctor to assess key health metrics such as body mass index, blood pressure, and cholesterol. Like a physical, a financial checkup can help identify problems, evaluate progress toward goals, identify future action steps, and provide motivation to change current habits.
A financial checkup can be done with or without the assistance of a financial advisor. March is a perfect month to do this assessment because:
- You are already focused on your finances during income tax season
- Recent financial records are readily available (think W-2s and 1099 forms)
- It is still too cold for fun warm weather activities in most of the country
This post describes ten 403(b) plan checkup and five additional financial planning checkup activities. It also summarizes research about the frequency of performance of financial management practices as well as three “need to know” facts and six take-away action steps.
Ten 403(b) Plan Checkup Activities
403(b) Plan Contribution Limits — The maximum contribution allowed for 403(b) plans is indexed annually for inflation. To keep pace with the maximum amount generally requires logging into your employer’s HR online portal and changing either the dollar amount or the percentage of gross income that you contribute. The maximum 403(b) plan contribution in 2024 is $23,000 for workers under age 50 and $30,500 for workers age 50+.
Catchup Contributions — As noted above, older workers can elect to contribute up to $7,500 more on top of the standard maximum 403(b) contribution of $23,000 for all workers. In addition, when workers reach 15 years of employment with the same employer, they can contribute up to $3,000 more per year, up to a total of $15,000, if their plan permits. Plan participants should anticipate these “trigger events” in their retirement planning.
Beneficiary Designations — 403(b) plan beneficiary designations should be regularly reviewed and changed, when necessary, to ensure they reflect your current wishes and changes in your life (e.g., divorce or death of an heir). Beneficiary changes can typically be made online via a plan vendor’s website. Be sure to name a “Plan B” contingent beneficiary, as well a primary beneficiary, to insure that your 403(b) account is distributed as you desire.
Life Changes — Significant life changes such as marriage, divorce, the birth of a child, a child attending college, and a child launched into adulthood can impact the amount of money available to save in a 403(b) plan. Paying off debt and no longer needing to pay for child care can free up more money for retirement savings.
Market Conditions — Current economic trends and market conditions may impact your 403(b) investments. For example, you may decide to put new contributions into less risky assets when there are market downturns if you are a moderate or conservative investor and get nervous when stock prices drop.
Investment Options — There may be changes to available 403(b) plan vendors, new investment options, or changes to existing plan options. Evaluating alternative investment choices can potentially enhance portfolio diversification and improve long-term performance.
Investment Asset Allocation — Asset allocation, the weighting of different asset classes (e.g., 65% stocks, 30% bonds, and 5% cash equivalent assets), should be reviewed at least once a year to ensure it remains aligned with your risk tolerance, time horizon, and financial objectives. Periodic rebalancing may be necessary to adjust your portfolio back to its original target asset allocation.
Investment Performance — The performance of 403(b) investments should be assessed relative to benchmark market indexes (e.g., the Standard and Poor’s 500) and the performance of peer investments (e.g., other 2045 funds if you have a 2045 target date fund). Underperforming investments may warrant closer scrutiny or potential replacement.
Investment Fees and Expenses — Fees associated with 403(b) investments (e.g., mutual fund and annuity expense ratios) should be closely scrutinized and compared with similar investment options. Lowering fees by replacing high-expense investments with lower-expense options can significantly enhance long-term investment performance.
Required Minimum Distributions (RMDs) — Plan participants age 73 or older are required to take annual withdrawals from their 403(b) account. Withdrawals are taxed as ordinary income at a participant’s personal federal income tax rate. Failure to take RMDs can result in a substantial tax penalty of 25% of the amount that should have been withdrawn but was not (10% if the RMD error is timely corrected within two years).
Five Additional Financial Checkup Metrics
Net Worth Calculation — Net worth is calculated by subtracting debts from assets. For example, $250,000 of assets minus $100,000 of debt equals a net worth of $150,000. Three categories of assets are cash assets (e.g., bank accounts), investment assets (e.g., 403(b) accounts), and property assets (e.g., car and house). Two categories of debt are current debts expected to be repaid within a year and long-term debts (e.g., student loans and mortgages).
Ideally, net worth should increase annually by virtue of increased savings and debt reduction. In reality, however, it will rise or fall- sometimes dramatically- if the value of investments changes from the prior year.
The ”Wealth Test” — The book The Millionaire Next Door describes a simple “Wealth Test” to determine the adequacy of someone’s net worth at any point in life. The formula works as follows: multiply your age times your realized pretax annual income from all sources, excluding inheritances, and divide it by 10. For example, a couple, both age 50, with a combined annual income of $100,000 should have a net worth of $500,000, calculated as follows: 50 x $100,000 = $5,000,000 ÷ 10 = $500,000
Emergency Fund Review — Liquidity ratio is a measure of the adequacy of one’s emergency savings and is calculated by dividing liquid assets (from a net worth statement) by essential monthly expenses (from an income and expense statement). The ratio should be 3:1 or better, meaning that someone has at least three months of expenses set aside.
Tax Diversification Review — To hedge uncertainty about future tax rates, experts recommend selecting different types of investments that are taxed in different ways. Taxable investments (e.g., a brokerage account) where earnings are taxed in the year they are received, tax-deferred investments (e.g., 403(b) plans) where earnings are taxed at a later date, and tax-free investments where taxes are not due on earnings (e.g., municipal bonds and Roth IRAs).
Retirement Savings Calculation — Less than half of American workers have calculated what they need to save for retirement. Online calculators like the FINRA Retirement Calculator and the Retirement Calculator from Calculator.net and Bankrate are useful resources. Simply list your desired annual income in retirement, subtract expected Social Security and/or pension benefits and the future value of current savings and calculate the gap that requires savings.
Research Results
Financial checkup activities often take some time. Research has found that financial practices that require allocating time for planning (e.g., written goals) and calculations (e.g., net worth) are performed less frequently than financial tasks that are more routine (e.g., checking account reconciliation and bill-paying).
Three (More) Things
- Some people find it useful to compare their finances with the median net worth or income for people in their geographic location or age category. Tools like Are You Rich? can provide useful metrics.
- Incremental progress toward financial goals is another financial checkup activity. If you want to save $5,000 by the end of 2025, you should have $2,500 saved by December 2024.
- Workers should review their estimated Social Security benefit for ages 62 to 70, estimated disability benefit, and reported annual earnings at https://www.ssa.gov/myaccount/.
Six Smart Strategies
No. 1: Adjust Your Budget — Numbers for income and projected expenses should be reviewed and adjusted at least annually to account for changes in earnings and inflation in various spending categories including food and auto insurance.
No. 2: Estimate Your Taxes — A 2024 income tax projection, based on expected changes from 2023 income, tax deductions and credits will indicate whether tax withholding and estimated payments are accurate. If not, complete a new W-4 form.
No. 3: Assess Your Investment Risk Tolerance — The University of Missouri Investment Risk Tolerance Assessment is a useful tool to determine your comfort level with respect to 403(b) plan asset allocation decisions.
No. 4: Review Your Retirement Goals — As people get older, their lifestyle expectations, desired retirement age and geographical area, and other retirement planning variables can change. It is a good idea to revisit retirement goals periodically.
No. 5: Consider Tax Efficiency — Consider present and future tax implications of 403(b) contributions and RMD withdrawals and strategies (e.g., selecting a Roth 403(b) account) to minimize the impact of taxes on investment returns.
No. 6: Seek Professional Advice — Consult a fee-only financial planner or retirement planning specialist on an “as needed” basis and take advantage of financial education resources provided by your employer or 403(b) plan provider. Resource for working a financial planner.
In Summary
Regular 403(b) plan and overall financial planning checkups (i.e., a “fiscal physical”) are as important for your wealth and medical exams are for your health. By assessing various aspects of your financial life, you can make informed decisions to achieve financial well-being today and in the future.
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.