8th and 9th Inning 403(b) Strategies
February 13, 2024
By Barbara O'Neill, CFP®, AFC®
This post was inspired by a recent e-mail from my client, Scott Dauenhauer, CFP®, a fiduciary financial planner and Director of Research for 403bwise, who wrote the following:
I have had many, many teachers in sessions I am holding saying things like "I'm so old". "Does it even matter for me to save at this point?" "What advice do you have for someone this late in the game? I have stopped my contributions to Equitable but what else should I be doing?"
I know this is complicated, but maybe a future post on advice for “late in the game” people who are trying to determine what to do next. Many are trying to figure out if it is worth getting their money out [of a bad 403(b) plan vendor] and/or saving elsewhere when they are retiring in a few years. I have tried to explain to them that the math is still there.
My Response
I couldn’t agree with Scott more about the math benefits of late career savings and 403(b) vendor changes. My reaction to these comments is as follows:
- First, any amount of savings is better than none, preferably going forward in a low-expense investment product (e.g., index fund) offered by a 403bwise Green-rated vendor such as Aspire Non-Advisor Option, Fidelity and Vanguard, or CalSTRS Pension 2. If these options are not available, a Roth and/or traditional IRA, a spousal IRA (if applicable), and even taxable accounts are viable savings options.
- Second, 403(b) plan participants’ investment time horizon is the rest of their life…not their retirement date. This means that if you started teaching at age 22, are age 54 today, retire at age 62, and live to age 90, you have 36 more years to grow your money through the magic of compound interest. The retirement savings game is hardly over. In addition many 403(b) plans grow sufficiently to leave money for heirs.
- Third, you want to have the least amount of “fee drag” on investment performance both before and during retirement. In the above example, the teacher’s total 403(b) plan investment horizon is 68 years (age 90 minus 22) and more than half of this time period occurs after leaving teaching. It is absolutely essential to end your teaching career and enter retirement with low-expense investments.
- Lastly, it is easy to feel discouraged by, and/or ashamed of, past investments made through sleazy salespeople for deceptively high-cost vendors. That was then, but you know better now. If you are beating yourself up over what you did in the past or haven’t done yet to prepare for retirement, it’s time to stop and take action to create a bright future. Today is the first day of the rest of your financial life!
This post starts by discussing the process of “ripping off the band-aid” of a high-cost vendor and getting out of a bad 403(b). It then describes the importance of continued saving through retirement age, finding money to save, dollar-cost averaging savings deposits, tax incentives to make up for lost time, and creating a retirement catch-up action plan that incorporates over a dozen strategies discussed in a previous (2022) post. It also summarizes research about “the arithmetic of investment expenses” as well as three “need to know” facts and six take-away action steps.
Ripping Off the Bad 403(b) Band-Aid
This is the first step to forging a late career 403(b) savings plan. The only way to get out of a bad 403(b) is to get out of a bad 403(b). 403bwise has step-by-step instructions to follow and plan participants in the 403bwise Facebook group (especially Dan Dews) can help with additional process questions and the selection of a new vendor from among those available on your employer’s vendor list.
Yes, the exit process is convoluted (high-cost vendors and employers have lots of paperwork!). Yes, there may be exit fees and surrender charges (depending on how long you have held your account). However, generally, it’s worth it to pay up and move on. Remember, late career vendor changes will impact your financial security for the remainder of your life.
Late Savings Matters!
Let me repeat myself: any amount of savings is better than none! In addition, five to ten years out from retirement, you may actually be in a better position to save for retirement than when you were younger. Perhaps your mortgage is repaid and your children are successfully launched into adulthood. Let’s revisit the 54-year old teacher who plans to retire in eight years and assume an conservative 6% return on investments.
First, let’s assume 403(b) savings of $15,000 annually ($1,250 per month). Output from the U.S. Securities and Exchange Commission Compound Interest Calculator shows estimated total savings of $148,462.
Let’s repeat the calculation with $30,500 ($2,541 monthly) of annual savings, the maximum the IRS allows in 2024 for workers age 50 and older. In this scenario, the late-start saver would accumulate $301,794! Using the popular “4% Rule” for asset withdrawals, this amount would produce $12,072 in annual income ($301,794 x .04 = $12,071.76) or about $1,000 of monthly income.
Finding Money to Save
Start with outstanding debt. The sooner it is repaid, the sooner monthly payments can be reallocated to retirement savings. In other words, compound interest will work for you, rather than against you. Make a plan to accelerate debt repayment. The free PowerPay program from Utah State University is a great resource to calculate the time and interest savings from two popular payoff strategies: paying more toward highest interest debt first (avalanche method) or smallest balance debt first (snowball method).
Next, identify expense reduction strategies that you can stick with over the long term and identify estimated monthly and annual savings that can be used for 403(b) deposits. Use this sample worksheet as a guide.
Dollar-Cost Averaging 403(b) Savings
Continued 403(b) savings through retirement is an example of dollar-cost averaging, where you invest equal amounts of money (e.g., 15% of earnings) at regular time intervals (e.g., every payday), regardless of whether the value of investments is moving up or down. Investors acquire more investment shares during market downturns and fewer shares in bull (rising) markets.
A simple illustration of dollar-cost averaging for a catch-up 403(b) plan saver can be found in the table below. The average cost per share is $7.06 ($6,000 divided by 850 shares).
Tax Incentives for Later Life Savings
Extra “catch-up” retirement savings contributions, combined with the magic of compound interest, can greatly enhance workers’ future financial security. The tax code has two tax incentives to consider:
Standard Catch-Up Savings- In 2024, workers age 50+ can make an additional $7,500 contribution to 403(b) plans on top of the maximum $23,000 for all workers, for a total of $30,500. Ten $7,500 deposits made over a decade, earning 6% on average, would grow to $98,856.
403(b) Plan Specific Catch-Up- Plan participants who work for the same employer for at least 15 years can contribute up to $3,000 more per year, up to a total of $15,000, if their plan permits.
Creating a Catch-Up Action Plan
A previous post described in detail “front-end” (pre-retirement) and “back-end” (after retirement) strategies for “late in the game” savers to catch up and have a comfortable lifestyle. Below is a quick summary:
Front-End Strategies- Increase 403(b) contributions, pay off debt, spend less, get a second job or side hustle, work longer than planned, invest more aggressively, and reduce investment costs.
Back-End Strategies- Trade down to a smaller dwelling, geographic arbitrage (move to a less expensive area), work after retirement, tap home equity (e.g., a reverse mortgage or sale-leaseback), shared housing with family and friends, and other income sources (e.g., public programs and rent from boarders).
The next step is to identify catch-up strategies that work for you and create a personal catch-up action plan. Various catch-up strategies can be combined for greater impact. For example, increase 403(b) savings by 2% of pay and delay retirement a year. Use the worksheet below as a guide. Several sample entries are provided.
Research Results
A 2013 study by Nobel-prize winning Economist William F. Sharpe investigated the impact of investment expenses on investors’ financial well-being. Terminal wealth levels for both lump sum deposits and a series of periodic amounts were calculated for investments with different expense ratios.
Results indicated that a person saving for retirement who chooses low-cost investments could have a standard of living throughout retirement more than 20% higher than that of a comparable investor in high-cost investments. These results speak unequivocally of the need to select low-cost investments NOW!
Three (More) Things
- If saving comes down to a choice between retirement and a child’s education, fund retirement first. There are loans and financial aid for college but nobody gives scholarships for retirement.
- People who retire early (age 55 to 62) need to invest more than later retirees because there is less time to set money aside and a longer retirement period over which funds must stretch.
- Late savers are often in their peak earning years and have accumulated more than enough “stuff.” These two factors can enable them to save substantial amounts in the last decade of their career.
Six Smart Strategies
No. 1: Just Do It! — Late savers must make securing low-cost 403(b) investments and saving through retirement age a priority. Full stop! Your “future self” will thank you.
No. 2: Think Positively — Time is still on your side. Even in your 50s with a bad 403(b), it is possible to turn things around and build wealth to retirement and through retirement.
No. 3: Don’t Delay — When you wait to take action, two bad things continue to happen. You continue to pay high investment expenses longer and you forgo compound interest on money that was not saved.
No. 4: Kick It Up a Notch — Saving just 1% more of pay adds up. A 57-year old teacher earning $55,000 would have $6,200 more saved at age 65 assuming a 6% average annual return.
No. 5: Consider a “Bridge Job” — A side hustle or second job started late in someone’s public school career can transition into a continued source of income in retirement.
No. 6: Consider Working Longer — Even one more year of work matters. One study found working a little longer and postponing Social Security benefits can raise retirement income by as much as modestly higher savings over several decades of work.
In Summary
Like baseball, you don’t give up when you’re behind in the final innings of your career. You stay in the game and fight to win. Actions taken during final years of a public school career have far-reaching impacts. Never consider yourself “too old” or “too late” to make them. Compound interest works best when income taxes are deferred or eliminated (e.g., Roth accounts) and when investment expenses are kept to a minimum.
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.