teacher in art class

If you are a teacher or any member of the educational community, there is a high likelihood that you are supplementing your retirement plan with a 403(b) or tax-sheltered annuity. If that is the case, pat yourself on the back because you are taking steps to secure your ideal retirement. That stated, you also probably have a 403(b) because it was the only option presented to you. By the time you are done reading this, I hope that you will explore other options and implore your friends and colleagues to do the same.

How a 403(b) works

The purpose of a 403(b) is to set aside a portion of your income now so you will have more income during your retirement.  There are three stages of retirement when you use a 403(b) as your savings vehicle. In this hypothetical example, we will use 30 years as the time-frame to prepare for retirement.

Stage 1 – Contribution

If you decided to place $500 a month toward your retirement, you would have contributed $6,000 ($500×12) that year towards retirement, and $180,000 ($6,000×30) that you have invested. The contribution simply is the amount of money you take out of your pocket to invest.

Stage 2 – Accumulation

Accumulation is the amount of interest that the contributed money yields over time because of compounding interest. For example, if you contribute $180,000 over 30 yrs, that interest earning 10% ( I know it may not seem realistic these days, but it’s just an example to illustrate the concept) would yield $1,139,663.

Stage 3 – Distribution

After you have contributed your $500 each month to watch it accumulate over the years, retirement is the reward. The money you live on during retirement is the distribution. Typical rule of thumb is to live on not more than 5 percent of your total nest egg to ensure that you don’t outlive our money. There are some definite benefits and drawbacks that people should consider when you invest in a 403(b).

Advantages of a 403(b)

  • pre-tax contribution
  • Deferred taxes

Disadvantages

  • taxes paid upon distribution
  • you don’t know the rate that your money will be taxed upon distribution
  • the money you take out in retirement may be taxed at a higher rate than the amount you saved on the money you put in years earlier

As teachers started to realize that their nest eggs were going to be depleted by taxes, they decided to explore other options that gave them more favorable tax treatment. With tax sheltered annuities, you simply delays taxes. Therefore, a more fitting name would be tax delayed annuities.

My objective was to simply open your eyes to explore other options that have:

  • No loss of principle in the stock market
  • More favorable tax treatment
  • No taxes upon withdrawal – if structured properly
  • No contribution limits

When you are able to find retirement investments that offer these benefits, you should take advantage of them because any investment that is missing any of the benefits above has the potential to diminish your long-term wealth building capacity.