Planning for Retirement
Factors to Consider
Retirement may seem distant, and as educators, saving for retirement may feel like the least of your concerns. However, planning for retirement is one of the most important ways of ensuring your long-term financial security. The earlier you start saving, the better chance you will have of meeting your goals. There are many factors you will want to consider when you think about saving for retirement, including:
- Your age
- When you plan to retire
- Your risk tolerance
With these factors in mind, you should consider how best to take advantage of the retirement benefits available to you. You should also consider how to reinforce those retirement benefits with additional savings and investments.
Defined benefit plans are also known as pension plans. Employers sponsor defined benefit plans and promise the plan’s investments will provide you with a specified monthly benefit at retirement. The employer bears the investment risks.
Defined contribution plans, like 403(b) and 457(b) plans, do not promise a specific payment upon retirement. In these plans, the employee or the employer (or both) may contribute to the employee’s individual account. The employee bears the investment risks.
Retirement Plans for Public School Teachers
1. Pensions. As a public school or non-profit private school teacher, you may have access to a defined benefit pension plan. Check with your employer, school district, or state pension provider for more information.
2. Social Security. You may also be eligible for social security benefits. Check with your employer, school district, or www.ssa.gov for more information on what types of benefits you may be able to receive in retirement.
3. Investment Plans. You may also have two types of defined contribution investment plans available to you: 403(b) and 457(b) plans. Check with your employer or school district to see if one or both are available to you.
403(b) and 457(b) Retirement Plans
What is a 403(b) or 457(b) plan?
403(b) and 457(b) plans are tax-advantaged retirement savings programs provided by certain employers. Employers such as public educational institutions (public schools, colleges and universities), certain non-profits, and churches or church-related organizations may offer 403(b) plans. Employers such as state and local government agencies and certain non-profit organizations may offer 457(b) plans. Some employers may offer both 403(b) and 457(b) plans, and allow you to contribute to both plans. Find general information about these plans on the Internal Revenue Service’s (“IRS”) website (IRS 403(b) webpage and IRS 457(b) webpage).
Similar to 401(k) plans, 403(b) and 457(b) plans can offer two account options, traditional and Roth. Traditional 403(b) and 457(b) accounts allow you to contribute pre-tax money directly from your paycheck to your 403(b) or 457(b) plan to invest in certain investment products. These pre-tax contributions and their investment earnings will not be taxed until you withdraw the money, typically after you retire. Roth 403(b) and 457(b) accounts allow you to contribute after-tax money. The earnings in these accounts are not taxed when you withdraw the money. This allows you to withdraw tax-free income during retirement. For additional information on these rules and tax consequences, please consult a tax professional. Also find information about choosing a Roth account on the IRS’s website.
How much can I contribute to a 403(b) or a 457(b) plan?
The IRS determines the annual contribution limits for both 403(b) and 457(b) plans. In addition to that amount, both plans allow “catch-up contributions” for eligible participants (those age 50 or older or turning 50 that year). Each plan has specific rules governing contribution limits and “catch-up contributions.” Confirm the current contribution limits for each plan on the IRS’s website (403(b) contributions and 457(b) contributions).
What are my investment options in a 403(b) or a 457(b) plan?
As a participant in a 403(b) or 457(b) plan, you may need to choose among different types of investments. Typically, 403(b) and 457(b) plans offer two types of investment products: (1) annuities and (2) mutual funds.
An annuity is a contract between you and an insurance company that requires the insurer to make payments to you, either immediately or in the future. There are three basic types of annuities:
- Variable annuity. The insurance company allows you to direct your annuity payments to different investment options, usually mutual funds. Your payout will vary depending on how much you put in, the rate of return on your investments, and expenses. One feature of variable annuities is tax deferral on earnings. But, if you are investing in a variable annuity in a tax-advantaged account, like a 403(b) or 457(b) account, you’ll get no extra tax advantage. The SEC regulates variable annuities. For more information about variable annuities, please read our Investor Bulletin: Variable Annuities—An Introduction.
- Fixed annuity. The insurance company promises you a minimum rate of interest and a fixed amount of periodic payments.
- Indexed annuity. This annuity combines features of securities and insurance products. The insurance company credits you with a return that is based on a stock market index, such as the Standard & Poor’s 500 Index.
- Fixed annuities and indexed annuities are regulated by state insurance commissions. Please check with your state insurance commission about the risks and benefits of these products.
A mutual fund is the common name for an open-end investment company. Like other types of investment companies, mutual funds pool money from investors and invest the money in stocks, bonds, short-term debt or money market instruments, or other securities. Mutual funds issue redeemable shares that investors buy directly from the fund or through a broker for the fund.
Please refer to the ‘Making Money Grow’ section for more information about mutual funds. For additional information about mutual funds, be sure to read our brochure entitled Mutual Funds and ETFs—A Guide for Investors.
What should I ask when selecting an investment product?
It will be up to you to select investments that best meet your financial objectives. Although you may be eligible to participate in a 403(b) or 457(b) plan, do not assume that your employer has endorsed any particular investment product offered through the plan. Before selecting an investment product for your 403(b) or 457(b) plan, ask the following three questions:
- What fees will I pay?
- Will I have to pay any penalties if I change my investment choices? If so, how much?
- Does the vendor make more money for selling me one product over another?
What fees will I pay in a 403(b) or a 457(b) plan?
Fees and expenses vary from product to product and can take a huge bite out of your returns. An investment with high costs must perform better than a low-cost investment to generate the same returns for you. Even small differences in fees can translate into large differences in returns over time.
If a vendor tells you an investment product has “no fees,” it may mean there are no upfront fees when buying the investment product. But most investment products in 403(b) and 457(b) plans have expenses related to their operation that come out of their investment returns on an ongoing basis (e.g., an expense ratio for mutual funds or administrative expenses for annuities). These ongoing expenses can have a major impact on the investment product’s overall investment return.
For mutual funds and variable annuities, you can find information on costs and fees in the prospectuses. For fixed annuities, check the sales literature or the contract. If you need additional help understanding mutual fund related fees, please read our Investor Bulletin: Mutual Fund Fee Expenses. If you need additional help understanding variable annuity fees, please read our Investor Bulletin: Variable Annuities—An Introduction.
In addition to investment product fees, you should also carefully consider the impact of vendor fees. You can generally find these fees in the vendor’s plan materials. For additional information on how fees can impact your investment returns, read our Updated Investor Bulletin: How Fees and Expenses Affect Your Investment Portfolio.
Will I have to pay any penalties if I change my investment choices? If so, how much?
Make sure you know the answer to this question before you make your investment choices. For example, if you withdraw money from an annuity within the first few years, the insurance company may assess a “surrender” charge. A surrender charge compensates the vendor who sold the annuity to you.
Some mutual funds have a back-end sales charge known as a “contingent deferred sales load.” Like a surrender charge for an annuity, the amount of this type of sales charge will depend on how long the shares are held, and it typically decreases to zero if the investor holds the shares long enough.
The question of whether you must pay a penalty or other fee for switching among investment choices in your plan is different from whether you must pay a penalty for taking money out of your 403(b) or 457(b) plan. You usually have to pay a tax penalty for early (pre-retirement) withdrawals from tax-deferred retirement plans. Consider consulting with a tax professional before you take money out of your 403(b) or 457(b) plan.
Does my vendor make more money for selling me one product over another?
Always ask how—and how much—the vendor receives as payment for selling a particular investment product. For example, you could ask:
- Do you receive a commission for selling Product X to me? If so, how much?
- Do you get any other type of compensation for selling Product X? If so, what? (This could include a bonus or points toward some other reward, such as a trip or a cruise.)
- Are there any other products that can meet my financial objectives at a lower cost to me, even if you do not sell those products?
How do I select a vendor for my 403(b) or a 457(b) plan?
Your employer may allow you to choose your 403(b) or 457(b) plan provider from a group of vendors. These are pre-selected financial professionals or firms. Please do not assume that your employer has endorsed any vendor. Determining which investment products best meet your financial objectives and identifying a vendor who sells those products is very important. Different vendors sell different types of products, and some vendors only offer a limited number of choices.
Before selecting a vendor, you should read your employer’s 403(b) or 457(b) plan documents to learn the basic rules for how your plan operates. In addition, read each vendor’s 403(b) or 457(b) plan materials. Research each vendor’s background, credentials and experience.
Some states require vendors that provide these plans to register with one or more state regulators—in addition to any required registrations under federal laws. If your state requires these vendors to register, it may provide resources to assist you in researching vendors. Some vendors may be registered with the SEC or state securities regulators. Vendors that are insurance companies generally register with your state’s insurance commission.
Other Ways to Save for Retirement
Of course your retirement savings don’t have to be limited to the retirement benefits offered by your employer. If possible, consider saving and investing additional money on your own. Explore a wealth of information about retirement topics such as employer-sponsored plans, managing lifetime income, avoiding retirement fraud and understanding senior specialists’ designations at Investor.gov.
The Office of Investor Education and Advocacy has provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.