Why (almost) every teacher shouldn’t use a 403b

A 403(b) is the staple of a teacher’s retirement savings plan – it’s not abnormable (yep, I made up a new word…) to run into a salesman in the hallway or teacher’s lounge, so many teachers end up using them.

But they may not be the best account to use, and in many cases, many teachers shouldn’t be using them. Here are some reasons why:

 

 

  1. As a new teacher, your income isn’t big enough to see a large difference. If you compared saving $5,000/yr in a 403(b) (no taxes now but in the future) versus a Roth IRA (pay taxes now, none in the future), you would most likely end up with a larger overall benefit using the latter approach. And you didn’t increase the amount of money you saved, you just did it in a different way.

 

  1. Compare the costs of a 403(b) to a Roth or taxable account. If you came to me and said “I want to invest $100 per week for the rest of my career. What are my options?” Here’s what I’d tell you:

 

  • I have one account that will save you a small amount in taxes now but you’ll have to pay taxes later when you’re retired. Out of the $100, I’ll take $3.50 out of every $100 for letting you use this account.
  • The other two accounts you won’t save anything in taxes right now, but you’ll either pay a minimal amount or no taxes in the future, but I’ll only take 50 cents from every $100 you want to invest.

Which one sounds better to you? The first option is your typical insurance-company 403(b). If you don’t know how to analyze a 403(b) to figure out if it’s a good one or not, then chances are, you’re using an expensive one.

 

  1. The average teacher will receive a pension in their 8th year of retirement that exceeds the amount of their last year of employment. Given the current set-up of Illinois’ pension system, a teacher will retire earning the most money of their career. The highest earning four years out of the last 10 will be one factor in determining what their pension will be. When you take into account the annual COLA (Cost of Living Adjustment), the pension of a teacher 8 years into retirement can be higher than their final year’s salary. To be withdrawing money from an account that is fully taxable is not the best move here – one that could have been avoided with some planning.

 

So what direction do you turn if you shouldn’t be using a 403(b)? It depends on your situation and one that requires careful planning. If you want some help, that’s where Finance for Teachers can come in. Contact us if you want to find out more.