If you are a teacher working for a public school, you likely qualify for a pension. For teachers in the state of Washington, you'll chose between Plan 2 (pension only) or Plan 3 (a smaller pension plus an investment account). Your contribution rate is either decided for you, or locked in when you sign up, with changes only possibly if you change school districts.
But did you know there's another investment option available, that you can contribute to in ADDITION TO your pension? It's called a 403(b), and here are some reasons you might want to use one:
1. Your Pension is Great, But It’s Not Always Enough
Pensions are a wonderful benefit, and they form a solid foundation for retirement. However, they often replace only a portion of your pre-retirement income—typically around 60-75% for many educators. While that may sound sufficient, it may not fully account for inflation, healthcare costs, or unexpected expenses in retirement.
Contributing to a 403(b) allows you to close that gap, ensuring you have the funds to maintain your desired lifestyle after you stop teaching.
2. Take Advantage of Tax Benefits
If you have extra cash flow available and want to save money on your taxes, a 403(b) account may be a great option!
Pre-Tax Contributions: Contributions are made before taxes, reducing your taxable income for the year. This means you pay less in taxes now while saving for the future.
Tax-Deferred Growth: Your investments grow tax-free until you withdraw them in retirement, allowing your savings to compound more effectively.
If you opt for a Roth 403(b), your contributions are made with after-tax dollars, but your withdrawals in retirement, including earnings, are tax-free. This can be an excellent choice if you expect to be in a higher tax bracket when you retire, or simply want to have a tax-free bucket of money available.
3. Flexibility to Adjust as Life Changes
One of the biggest advantages of a 403(b) account is its flexibility. Unlike pensions, which are largely fixed, a 403(b) allows you to adjust your contributions over time. When you receive a raise or your household income increases, you can increase your contributions. If your family takes a pay cut, or you go through a separation, you can reduce your contributions.
The flexibility of 403(b) accounts allows you to contribute as much as you can when you're able, without locking you into a contribution rate that's too high in the future.
4. Support an Early Retirement
If you dream of retiring early, a 403(b) can be a game-changer. By consistently contributing to your account, you can build a substantial nest egg to bridge the gap between leaving the workforce and when your pension benefits or Social Security kick in.
Keep in mind that the earlier you start contributing to a 403(b), the more time your money has to grow. Thanks to the power of compounding, even small contributions made consistently over time can add up to a substantial nest egg. For example, let’s say you start contributing $200 per month at age 30, earning an average annual return of 7%. By age 65, you’ll have over $360,000!
How to Get Started
Getting started with a 403(b) is easier than you might think. Here are a few steps:
Check with Your Employer: Speak with your HR department to understand your district’s 403(b) plan options, and what investment companies are available.
Set a Contribution Goal: Decide how much you can comfortably contribute. Starting with a small amount is better than not starting at all, as it puts the habit in place.
Choose Investments Wisely: Review the investment options available within your plan and select those that align with your risk tolerance and retirement timeline.
Seek Professional Advice: A financial advisor familiar with teachers’ unique financial needs can help you incorporate a 403(b) account as one piece of your overall financial plan.
Your Future Self Will Thank You
Contributing to a 403(b) is more than just a smart financial move; it’s an investment in your future peace of mind. By taking steps now to supplement your pension, you’re giving yourself the gift of financial freedom and flexibility in retirement.