Previously I posted some big questions and general answers. Today I’ll walk through them with the example of my university’s byzantine retirement programs.
How much to save: We’re not naturally big spenders and our university incomes are comparatively high for the small town we’re living in, so tax advantaging our longer-term savings would be all to our benefit, even if it’s more than “recommended.” On top of that, we need to make up a bit for those high rent piddly stipend years in graduate school. (There’s also that dream in which we get $10mil, quit the rat race, and move to Northern California to share a 3 story flat in SF with the library on the ground floor.) So we’re thinking we’ll put away the mandatory amount plus an additional 33K (this is 16.5K for each of us). Any additional savings we will pour into pre-paying our 5.5% mortgage.
DB vs DC: The DB plan took 5 years to vest. The DC plan vested right away. Untenured first-year professors go with DC, all other things equal. I still think this was the right decision to have made.
How much to put in the DC plan: At my school, it is mandatory to save something like 6% of income which is matched at around 6%. Apparently the actual number is determined on an annual basis. Ironically, this mandatory plan is called our “optional” plan. (Mine too!)
On top of the optional plan we have two other methods of saving. We can individually save up to 33K on top of the ~12% of income that’s mandatory. That’s an awful lot of money, and probably way more than most of us need to be saving in retirement accounts (with the exception of older folks who need some serious catch-up or people with very high incomes). As I noted before, we’re going to try to save an additional 33K in tax-advantaged retirement savings. We did max out the Roths with the funky Roth conversion but we’re not Roth eligible for next year (and in the traditional IRA phase-out range), so all 33K of that will be going via our employer this year.
How to invest:
We’re too young to trust an annuity company to stay in business, so that was out right away.
First I compared the fees and general portfolios across the target-date plans of all of the 403(b) options. Target plans are great because you can “set and forget” –they will rebalance automagically and they’ll have a reasonably good diversified mix of stocks and bonds for your target retirement date. They’re great for satisficing. Unfortunately, companies know that people think they’re great (or more likely that the people who most want to use them are also the people that least want to or know how to look at expenses) so most of them are charging much higher fees to use Target date funds than to use the individual funds that make up the target-date (much higher than the amount Vanguard charges to make up for the additional expense of rebalancing). Fees for my target date ranged between 0.72% to 1.17% (Ing, but it doesn’t charge the 0.7% on top of that for the target date funds). Not so great compared with Vanguard’s 0.20%. So target date funds were out… back to a more complicated mix of low-fee index funds.
Both the 403(b) plan and the 457 plans offered low fee index funds. The 457 plan fees weren’t given as a percent, but as a weird kind of step function with actual money amounts. So I had to do some math to make the comparisons. In the end we narrowed it down to two, TIAA-CREF and Fidelity. TIAA-CREF in the 403(b) option has index funds that I know and understand across the board at 0.34%. Fidelity has some Spartan funds that have an expense ratio of 0.10% and I need to see how those map into what I want, but also has some Indexes (that I actually understand) at 0.62%. Right now I’m pretty sure we’re going with Fidelity. If worse comes to worse we can keep it all in their 0.10% funds and diversify with our old IRA accounts.
Figuring all of this out took more than 8 hours and several phone calls to companies. Before we actually make the plunge in August, we still need to go through one more time. We’ll build the portfolio we think best and compare Fidelity and TIAA-CREF and make sure that the indexes are actually what we think they are. Then we will call a representative, print out paperwork, and make the switch. It will all be settled before we get our first paycheck for the year.
Ok, other questions: Regular vs. ROTH 403(b). That’s a good question we haven’t figured out yet. Our income is lower for the 2010 tax year, but back to normal for 2011. So what I’m thinking we will do is contribute some of our leftover cash from this year to a ROTH IRA (which we won’t be able to do next year), then use a regular IRA for the 403(b). It’s a little risky in case the income numbers don’t work out quite right with the ROTH, but if I do it this way I won’t forget to change it to a regular IRA for Fall semester. We can actually do both in the 403(b), but with the same income limit. Next year we will probably mix it up since tax diversification is nice. I like paying fewer taxes this year, but I will also like paying no taxes in the future. Mmmm. I know the government needs our money to fix market failures (among other things), but I still like keeping mine.
403(b) vs 457: Since the various reasons to prefer one over the other didn’t apply to us, we went with the 403(b) because it seems to have lower fees. The 457 only has one option and it gets expensive.