By Paul Bullock

As a college faculty member, your passion lies in teaching and shaping the future. However, when it comes to planning for your own financial future, the complexities of retirement savings, particularly with 403(b) plans, can be daunting. Understanding how to maximize the benefits of your 403(b) investment plan can make a significant difference in your retirement readiness. This blog post is designed to help you make informed decisions about your 403(b) plan and ultimately secure your financial future.

What is a 403(b) Plan?

A 403(b) plan is a tax-advantaged retirement savings option specifically designed for employees of public schools, colleges, universities, and certain non-profit organizations. Much like the private sector’s 401(k), a 403(b) allows you to save and invest a portion of your income for retirement on a pre-tax or Roth (after-tax) basis.

Key benefits include:

• Tax-deferred growth: Contributions to a traditional 403(b) are made with pre-tax dollars, meaning you won’t pay taxes on that money until you withdraw it in retirement. This allows your investments to grow tax-deferred.
• Roth option: Some 403(b) plans offer a Roth option, where you contribute after-tax dollars, but qualified withdrawals in retirement are tax-free.
• Employer contributions: Many universities and colleges offer matching contributions, helping you boost your retirement savings faster.

Key Strategies for College Faculty to Maximize 403(b) Plans

1. Maximize Contributions
   • In 2024, the annual contribution limit for 403(b) plans is $23,000, with an additional catch-up contribution of $7,500 for employees aged 50 and over. To take full advantage of this benefit, aim to contribute as much as you can, especially if you’re eligible for employer matching. Missing out on matching contributions is essentially leaving free money on the table.
2. Understand the Investment Options
   • Many 403(b) plans offer a wide range of investment options, including mutual funds, annuities, and target-date funds. Take the time to understand your investment choices and how they align with your risk tolerance and retirement goals. For younger faculty members with a longer time horizon, a more aggressive approach focused on stocks might make sense. For those closer to retirement, more conservative investments such as bonds or fixed-income assets may be better suited.
3. Take Advantage of Catch-Up Contributions
   • If you’re 50 or older, you’re eligible for catch-up contributions, allowing you to contribute an extra $7,500 annually. If you haven’t been able to save as much as you would have liked earlier in your career, this is an excellent opportunity to boost your retirement savings in the final years before retirement.
4. Diversify Your Investments
   • Avoid putting all your retirement savings into one asset class. Diversifying across stocks, bonds, and other asset types can reduce your risk and improve the stability of your portfolio over time. It’s also important to periodically review your portfolio to ensure that it’s still aligned with your risk tolerance and retirement timeline.
5. Consider a Roth Conversion
   • If your 403(b) plan allows, consider converting some of your traditional pre-tax savings into a Roth account. This can be especially beneficial if you expect your tax rate in retirement to be higher than it is now. The conversion is taxed at your current rate, but qualified withdrawals from a Roth account in retirement are tax-free.
6. Understand Required Minimum Distributions (RMDs)
   • Once you turn 73, you’re required to start taking distributions from your 403(b) account. These RMDs are subject to income tax, and failing to take them results in significant penalties. Be mindful of these requirements and plan accordingly so that your withdrawals fit into your overall retirement strategy.

Common Pitfalls to Avoid

• Neglecting Fees: High fees can erode the growth of your investments over time. Pay attention to the expense ratios of your mutual funds and any administrative fees your 403(b) plan might charge. Opt for low-cost options whenever possible.
• Overlooking Employer Match: Many colleges and universities offer an employer match, but it may require you to contribute a certain percentage of your salary. Make sure you’re contributing enough to receive the full match—this is essentially free money that can significantly boost your retirement savings.
• Failing to Rebalance: Over time, your investment portfolio may become unbalanced as certain assets outperform others. Rebalancing your portfolio periodically helps you maintain your desired level of risk and ensures that your investments remain aligned with your retirement goals.

Seek Professional Guidance

While these tips offer a general roadmap for optimizing your 403(b) plan, every individual’s financial situation is unique. College faculty members often face additional challenges, such as tenure uncertainty, sabbaticals, or changes in employment status. Seeking the guidance of a financial advisor who understands the intricacies of 403(b) plans can help you navigate these complexities and ensure your retirement strategy is on track.

Your Needs Matter Too

While you continue your service in our communities, don’t forget to prioritize your own retirement needs to experience a financially stable and worry-free future. At Wellington Investment Advisors, we’re here to assist you in transforming your retirement dreams into a tangible reality. Don’t hesitate to connect with us: schedule a no-obligation introductory meeting or reach out to me at paul@wellingtoninvestmentadvisors.com or by phone at (812) 333-0874.

About Paul

Paul Bullock is CEO of Wellington Investment Advisors, an independent, boutique fiduciary firm serving pre-retirees and university faculty across Indiana. With over 34 years of financial experience, Paul is committed to building long-term relationships through thoughtful, personalized investment advice and guidance. He focuses on a disciplined tactical asset allocation approach to money management through a strong understanding of economic and market conditions and strives to build trust with clients by providing sound guidance. Paul understands the hard work his clients have put in to arrive at where they are today and wants to see them succeed in their goals for the future. Paul graduated from the University of Texas with an MBA, as well as a bachelor’s degree in finance, and has been dedicated to assisting clients with their financial needs ever since. When he is not working, Paul enjoys time with his family and is also an avid equestrian polo player who helps raise money for over 18 different charities through his playing. To learn more about Paul, connect with him on LinkedIn.

Disclaimers:

Securities offered by Registered Representatives through Private Client Services, Member FINRA / SIPC. Advisory products and services offered by Investment Advisory Representatives through Wellington Investment Advisors, a Registered Investment Advisor. Private Client Services and Wellington Investment Advisors are unaffiliated entities.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Wellington Investment Advisors and PCS do not offer tax or legal advice. Always consult a tax or legal professional regarding your specific situation. Individual situations and results can vary. Investment involves risk, and past performance is no guarantee of future results. Diversification does not ensure against loss.