Max out 403(b) at work?

[J.P. MoreGains]

Hello all I'm new here so gonna start with a question.

I work at a state college and instead of paying into social security we have a 401k type investment with TIAA where they automatically deduct a portion of my check and my employer also contributes.

I've asked around and I can also open a 403(b) to contribute what I would like in addition to this regular account. The max I can put into this in a year is about 19k.

My take home is about 2300 a month... I actually think I'm going to put 100% of my paycheck in because it's a pretax investment. I have like 13k in my checking and savings and I think I can live off of this until december because my rent is $525 and my car is paid off. I usually spend around $1200 a month.

My question is does it make sense to just put everything in this 403(b) or would it make sense to just put some in and put the rest in my vanguard account? I'm leaning toward putting it all in the 403(b) since my salary is only 36k and I wouldn't have to really pay much taxes next year and I'll get a nice refund back.

I like putting money in my vanguard account but I always hear 'max out the pretax' options. I already put 6k in a roth for this year.

Other than that I'm pretty new but motivated. Probably do a case study soon to do a formal intro but general numbers are:
no debt
13k checking and saving
7k in my existing TIAA account
25 or so k in vanguard mostly vtsax, smaller amounts in a bonds index and international index
42 k in a roth ira

I'm getting more serious and want to get my earnings up, i changed careers and i'm kind of starting over. Want to generally know advice about what people mean when they say "max out pre tax contributions"

Thanks in advance for anyone who posts!

[draco44]

Hi! Good for you for thinking about your investment strategy.

First of all, look here if you haven't done so already:
https://forum.mrmoneymustache.com/investor-alley/investment-order/

Some thoughts and clarification requests to get the ball rolling for other commenters:

1. When you say "my vanguard account," from context it sounds like you are talking about a taxable brokerage account. Is that correct? You mention an Roth IRA separately. Is your Roth IRA also with Vanguard? If not, who's it with?
2. What's the breakdown of your non-rent expenses?
3. Generally yes, you want to max out non-taxable investment accounts before investing in taxable ones. However, even more fundamental than investing is having an emergency fund. It sounds like your $13k in checking would function as your emergency fund, unless you have other money somewhere you forgot to mention. Wherever you store it, be careful not to draw your emergency fund down to zero in an effort to maximize your investments.  People have different comfort levels in terms of how much they keep in their emergency fund, but common benchmarks are 3-6 months worth of expenses. Others like to have much more than that.

[draco44]

Follow-up: This bogleheads version of investment order priorities says basically the same thing as the MMM forum version I just gave up a link to, but contains some hyperlinks to related topics in case that helps:
https://www.bogleheads.org/wiki/Prioritizing_investments

The answer to your question about why people say "max out pre tax contributions" is a concept called tax efficiency or tax-efficient fund placement (https://www.bogleheads.org/wiki/Tax-efficient_fund_placement). Basically, it means invest money first in places where it will be taxed the least. It's easiest to think about if you remember that you can often buy a share of the same investment (e.g. VTSAX) and put it in different accounts (e.g. Roth IRA, IRA, taxable account). If you have the same thing but it costs less to keep one place than in another place, it benefits you to keep it in the lower cost place first.

[RWD]

Are there any management fees on the 403b? What is the fund selection like (are there low-cost index funds, for example)?

[seattlecyclone]

Given your currently low income and your desire to increase your income over time, you may wish to look into Roth options, whether in your 403(b) or elsewhere.

[cool7hand]

+1 on the investment order posts above.

In addition, be sure to learn about the fees in the 403b. My wife is a public employee and joining me in FIRE in a few weeks (yay!). Her employer has multiple companies that host her 403b options, and they all have much higher fees than 401ks in our jurisdiction. We ultimately invested in the 403b, but it was always the last place we put the dollars we earmarked for accounts with a tax advantage. As you might expect, we already have our finger on the button to transfer the 403b accounts to rollover IRAs to free ourselves of those fees as soon as she FIREs.

[Sandi_k]

Good for you!

One question: do you also have access to a 457 account? The big advantage to them is you don't need to be retirement age to access the account and the growth. If you are planning on early retirement, the 457 might be a better choice for you.

[J.P. MoreGains]

Wow! I appreciate the responses.

A little more detail about all of this.

First, the order of investments is extremely helpful. I'm pretty new to this and this past year I haven't contributed anything extra to the 401k/403(b) options... anything extra I'd just invest in my Vanguard VTSAX which is taxable so I think I was out of order. That's why recently I wanted to learn more about these other options. I think my Vanguard accounts are all taxable brokerage... not really sure of all of the terminology but I'd say yes.

My HR said I can't contribute anything more to the 401k and that the 403(b) is what I can set up on my own. I actually don't know what the fund is really like. I'm speaking with our rep from TIAA tomorrow and will ask about the different options. I imagine though that the pre-tax options like this is better than just putting it in VTSAX or my other vanguard funds. That's the order for doing things pre tax. So I'll ask about index options during our conversation. Also need to ask about management fees.

My Roth is with a company called American Funds... I've put in the 6k for the year. I've thought about bringing this over to Vanguard but haven't done so yet.

Other than that I got a late start to saving... I'm 41 years old. I was saving 4k a month as a mechanic on ships before switching careers. I got in to that late and it definitely takes a toll on the body, really strenuous work and I was always hurting. I just want to get back to that level of savings and do so in a job that is more sustainable. So the big goal now is to get my income up.

My 13k in checking and savings is sort of an emergency fund, but I really want to invest as much as I can now. My parents would always help me if there was ever an emergency or problem. So I think I have the freedom to just live off of that and not really worry about a bad situation because they could always help me if that were the case. I know not everyone has a situation like this with their parents so I'm lucky for that.

My monthly expenses I have to track better... I really don't track them much at all and I've been happy with usually having about $1,000 to invest at the end of the month. Rent is $525 and no car payment so I do make enough money to live okay off of. I think getting on here, getting more serious about my investments will also help me to track my expenses better.

So that's about it. I'm going to talk to the TIAA person tomorrow and look to get something started there. Other than that I'll probably start a log/journal on here to track progress. And the big thing is getting my income back up to save 4k a month (or more!).

Thanks again for the help, gives me some good questions to ask in this meeting.

[Sandi_k]

Make sure to ask the TIAA person about which funds OTHER than American they have, because American is notoriously high fee - they charge a commission of 5.75% of every dollar you invest in their funds. It should be criminal.

You want their INVESTMENT chart, listing all available funds - with ticker symbols! - and all Expense Ratios. Plus what their fees are for the 403(b) account maintenance/commissions/loads.

[draco44]

Thanks for the extra info! I'm glad to hear the investment order post was useful to you. For more background reading, I also suggest the JL Collins Stock Series: https://jlcollinsnh.com/stock-series/ That's another commonly cited reference on this forum. It explains the thinking behind why people in the MMM crowd lean heavily towards a passive rather than active investing strategy. The author also wrote a book called the Simple Path to Wealth. Your local library may have a copy you can check out for free.

Also, for your TIAA meeting tomorrow, if you have a chance it may be useful to you to poke around their website before your appointment so you have a few more specific things you'd like to ask about. Also, I could be wrong but based on their website's design and marketing language, I'm getting the vibe that the TIAA people may try to push annuities and actively managed funds on you. Resist! Ask to see a list of all their mutual funds that includes expense ratios and any other fee information, and a separate index fund list it. This is Vanguard's master list, for reference: https://investor.vanguard.com/mutual-funds/list#/mutual-funds/asset-class/month-end-returns.

I poked around a bit and had trouble finding TIAA's equivalent list, but I think I eventually did here: https://www.tiaa.org/public/investment-performance. The trick is that although that page is titled "PERFORMANCE: Mutual Funds and In-Plan Annuities," TIAA's IT people appear to have set their list of investments website to automatically loads with only annuities selected to display, not the mutual funds. To see only those, you have to manually click the box to see mutual funds, then wait for the page to update. Clever! And it helps to also turn off viewing the annuities when viewing the mutual funds, because if you view both at once the annuities entries display at the top of the page.

Alright, I've gone far enough down this rabbit hole. I'm sure they'll be able to help you out with many questions, but remember to be an advocate for yourself in the conversation too. No one cares more about your financial future than you do.

Edit: I'd like to caveat my advice by noting that some people like annuities for certain life situations, and not all annuities are created equal. But they're not for me at this point in life at least. YOU ultimately get to pick whatever investing strategy works best for you. We all just gab on this forum about our own preferences and how things are going. Good luck to you tomorrow!

[J.P. MoreGains]

Hey there again. I appreciate the in depth points! Great to have a bunch of feedback being new.

Good news is my appointment was cancelled and rescheduled until next Friday... I'm happy about this. I've also looked at some info to speak to your points.

First a general question... regardless of expenses, etc. It's better to do a pre-tax investment like this as opposed to just taking my after tax dollars and investing it in VTSAX right? I think I can literally invest my whole paycheck through December and get my taxable income down to under $20,000. Obviously I want to choose the best pre-tax option... but it seems like it's a question of which pre-tax option is the issue. So following investment order I do pre-tax first since that is the best overall strategy even if I have to settle a little compared to vanguard low fees.

Thanks for the tip for looking at expense ratio... just looked up the definition.

With TIAA my options are actually limited to an assortment of mutual funds and annuities that are somehow available to my employer and myself. Unfortunately it looks like any index funds are excluded.

This is the prospectus for my current plan. It's TIAA-CREF Lifecycle 2045 Fund - TTFRX the retirement option. Net expense ratio .70% gross expense ratio .86%

http://connect.rightprospectus.com/TIAA/TADF/886315589/SP

I've looked and found what I think is a very similar index fund. It's TIAA-CREF Lifecycle Index 2045 Fund - TLMRX also the retirement option. .35% / .43% expense ration. Also the prospectus

http://connect.rightprospectus.com/TIAA/TADF/87245M756/SP

Correct me if I'm wrong on this but... it looks to me like the plan I'm currently in and that I have an option to open a 403(b) with is basically almost the same as the index fund option shown? It looks to me like it's just set up to mimic the index, throw in a direct real estate component, plus some other active management right?

Comparing prospectus it also looks like with their example investment of $10,000, the fees in the fund I'm in are double the fees in the index fund.

Also, looking at the average annual return section and doing a comparison... without considering fees the average rate of return is basically the same within a .0x % point, with even the index fund being the higher of the two. Considering fees, the actively managed fund I'm in underperforms the index it looks to be set up to approximate or beat.

Is this pretty common? Unless I'm misreading things the question to ask would be why would someone invest in an actively managed fund that mimics a cheaper index fund but doesn't outperform it.

This may really end up being the option I end up going with because I don't think I'll have access to this index fund.

Again, it looks like pre-tax tops the list in investment order, so I'll live with a higher expense ratio but end up saving on taxes. Not the optimal situation but looks like the best way forward. I definitely want to ask about this point though. If it's the case then it's almost like access to the index funds are like prohibited to us - which I think is the case.  I think I only have options that are linked to the university account configuration or something like that.

Anyway, I'm still feeling pretty good about my trajectory. Just got to get my income up and actually start tracking my expenses closer.

Thanks again to everyone for all the great responses to think about.

[MDM]

First a general question... regardless of expenses, etc. It's better to do a pre-tax [tax advantaged] investment like this as opposed to just taking my after tax dollars and investing it in VTSAX right? I think I can literally invest my whole paycheck through December and get my taxable income down to under $20,000. Obviously I want to choose the best pre-tax [tax advantaged] option... but it seems like it's a question of which pre-tax [tax advantaged] option is the issue. So following investment order I do pre-tax [tax advantaged] first since that is the best overall strategy even if I have to settle a little compared to vanguard low fees.

As edited, yes.  In general, Roth will always be better than taxable because both start with after-tax contributions but no tax is due on Roth gains.  The question then is whether traditional (aka pre-tax) contributions will work better than Roth contributions.  See Traditional versus Roth - Bogleheads for more on that.  If you are very close to one of the saver's credit tiers then some traditional may be good, but otherwise seattlecyclone's post is worth considering. 

With TIAA my options are actually limited to an assortment of mutual funds and annuities that are somehow available to my employer and myself. Unfortunately it looks like any index funds are excluded.

See the chart in rows 2-8 of the 'Basic Terms' tab in the case study spreadsheet for some context, and TIAA - Bogleheads for some TIAA-specific comments.  You may have some good options within TIAA.

Is this pretty common? Unless I'm misreading things the question to ask would be why would someone invest in an actively managed fund that mimics a cheaper index fund but doesn't outperform it.

An excellent question.  If you had been around 45 years ago, you might have beaten Jack Bogle and Vanguard to the punch. ;)

[draco44]

Is this pretty common? Unless I'm misreading things the question to ask would be why would someone invest in an actively managed fund that mimics a cheaper index fund but doesn't outperform it.

An excellent question.  If you had been around 45 years ago, you might have beaten Jack Bogle and Vanguard to the punch. ;)

Lol, an astute question indeed. The three general reasons I can think of why people buy actively managed fund are:
1. The buyer feels confused by investing and wants to pay someone else to figure everything out.
2. Financial professionals (depending on how they are paid) often have an incentive to sell their clients the types of investments that brings in the most money for the firm, regardless of whether it is the optimal choice for the client.
3. It is true that some actively managed funds outperform passively managed index funds, and people believe they or a professional they pay can consistently pick those winners.

How many actively managed funds outperform the market? Estimates vary, but the odds of finding a winner are worse than a coin toss. And the winner today may not be a winner tomorrow. A Standard & Poor's retrospective study found that about 23% of actively managed mutual funds outperform the S&P 500 over five years: https://www.fool.com/investing/how-to-invest/index-funds/why-invest/ With those odds, I prefer index funds rather than trying to swing for the fences and more likely than not get eaten alive by management fees.