Author Topic: Early retirement and 403(b)  (Read 24535 times)

cabeasle

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Early retirement and 403(b)
« on: December 09, 2012, 09:21:59 AM »
Good morning all,

I am new to the forums, but am a long time reader of the site.  I'm currently bungling my way through investing, readings lots, and making changes to my strategy as I learn better/more refined methods.

I recently learned that I have the option of entering a 403(b) plan through work (I'm a teacher).  For the previous two years, I have been maxing out a Roth IRA and then putting a large chunk of cash into taxable accounts via Vanguard, but am now trying to decide if I should switch over to the 403 instead of the taxable accounts.

My concern is that I want to retire as early as possible (whenever that may be), and I don't know if a 403b is a good option in that case since it ties up my cash until age 59.  Then again, I hate to lose out on the tax break.

It also appears that the firm that handles the 403 (VALIC) has a few fees associated with it, as well, and has a limited range of investment options.  I hate to give anyone money to handle my accounts when Vanguard is so cheap, but perhaps the tax savings will help to offset the increased cost?

So, basically, I am just wondering what opinions are out there about 403(b)s and early retirement.  Is this a good investment vehicle, or should I go ahead and keep using taxable accounts so that I have access to my money however early I want it?

Thanks :)

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Re: Early retirement and 403(b)
« Reply #1 on: December 09, 2012, 10:10:43 AM »
Teacher 403(b) plans rend to be heavily oriented toward annuities.  VALIC is the new name for AIG Retirement, which you can expect to push annuities.  There may be self-directed mutual fund accounts offered, depending on the program selected by your employer.  If you post more about the available investment options and fees, the folks here will be in a better position to evaluate the program.

Unless all they offer is annuities, the tax deferral is probably worth the cost.  I had Prudential as a 457 plan provider for a number of years, and I held my nose, paid the admin fee, and picked the best of the available choices.  It definitely worked to my advantage.

Another Reader

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Re: Early retirement and 403(b)
« Reply #2 on: December 09, 2012, 10:40:00 AM »
Here's a typical mutual fund offering from VALIC for Fairfax County Schools.

https://www.valic.com/Images/fairfax_403b_mf_perf_tcm774-452266.pdf

The low cost index fund people will have heart attacks, but several of the funds aren't that bad.  If this is similar to what you are offered, you may want to consider doing this.  I haven't reviewed all these funds, but I always look at the Morningstar reports.  It's nice to say the average return is X, but you are interested in compounded returns.  The Morningstar hypothetical growth of $10,000 chart is very informative.  With funds offered by insurance companies, I always run them through Fund Alarm.  The results can be quite surprising. 

My philosophy with the deferred plans is to pick the best funds offered by the plan, independent of asset class.  If you find yourself wanting more balance among asset classes, put the missing asset classes in your IRA or taxable account.  Don't pick a bad fund in the name of diversification.

Remember, Valic stands for Variable Annuity Life Insurance Company.  Their "financial advisors" will push the annuity wrapper.  In your shoes, I would politely decline and just pick the best funds from their fund portfolio.

cabeasle

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Re: Early retirement and 403(b)
« Reply #3 on: December 09, 2012, 11:50:55 AM »
Thanks for the thoughts.  When I had a meeting with one of the VALIC advisors, I felt that he was pushing a plan (and repeatedly mentioning "annuity") without really listening to my thoughts about wanting to retire early.  He gave me the impression that he was more salesman than anything which made me nervous.  That's why I wanted to bring my questions to other people :)

I will ask the advisor some follow up questions and see if there is a way to decrease the potential costs.  I will also get more detailed info to link here.

arebelspy

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Re: Early retirement and 403(b)
« Reply #4 on: December 09, 2012, 11:57:44 AM »
Lots of times if you have a 403(b) available, you may have a 457b available as well, which is superior to the 403b, and MUCH better for early retirement.  That particular company may not offer it, so they don't tell you about it, but check with your district.
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Another Reader

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Re: Early retirement and 403(b)
« Reply #5 on: December 09, 2012, 12:31:51 PM »
Arebelspy is correct.  If you have a 457 plan, it is far superior in one very important respect.  Since the contributions are considered deferred compensation, not retirement contributions, there is NO 10 percent penalty for taking money out before age 59 1/2.  You simply pay the income tax. 

The one positive thing about these insurance companies' offerings is their stable value funds.  That's cash to you, with a 3 percent interest rate right now.  That's a great place to store the early income you will need after you retire or leave.  I kept money in one plan that I did not roll over to an IRA when I left to use eventually for that purpose.  These funds are not bank deposits and do not carry FDIC protection.  The income is derived from short term annuity contracts with the company.

If you look at the paperwork you likely were given, you probably have at least two options.  I would take the pure mutual fund option, if it's available.  If you did not get the fancy brochure, your plan may be on-line, as was the one I cited.  You will benefit greatly from studying the options before you talk to the annuity salesman/advisor again.

cabeasle

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Re: Early retirement and 403(b)
« Reply #6 on: December 09, 2012, 03:16:21 PM »
Yeah, they really didn't send me any info.  The advisor just said that it is a lot to cover and he would set up a meeting :)  I will make a point to get some hard info/paperwork in hand to review.

Hamster

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Re: Early retirement and 403(b)
« Reply #7 on: December 09, 2012, 04:00:18 PM »
Lots of times if you have a 403(b) available, you may have a 457b available as well, which is superior to the 403b, and MUCH better for early retirement.
Interesting. You have a knack for making me rethink my assumptions...

I have  a 457 option through work (not-for-profit healthcare organization). I put a few thousand in the 457 this year after maxing out my 403(b), but I've always been a bit leary of putting much in there. The 457 "contributions" are deferred compensation, and belong to the organization until I leave or retire. So, if they go bankrupt, I could potentially lose everything in my 457. I'd have to get in line as any other creditor. The 403(b) on the other hand is my money from day 1, so if my employer goes under, then I don't lose that money.

Maybe that's being overly cautious on my part. The organization's finances are very strong right now, but we all know healthcare is going to need to be radically reshaped, and other big healthcare providers have gone upside down very quickly in the past few years...  I'd hate to be in a situation where they run out of money, so I lose both my job and my savings.

As for early retirement, I've always thought that I'll go part time rather than fully retiring. I get paid well, and enjoy my job, but would like to work a lot less. In that situation, I may not get access to my 457 deferrals until retirement age anyway. As long as I work part time for them (and they are the only game in town), I can't take that money from the 457 plan. Maybe quit my job for a year to get the 457 money out, reinvest it on my own, then re-apply for my job...??? but all my benefits would start over from zero.

As for the OP, I'd be more concerned about the 457 if it's with a private non-profit school than if a public school. I'd assume a public school district is much less likely to go bankrupt.

Hamster

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Re: Early retirement and 403(b)
« Reply #8 on: December 09, 2012, 04:06:05 PM »
When I had a meeting with one of the VALIC advisors, I felt that he was pushing a plan (and repeatedly mentioning "annuity") without really listening to my thoughts about wanting to retire early. 
..because he was.
He gave me the impression that he was more salesman than anything which made me nervous.
...because he is.
I would guess he gets paid more for selling those plans that he is pushing. I think it's completely fair to ask him how he is paid (not how much... but what the incentive structure) so that you know what his motives are.

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Re: Early retirement and 403(b)
« Reply #9 on: December 09, 2012, 05:25:16 PM »
My understanding is the rules are different for governmental 457 plans.  Starting sometime in the late 1990's, the assets were required to be deposited in custodial or trust accounts for the benefit of the employees and were no longer subject to claims of the government employer's creditors.  This is not true of 457 plans in private entities and the risk should be considered if your employer is a private entity.

kelly1mm

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Re: Early retirement and 403(b)
« Reply #10 on: December 09, 2012, 05:57:54 PM »
403b's follow the same early withdrawal rules as 401k's (which are different slightly than IRA's), the biggest one I can see for semi-early retirement is you can withdrawal as soon as age 55 if you retire/leave the job.  Shaves 4.5 years off tetime till you can tap it.  That is basically our plan - take early retirement but defer pension till 62 so their is no reduction of 6% per year, take out the 403b money up to the point of taxation (about 19k per year) and live off taxable accounts.  Basically we should be able to avoid taxes on about 100k of the 403b account by doing that, while getting a 40% larger pension at 62.

Honest Abe

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Re: Early retirement and 403(b)
« Reply #11 on: December 09, 2012, 07:05:38 PM »
As a fellow teacher I ask the OP - do you have a pension and if so how does it play into your vision of early retirement? 60% of my final salary for life at 55 is too good to turn down, no matter how much i'd like to retire early

arebelspy

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Re: Early retirement and 403(b)
« Reply #12 on: December 09, 2012, 07:55:26 PM »
403b's follow the same early withdrawal rules as 401k's (which are different slightly than IRA's), the biggest one I can see for semi-early retirement is you can withdrawal as soon as age 55 if you retire/leave the job.  Shaves 4.5 years off tetime till you can tap it.  That is basically our plan - take early retirement but defer pension till 62 so their is no reduction of 6% per year, take out the 403b money up to the point of taxation (about 19k per year) and live off taxable accounts.  Basically we should be able to avoid taxes on about 100k of the 403b account by doing that, while getting a 40% larger pension at 62.

Where do you get that age 55 number? I believe it's any age, as long as you've severed employment, no?

As a fellow teacher I ask the OP - do you have a pension and if so how does it play into your vision of early retirement? 60% of my final salary for life at 55 is too good to turn down, no matter how much i'd like to retire early

I'm a teacher as well and vested in my pension plan.  If I stay until 47 I can get 75% (that's the max) of my salary (assuming I purchase the max years - 5, otherwise I could work until 52).  Hah.  I'm planning on being out in my 30s.  Won't let me take the pension until 60 then (and it'll be much less than 75%, and will have deteriorated due to inflation, though it is eventually COLA'd, its value will be down from the years between my stopping working at taking it).  You can also take it early, at a penalty, which I will likely be doing.

Working until age 47 to get the full pension is my plan D.
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Honest Abe

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Re: Early retirement and 403(b)
« Reply #13 on: December 09, 2012, 08:05:29 PM »


Where do you get that age 55 number? I believe it's any age, as long as you've severed employment, no?

That is correct, it's whenever you leave that particular employer

Working until age 47 to get the full pension is my plan D.

Damn I may have to move to NV!! :)

arebelspy

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Re: Early retirement and 403(b)
« Reply #14 on: December 09, 2012, 08:41:36 PM »
Working until age 47 to get the full pension is my plan D.

Damn I may have to move to NV!! :)

30 years is the requirement here.  I started at 22, so 30 years would be 52, and you can purchase up to 5 years, which makes it 47.
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kelly1mm

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Re: Early retirement and 403(b)
« Reply #15 on: December 09, 2012, 08:47:34 PM »


Where do you get that age 55 number? I believe it's any age, as long as you've severed employment, no?

That is correct, it's whenever you leave that particular employer

Working until age 47 to get the full pension is my plan D.

Damn I may have to move to NV!! :)

I am specifically referring to taking out as much as you want in any one year without penalty, which you can do at 55 wth a 401k/403b, but not a IRA, if you retire/leave the position.  You could do a 72d distribution (substantially equal periodic payments) at any age without penalty so long as you have left that employer. 

The reason this is important is the72d distributions, started at a early age, will be very small, nowhere near the 19kish that is now untaxed (MFJ) by the feds for almost all participants.  If you use the 55+ clause, you can take out 19kish per year and avoid ALL federal taxation of those funds as thy were not taxed going in to the 403b, and are under the standard deduction amount for MFJ filers. 

Here is a link to the IRS pub on theissue and a snipit:

http://www.irs.gov/taxtopics/tc558.html
"There are certain exceptions to this additional tax. The following six exceptions apply to distributions from any qualified retirement plan:
•Distributions made to your beneficiary or estate on or after your death.
•Distributions made because you are totally and permanently disabled.
•Distributions made as part of a series of substantially equal periodic payments over your life expectancy or the life expectancies of you and your designated beneficiary. If these distributions are from a qualified plan other than an IRA, you must separate from service with this employer before the payments begin for this exception to apply.
•Distributions that are equal to or less than your deductible medical expenses under section 213, that is, the amount of your medical expenses that is more than 7.5% of your adjusted gross income. You do not have to itemize to meet this exception. For more information on medical expenses, refer to Topic 502.
•Distributions made due to an IRS levy of the plan under section 6331.
•Distributions to qualified reservists. Generally, these are distributions made to individuals called to active duty after September 11, 2001 and on or after December 31, 2007.


The following additional exceptions apply only to distributions from a qualified retirement plan other than an IRA:
1.Distributions made to you after you separated from service with your employer if the separation occurred in or after the year you reached age 55, or distributions made from a qualified governmental defined benefit plan if you were a qualified public safety employee (State or local government) who separated from service on or after you reached age 50.
2.Distributions made to an alternate payee under a qualified domestic relations order, and
3.Distributions of dividends from employee stock ownership plans.

arebelspy

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Re: Early retirement and 403(b)
« Reply #16 on: December 09, 2012, 09:11:37 PM »
Everything I've read and heard is you can access it any age if you've severed employment.

http://www.457bwise.com/faqs/index.html :
Quote
Public (governmental) plan 457(b) money is not subject to the age 59 1/2 withdrawal rule, so money can be withdrawn (subject to income tax on the full amount) without incurring a 10% early withdrawal penalty.

If you read the publication you quoted, it only applies to "qualified retirement plans" which this isn't.

Note that they define qualified retirement plans:
Quote
The term "qualified retirement plan" means:

A qualified employee plan under section 401(a), such as a section 401(k) plan
A qualified employee annuity plan under section 403(a)
A tax-sheltered annuity plan under section 403(b) for employees of public schools or tax-exempt organizations, or
An individual retirement account under section 408(a) or an individual retirement annuity under section 408(b) (IRAs)

457 isn't on there.  It specifically notes that a 457 is a non-qualified plan, and that IF you roll over from one of those into a 457, you'll owe the 10% penalty if you withdraw that from the 457.  But if you didn't roll over, there's no 10% penalty from withdrawing from a 457.

Bogleheads confirms as well: http://www.bogleheads.org/wiki/457-b
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

kelly1mm

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Re: Early retirement and 403(b)
« Reply #17 on: December 09, 2012, 09:27:29 PM »
Everything I've read and heard is you can access it any age if you've severed employment.

http://www.457bwise.com/faqs/index.html :
Quote
Public (governmental) plan 457(b) money is not subject to the age 59 1/2 withdrawal rule, so money can be withdrawn (subject to income tax on the full amount) without incurring a 10% early withdrawal penalty.

If you read the publication you quoted, it only applies to "qualified retirement plans" which this isn't.

Note that they define qualified retirement plans:
Quote
The term "qualified retirement plan" means:

A qualified employee plan under section 401(a), such as a section 401(k) plan
A qualified employee annuity plan under section 403(a)
A tax-sheltered annuity plan under section 403(b) for employees of public schools or tax-exempt organizations, or
An individual retirement account under section 408(a) or an individual retirement annuity under section 408(b) (IRAs)

457 isn't on there.  It specifically notes that a 457 is a non-qualified plan, and that IF you roll over from one of those into a 457, you'll owe the 10% penalty if you withdraw that from the 457.  But if you didn't roll over, there's no 10% penalty from withdrawing from a 457.

Bogleheads confirms as well: http://www.bogleheads.org/wiki/457-b

If you are replying to me, you will see that every post I have mentioned that I was refering to a 401k/403b plan, not a 457 plan.  The OP was asking a question about 403b's.  The discussion verred off int 457s and back an forth.  I am only referring to 403b's and a bit of a 'trick' you can use to take semi early retirement, defer your pension to get additional growth (1/2% per month till age 62 for me) and get access to penalty free, tax free (at least up to the MFJ SD amount)  withdrawals from the 403b account starting at age 55 instead of 59.5.

Sorry if  was unclear.

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Re: Early retirement and 403(b)
« Reply #18 on: December 10, 2012, 03:38:29 AM »
@abebelspy Just out of curiosity what does your pension charge to buy a year of service?

arebelspy

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Re: Early retirement and 403(b)
« Reply #19 on: December 10, 2012, 07:38:48 AM »
Gotcha Kelly, makes sense.  Definitely a reason one should invest in 457s over 403s, if available (and in the public sector, private sector risk must be evaluated, as discussed above).

Abe: cost depends on what your salary is, and your age.

Obviously if you make more it costs more, and if you're older it costs more.

Here is the website to calculate it for NV: http://nvpers.org/public/oscEstimator/index.jsp

For me each year purchased costs ~7400, so total for both the wife and I to purchase 5 years each will be ~75k, if we buy them now.  Basically like purchasing a prepaid annuity.

They can be bought pretax, which is nice (I.e. taken from paycheck before you pay taxes on it, or rolled over penalty and tax free from a retirement account).
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Honest Abe

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Re: Early retirement and 403(b)
« Reply #20 on: December 10, 2012, 08:55:19 AM »
Wow... If my pension system (NYSTRS) offered that I'd be all over it.. My only hope will be the fact that by the time I near retirement, my wife and I will be the few remainders of the tier that doesn't contribute (my tier is 3%/year for 10 years.) I'm guessing they'll be excited to rid of us and may offer an incentive, but I'd rather they cut to the chase and allow us to buy ourselves out like they do in your state.

cabeasle

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Re: Early retirement and 403(b)
« Reply #21 on: December 10, 2012, 02:59:27 PM »
I am definitely jealous of the pensions you guys have.  My teacher pension isn't terrible, but certainly nothing amazing.  To receive benefits, we have to hit age+years of service=80 which for me is around 52.  But, if I retire before 60, I take a 5% hit off my salary each year, which works out to only receiving about 25% of total salary at 52 or closer to 85% at 60.  Huge difference.... but I'm with arbelspy... even 52 sounds like waaaay too long (and I like my job... but I like my summers off even more)

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Re: Early retirement and 403(b)
« Reply #22 on: December 10, 2012, 03:15:06 PM »
The job has changed a lot... It used to be about the kids, now it's trying to fit the kids in around all the paperwork. But that's for another thread. :) lets just say I'm counting the years!

arebelspy

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Re: Early retirement and 403(b)
« Reply #23 on: December 10, 2012, 05:34:44 PM »
I am definitely jealous of the pensions you guys have.  My teacher pension isn't terrible, but certainly nothing amazing.  To receive benefits, we have to hit age+years of service=80 which for me is around 52.  But, if I retire before 60, I take a 5% hit off my salary each year, which works out to only receiving about 25% of total salary at 52 or closer to 85% at 60.  Huge difference.... but I'm with arbelspy... even 52 sounds like waaaay too long (and I like my job... but I like my summers off even more)

My hit is 4% per year taken early (before age 60, since I'm not going to do the full 30 years, which then allows any age).  I've got a spreadsheet that calculates the hit and does break even lines based on age.

It looks like I'm going to take my pension ten years early (age 50) at a 40% hit, to only get 60% of what I would if I waited.  If I live to 85 or more, I should have done it the other way around, but if I don't make it to 85 (the break even point) taking it earlier and taking the penalty works out better.

And I hear ya Abe about the paperwork.  I try to ignore most of that until I get called on it.. So much of it is unnecessary that no one ever looks at anyways.  I love teaching though.  Will be interesting to see how quickly I ER after FI.  Not sure.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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Re: Early retirement and 403(b)
« Reply #24 on: December 13, 2012, 01:42:02 PM »
Cabeasle,
As you know there are many paths to wealth, financial independence and early retirement.  Believe it or not, teachers have more retirement options than most private-sector jobs:  state teachers' pension, 403b, 457, IRAs and some districts even offer district plans (403a) too.  The trick is to use the plans to the max on a teacher's salary.  It's not easy, but it can be done.   

Here is what my wife and I (both teachers) have done over the last 10 years.

$3,000 – 2002
$30,000 – 2003
$32,000 – 2004
$50,000 – 2005
$53,000 – 2006
$60,000 – 2007
$54,250 – 2008
$62,095 – 2009
$82,473 – 2010
$82,850 – 2011
$88,817 – 2012

Phase 1:  We started by maxing out our 403b plans and traditional IRAs in 2003.  Later, we started putting some money in our 457 plans until we had about $60,000 in 457 plans.  In retrospect we should have maxed out our 457 plans first because they do not have a 10% pre-59.5 penalty; 457 money is more flexible than 403b / IRA money.  Once you separate service from an employer, you can strategically tap 457 money; it is treated as regular income.  (Remember, you still have to pay tax on income!)

Phase 2:  In 2009, we quit our jobs and took jobs in another district.  Why?  So that we could tap our 457 money for living expenses and double down on our savings.  As you can see, 2009-2012 were big savings years for us. 

As for the 403b account versus the IRA, I like them both, BUT I never invest in mutual funds via my 403b or 457 accounts.  I only use short-term fixed accounts that pay about 2%; yes, I realize that I'm losing purchasing power due to inflation.  However, I do not want to expose my savings to both market uncertainty and annuity fee certainty (thanks Mr. Annuity salesman!).  Most 403b and 457 plans have far too many fees for my taste.  That said, I still use the hell out of them...making lemonade from lemons!  Do your investing in your IRA accounts and do your savings in your 403b and 457 accounts.  At some point, you will have to quit your job to move YOUR money. 

Phase 3:  In 2013 we plan on taking 72T / SEPP distributions from our tradtional IRA; this should provide about $18,000 a year (balance of $530K).  To make this possible we rolled all of our 403b accounts to our IRAs.  Then, we will take about $15,000 per year from our 457 accounts (balance of $107K.  This results in $33,000 a year.  Plus, we qualify for our pensions when we turn 60.  (We late 40s now).  Any future earnings will be funneled into retirement accounts and this virtuous cycle will continue...I call it PAY YOURSELF FIRST TO THE EXTREME.   

I hope this helps and gives you some ideas to bounce around. 

Honest Abe

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Re: Early retirement and 403(b)
« Reply #25 on: December 13, 2012, 01:53:25 PM »
Ed -

You are my freakin hero. I hope you stick around here and contribute more!

-another teacher

cabeasle

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Re: Early retirement and 403(b)
« Reply #26 on: December 13, 2012, 03:31:17 PM »
Ed -

You are my freakin hero. I hope you stick around here and contribute more!

-another teacher

Agreed.  I will be looking into this for sure.  Now if I can only get the benefits coordinator to actually answer her emails, I will be in business :P

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Re: Early retirement and 403(b)
« Reply #27 on: December 13, 2012, 06:18:06 PM »
Ed -

You are my freakin hero. I hope you stick around here and contribute more!

-another teacher

Ditto.

Can you explain more about tapping your 457 while still working (but having severed employment from who that 457 was with)?
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Re: Early retirement and 403(b)
« Reply #28 on: December 13, 2012, 06:39:46 PM »
Tapping a 457 account is easy...just as long as you have separated service.  Say you have a 457 account with Valic for Smith County School District worth $25,000.  When May rolls around, you decide not to renew your contract with Smith.  Behind the scenes you get a job with Johnson County School District.  JCSD also offers a 457 account with Valic that you begin funding.  During your employment with JCSD you can take distributions from your Smith County Valic 457 fund...NOT your current employer.  Why?  Because you have not separated service. 

If you quit Johnson County a year later, your JCSD contributions are also ready for harvesting.  Why?  Because you separated service.  Separation also allows you to roll your 403b money to your IRA account.  This almost always beats the heck out of staying in a fee-bloated annuity contract.  Quitting your job can make you a big winner for two main reasons.  First, you can get to your 457 money prior to 59.5 without the 10% early withdrawal penalty.  (We view our 457 plan as our emergency fund / financial independence account.)  Second, you can get your 403b money to a "real" retirement investment such as a low-cost Vanguard or Schwab account.   

Be aware that when you take distributions from a 457 there is a 20% automatic withholding.  Don't worry, with a little tax planning you get all of this withholding back. 

arebelspy

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Re: Early retirement and 403(b)
« Reply #29 on: December 13, 2012, 09:48:47 PM »
Gotcha on the how.  What are the advantages of that?

Essentially does that lower your tax rate to 0?
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
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Ed Mills

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Re: Early retirement and 403(b)
« Reply #30 on: December 14, 2012, 07:10:50 AM »
Pardon the stream-of-consciousness style here: 

457 advantages

1.  You set your tax rate.  Most teachers could plow their whole salary into their tax-deferred accounts.  If you have enough money 'stached in a previous job's 457 plan, you could load up all of your accounts at your new job.

2.  If you want to pay zero taxes, you have to first know how much "free money" the government allows you and your family.  Everyone should make this easy calculation and know it off the top of their head.  In our case, our "free money" for 2012 is $33,300:  $11,900 + $11,800 ($3,800 *3) + $10,000.  These numbers are:  Standard Deduction + 3 Personal Exemptions + Our Credits.  We have 3 personal exemptions and a $1,000 child tax credit.  At the 10% tax bracket the child tax credit is worth an extra $10,000 in income ($10K * 10% = $1,000 child tax credit).  If you don't know this calculation, do it today! 

As a general rule of thumb, we try to say in the 10% tax bracket.    So, in our case we can earn up to $50,700 and stay in the 10% bracket.  $50,700 = $33,300 + $17,400 (the max at 10% bracket for married filing jointly).  Read the big 'Stache's (yes, double apostrophe!) article on taxation in early retirement; the same idea works in the savings phase: 

3.  The biggest advantage to doing this is that it puts you in charge of your finances.  By investing first and foremost, we feel a real sense of financial control.  When you stop worrying about money, you feel 100 times more confident at your job because you don't have to work for the money.  I wish every new teacher would blow out their accounts (especially the 457) in their first few years of teaching.  I know it's not easy to save on a teacher's salary, but it would change the way they think forever. 

For the record, MMM is by far my favorite blog.  You guys are on to something here that is revolutionary.  Financial independence promotes true freedom, and it can be achieved through hardcore savings and frugal living.  As an old fart (49 next week), I wish I had stumbled upon these ideas in my youth, but better late than never.       
« Last Edit: December 14, 2012, 07:17:24 AM by Ed Mills »

rtrnow

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Re: Early retirement and 403(b)
« Reply #31 on: December 14, 2012, 07:22:56 AM »


As for the 403b account versus the IRA, I like them both, BUT I never invest in mutual funds via my 403b or 457 accounts.  I only use short-term fixed accounts that pay about 2%; yes, I realize that I'm losing purchasing power due to inflation.  However, I do not want to expose my savings to both market uncertainty and annuity fee certainty (thanks Mr. Annuity salesman!).  Most 403b and 457 plans have far too many fees for my taste.  That said, I still use the hell out of them...making lemonade from lemons!  Do your investing in your IRA accounts and do your savings in your 403b and 457 accounts.  At some point, you will have to quit your job to move YOUR money. 


I wonder if I'm missing something or just have better options than lots of you other public sector employees. My retirement plan (401h or a or something) is with Valic and my 457 is with TIAA-CREFF. The fees are not as low as say Vanguard but most are below .5%. The highest one is right at 1% for a REIT that's been paying pretty high dividends. Are these fees way higher than I think or did I just luck out with some decent choices? I'm also happy to say my Valic rep didn't really try to sell me anything when I was just starting out at 24. He instead encouraged me to go 100% stocks with a few choice funds. I've learned a lot since then, but his advice really helped me get a good start.

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Re: Early retirement and 403(b)
« Reply #32 on: December 14, 2012, 08:28:49 AM »
RTRNOW,
Tiaa-Cref is a very solid option.  Valic is not my favorite, but it seems to be the 403b provider of choice nationwide.  My problem is that investing in most 403b and 457 plans is way too expensive.  Costs are a major drag on performance, so I shoot for 20 basis points or below.  Annuity products almost always exceed 2% (200 basis points) when you invest them in mutual funds.  That's a non-starter for me.  While the underlying mutual fund might be a good choice, the various fees (insurance wrap for example) make them unusable.  For example, using a Vanguard LifeStrategy through Valic adds 1.25% / 125 basis points...see page 6 of this link (http://www.valic.com/Images/pd_contract_tcm82-14920.pdf) of fees to Vanguards .16% (16 basis points).  End result:  1.41% total expense ration for something you could get retail for .16%...nope, not doing it out of principle.  Seeing that I already know where I want to put my money, the extra 1.25% in fees is money down the toilet.  I do my "real" investing in my IRA.

I'll try not to go crazy here, but let me say this:  the vast majority of 403b and 457 plans are giant skimming operations designed to transfer the client's money into the firm's money over time.  You put up 100% of the money, you bear 100% of the market risk, but you don't net 100% of the return.  Why?  Easy, you have a silent partner who puts up 0% of the money, bears 0% of the market risk and makes off with 20-80% of the return over time.  If you decide you want to move your money, there are all types of limitations in the annuity contracts.  This why I am such a big fan of quitting when necessary to move my money.  Maybe I'm crazy, but shouldn't the investor get the majority of the return from his investment?  In today's marketplace, the financial intermediaries make off with the majority of the return via fees...the financial equivalent of death by a 1,000 cuts. 

Anyone who thinks I'm exaggerating, should read what John Bogle had to say about Wall St. here: 
http://www.pbs.org/wgbh/pages/frontline/retirement/interviews/bogle.html#2 

All that said, I'd be using both of those account to the max.  Of course, I'd do it my way.  I hope this helps.

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Re: Early retirement and 403(b)
« Reply #33 on: December 14, 2012, 08:42:28 AM »
A lot of the 403(b) and 457 plans, even those run by insurance companies, offer stand alone mutual funds as well as annuity wrapped funds.  I had one 457 plan with Prudential, and I invested in the mutual funds with no annuity wrap.  However, I was a public employee, not a teacher.  Are the teacher 403(b) and 457 plans generally annuity only plans?  The VALIC plan I mentioned in another thread for Fairfax County teachers offered a choice.

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Re: Early retirement and 403(b)
« Reply #34 on: December 14, 2012, 09:05:05 AM »
Magnum,
There are more and more districts offering a mutual fund platform, but many (probably most) districts still use the annuity platform.  Getting a change at the school district level is a big deal that requires lots of committee meetings, emotional energy, and ultimately the testicular fortitude to vote for a change.  Even when a district does decide to change the platform, they still usually pay more fees than they would with retail product at Vanguard or Schwab.  The two times I worked with benefits committees I was very disappointed with the result.  Generally, you end up with improvements that still suck in MHO.  For example, a mutual fund platform charging 1% a year in fees is much better than an annuity platform charging 2% a year.  However, I would never use a mutual fund charging 1% in my IRA, so I'm not happy about using it in my 403b or 457.  In the 403b-457 world, "better" does not mean good; it often means less bad.

« Last Edit: December 14, 2012, 09:14:36 AM by Ed Mills »

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Re: Early retirement and 403(b)
« Reply #35 on: December 14, 2012, 09:48:55 AM »
Less bad is still better than 2 percent and some of the "less bad" actively managed mutual funds perform well.  I did much better than that with my 457 investments by holding my nose and picking the best funds offered.  I just put different assets in the IRA's and taxable accounts to balance things out. 

I'm happy to see the insurance companies getting their collective noses bloodied on the captive annuity audience.  Teachers tend to be some of the least financially savvy and most security-seeking folks out there.  That makes them easy prey for the annuity salesman.

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Re: Early retirement and 403(b)
« Reply #36 on: December 14, 2012, 11:02:19 AM »
Thanks for the info. I guess less bad is a good way to put it. I agree that I would never invest my IRA in a fund with a 1% fee but that's about all I can do now. I assume after I leave my current job I will roll everything but the 457 into an IRA for better options. As far as I know, I have to leave the 457 money alone to be able to withdraw in ER.

In case you care or are curious, these are the funds I'M using with valic. (PESPX, DISSX, PEOPX, RGACX, DNERX, RERCX, DBMIX)

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Re: Early retirement and 403(b)
« Reply #37 on: December 14, 2012, 01:40:15 PM »
Yep, some of those are the usual suspects in these less than great 403(b) plans.  What I would do in your shoes is to look at the fund performance over the last 10 years/LOF and the hypothetical growth of $10,000 chart produced by Morningstar.  Also run them through Fund Alarm.  If any of them are, um, particularly odiferous, I would get rid of them and replace them with the stronger performers.  You can make up any missing pieces of your asset allocation outside the 403(b) plan.

The 457 plan makes a great bridge from retirement to age 59 1/2.  I left some money in the stable value fund at Prudential in the event I needed some income during that time.