You did it! You made it to the beginning of what will certainly be the most unique start to school in your career. As you sort through the conundrum of whether hand soap can sting if used too frequently or whether your mute is turned on during a Zoom call, should you also consider your own retirement? I think so.
Now hold on a second, doesn’t the Teacher Retirement System (TRS) take care of that for you? Well, yes and no. Yes, the TRS is a pension fund that takes 7.7 percent of your paycheck and invests it on your behalf providing you a defined benefit once you retire. “On your behalf” is the key here – you don’t get to control how your funds are invested, and this can have major consequences for your bottom line.
So what can you expect from your TRS funds then? The average TRS benefit replaces about 69% of a member's pre-retirement income according to the TRS. This is not too bad, but for those who would like to have an additional retirement source, a 403b plan may be a fit. There are other retirement accounts available, but let’s focus on the 403b for this article.
What is a 403b plan?
It is like a 401k, but is generally used by nonprofit organizations. Pre-tax monies are taken out of your paycheck and placed in your fund for your benefit. This time, unlike the TRS pension fund, you are in charge of how to invest the money! As we have discussed previously, this is a good thing, giving you the choice to choose lower-cost investments.
This 403b retirement plan can be a source of income over and above the TRS monies for those who are able to contribute. It is certainly not easy to contribute to a 403b account without a budget and a clear goal, but if you can, you should.
How do I choose which fund to invest in?
There are 60 different providers of investments in the TRS approved vendors list. These 60 choices are shark infested waters. Let me throw you a life preserver. I recommend you choose Vanguard as your provider. Vanguard is not a profit-seeking enterprise and operators for the benefit of its customers. This means it is likely that Vanguard will continue to offer the best products at the best prices going forward. Once within Vanguard, I recommend using their index fund products and avoiding annuities. Thanks to the existence of motivated salesmen, 403b plans are filled with high priced annuities. Annuities are an expensive and unhelpful way for you to build wealth. Avoid them.
The first thing to look for when shopping for a mutual fund is the expense ratio. This is your way of seeing how much the fund provider will charge you each year for investing your money. The lower the better.
For example:
1.00% expense ratio on a $ 1,000 investment is a charge of $10 a year.
.05% expense ratio on a $ 1,000 investment is a charge of $.50 a year.
What product should I buy?
If available, I recommend a Target Date Fund. These funds are designed to invest on your behalf with a particular date in mind.
For example, a 30-year-old teacher may choose to invest in the Vanguard Target Date 2055 Retirement Fund as they would be 65 years old at the target date. The monies invested start out aggressive, and then become more and more conservative as the target date approaches. This is truly a set it and forget it strategy that will serve you for decades to come.
This will be no surprise to you, but education is one of the keys to financial success. Reading a book titled The Simple Path to Wealth by JL Collins would be a worthy investment of time and money as you seek to equip yourself to make excellent choices in the future. Good luck!
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Robert Hunt is an experienced personal financial advisor. Driven by the need to tell every client the truth about their money, he takes pride in providing the best services possible. As a Registered Investment Advisor his goals include empowering clients to understand how to invest on their own and achieving financial peace for themselves and their family.
When not teaching others how to invest, he can be found with his wife and children watching Disney movies only a two year old could love.