Retirement Advice for a Novice 457 vs 403b

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Topic Author
PatientDH
Posts: 5
Joined: Sat Jan 05, 2019 2:48 pm

Retirement Advice for a Novice 457 vs 403b

Post by PatientDH »

Greetings,

First time poster, this forum has truly been a blessing. I found this site about 3 years ago while on paternity leave with my first child. Please help me with any advice or wisdom on how to best invest in my retirement.

Background:
- 37, married, and have worked in education the past 15 years.
- I make a mandatory contribution to MTRS (pension) at ~11%.
- Emergency Fund: 3 months
- Debt: mortgage $520K @2.875%, her student loans ~$70K @5.5%
- His Roth IRA: ~$11,000 in FSKAX
- Tax filing: MFJ 24% fed and 5% state (MA) with 2 children (0, 2)
- I plan to work at least 25 more years
- Preferred asset allocation would be 70-20-10, US-Int-Bond right now.
- Had a horrible annuity plan with Axa, but have moved districts and now have better options.
- Will direct transfer ~$40K from Axa into new account
- No company match for either 403b or 457
- 457 offers a Roth option, not sure with 403b

Questions:
If I’m only able to make a max contribution of $15K/year for my tax-deferred accounts right now, should I invest in a governmental 457 or a 403b? Or should I do a combination of both?
What are the benefits of going with one over the other in my circumstance?
Any other advice you’d give me?

Option 1 portfolio - Massachusetts Deferred Compensation 457 SMART Plan
1. Large Company Stock Index Fund (State Street S&P 500 Index) - Mirrors S&P 500 index - ER: 0.01%
2. International Stock Index Fund (State Street Global All Cap Index) - Mirrors unmanaged Morgan Stanley Capital International (MSCI) Europe, Australia, Far-East (EAFE) Index - ER: 0.05%
3. Bond Index Fund (State Street US Bond Index) - Seeks to match the total rate of return of the Barclays Capital Aggregate Bond Index - ER: 0.02%

Additional fees: annual management fee of 0.0075%, $10 annual fee on accounts over $1,000, and a records & communication fee of 0.07%

Option 2 portfolio - Vanguard 403b
1. Vanguard Total Stock Market Index Fund Admiral (VTSAX) ER: 0.04%
2. Vanguard Total International Stock Index Admiral (VTIAX) ER: 0.11%
3. Vanguard Total Bond Market Index Fund Admiral (VBTLX) ER: 0.05%

Additional fees: $60 admin fee/year

Option 3 - combination of both?

Let me know if I need to provide other information to help. Thank you!
Last edited by PatientDH on Sun May 16, 2021 2:19 pm, edited 4 times in total.
02nz
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Joined: Wed Feb 21, 2018 2:17 pm

Re: Retirement Advice for a Novice 457 vs 403b

Post by 02nz »

Welcome to the forum.

I think the very first thing I'd recommend is to max the Roth IRA for yourself and spouse. Keep in mind that you can fund the Roth IRA for your spouse even if that person does not earn an income, as long as you have enough earned income to cover the contributions ($12K). Hurry, you have until tomorrow to fund for 2020!

Does either the 403b or 457b offer a Roth option? If so I'd probably go with that. Many educators are better off making Roth (not tax-deferred) contributions, because they generally get a pension that replaces a substantial portion of their income in retirement. That means deferring taxes now may not be a good idea. We can answer this more precisely if you use this format: viewtopic.php?t=6212

Both plans do have good, low-cost options. The 457b is more flexible, as soon as you leave that employer you can withdraw without penalty, unlike the 403b which has an age requirement. The 403b plan as the advantage of somewhat broader index funds (total stock market instead of S&P 500, total international instead of MSCI EAFE), but it's not a huge difference and you can make that up elsewhere in your portfolio.
calwatch
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Re: Retirement Advice for a Novice 457 vs 403b

Post by calwatch »

I like 457 only because it doesn't have a 10% penalty if you take the funds out before 59 1/2 (or before 55 if you sever employment from the entity that you contribute to the 403b). It looks like your all in fee is 0.0775%, or $7.75 per $10,000 (plus the $10 annual fee). The Vanguard 403b has slightly higher expense ratios, lower 403b administration fees for larger amounts, but both are extremely low fee options and the cost is essentially the same.

Therefore I would go with the 457 for added flexibility should early severance from employment arise.
L82GAME
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Re: Retirement Advice for a Novice 457 vs 403b

Post by L82GAME »

Hi PatientDH,

Is there an employer match offered for either plan?

Setting aside the question of employer match for a moment, and assuming that you have little to no debt and an emergency fund set aside, based on the fees and fund offerings alone:
  • Once you separate from your employer, you can withdraw from the 457 plan penalty free prior to age 59.5 and pay only income taxes.
  • *If you are within three years of normal retirement age, then you may contribute even more than annual limits to a 457.
  • The individual funds are less expensive overall in the 457, but not as well diversified (i.e., Total Stock vs. S&P 500, but many here would argue that is a quibble)
  • Total fees of the 457 will be lower in gross dollars as compared to the 403b's funds and fixed annual fee while the portfolio holdings are < ~$123k. The fixed management fee structure of the 403b will be more advantageous on an annual basis as the portfolio grows in value.
Assuming that there is no employer match provided for one plan versus another, they both offer low cost options and the three fund approach you propose is sound. Therefore, if you don't mind giving up the total stock market index under the 403b, I'd propose you consider the 457 as it gives you more flexibility should you change employers in the next ~22 years, and the difference in overall fees between the two plans is relatively small in magnitude.

I don't think there's value in contributing to both simultaneously and would present unneeded complexity.

*Subsequent edit to add this point.
"Simplify, simplify, simplify! I say, let your affairs be as two or three, and not a hundred or a thousand…” - Thoreau
Topic Author
PatientDH
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Joined: Sat Jan 05, 2019 2:48 pm

Re: Retirement Advice for a Novice 457 vs 403b

Post by PatientDH »

Wow, thank you for such quick responses!

Company Match - I don't receive a company match for either plans. It seems like the differences are negligible, but the 457 does provide more flexibility if I were to leave my employer.

Roth option - The 457 does offer a Roth option. I will need to get back to my HR to see if there's a Roth for the Vanguard 403b. If there is a Roth option, should I go with that over traditional?

I'll also add that both my wife and I are in education. We've been fortunate enough to move into positions that pay us well considering (>$220K). Knowing that, would you still recommend Roth contributions first?

Thank you again!
L82GAME
Posts: 616
Joined: Sat Dec 07, 2019 8:29 am

Re: Retirement Advice for a Novice 457 vs 403b

Post by L82GAME »

PatientDH wrote: Sun May 16, 2021 1:56 pm We've been fortunate enough to move into positions that pay us well considering (>$220K). Knowing that, would you still recommend Roth contributions first?
See 02nz’s comments above regarding posting portfolio questions. I’d like to see more info. before answering your question. Nonetheless, generally imho a bird in the hand of deferred taxes beats 457 Roth contributions at your income level that you wouldn’t be able to access in a tax-advantaged way prior to 59.5 YOA until separating from service and then rolling into a Roth IRA (unless your plan allows for in-service transfers from the 457 Roth).

EDITED for clarity regarding tax treatment of 457 Roth.
Last edited by L82GAME on Mon May 17, 2021 5:26 am, edited 1 time in total.
"Simplify, simplify, simplify! I say, let your affairs be as two or three, and not a hundred or a thousand…” - Thoreau
Topic Author
PatientDH
Posts: 5
Joined: Sat Jan 05, 2019 2:48 pm

Re: Retirement Advice for a Novice 457 vs 403b

Post by PatientDH »

I've updated information in the original post. Thank you again for you advice and wisdom so far.
Sahara
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Re: Retirement Advice for a Novice 457 vs 403b

Post by Sahara »

I might recommend doing a back of the envelope projection of your retirement income streams. To do that you'll need an estimate of your pension(s) and social security. From that projection, you'll be able to compare your current tax rate to your retirement tax rate and make an informed decision regarding Roth vs Traditional.
L82GAME
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Re: Retirement Advice for a Novice 457 vs 403b

Post by L82GAME »

Hi PatientDH,
  • What type of student loan (i.e., private vs. FFELP vs. DL?) does your wife have, and what are your monthly payments?
  • Does the $15k per year you plan to contribute to tax deferred plans equal your total planned savings each year vs. cash vs. Roth?
"Simplify, simplify, simplify! I say, let your affairs be as two or three, and not a hundred or a thousand…” - Thoreau
anonenigma
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Re: Retirement Advice for a Novice 457 vs 403b

Post by anonenigma »

I recommend doing both. You can't access the 403(b) before age 59.5, but you can't access the 457(b) before you leave the employer. If you were fully into the 403(b) and needed money before age 59.5, you'd face a penalty. If you were fully into the 457(b) and needed money at 62 but had not left the employer, you wouldn't be able to access it without paying a penalty. One can't know the future.

You're lucky to have low-cost options for each.

After I retired, I merged my 457(b) into my 403(b), which had no plan charge and offered the TIAA Traditional with a slightly higher return (25 bp). Combined, I gained 47 bp.
lakpr
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Re: Retirement Advice for a Novice 457 vs 403b

Post by lakpr »

OP,

Please read my response in this thread for a very similar question as yours

viewtopic.php?p=6007405#p6007405
Topic Author
PatientDH
Posts: 5
Joined: Sat Jan 05, 2019 2:48 pm

Re: Retirement Advice for a Novice 457 vs 403b

Post by PatientDH »

L82GAME wrote: Sun May 16, 2021 4:38 pm Hi PatientDH,
  • What type of student loan (i.e., private vs. FFELP vs. DL?) does your wife have, and what are your monthly payments?
  • Does the $15k per year you plan to contribute to tax deferred plans equal your total planned savings each year vs. cash vs. Roth?
The student loan is private, with a monthly payment of $1,500.

My total savings:
Mandatory Pension contribution: ~$10,500
Roth IRA: $3,000
Tax deferred account: $15,000
I don't have a set amount going towards cash since we already have a 3 mo. emergency fund.
Topic Author
PatientDH
Posts: 5
Joined: Sat Jan 05, 2019 2:48 pm

Re: Retirement Advice for a Novice 457 vs 403b

Post by PatientDH »

lakpr wrote: Mon May 17, 2021 1:31 am OP,

Please read my response in this thread for a very similar question as yours

viewtopic.php?p=6007405#p6007405
Thank you, this is very helpful.
L82GAME
Posts: 616
Joined: Sat Dec 07, 2019 8:29 am

Re: Retirement Advice for a Novice 457 vs 403b

Post by L82GAME »

PatientDH wrote: Mon May 17, 2021 8:20 am The student loan is private, with a monthly payment of $1,500.
At the loan int. rate of 5.5%, and given that:
  • You have an EF;
  • The loan is private and not likely to be included in a federal student loan forgiveness program;
  • The above the line tax deduction is capped at $2500/yr.;
I suggest that you divert your planned tax deferred savings of $15k per year toward aggressively paying down your wife’s loan in addition to the current monthly payments, and close that debt in just over two years, earning an immediate return of 5.5%. Then come back to your dilemma outlined in your OP. At that point, you’d be able to sock away ~15% of gross income in addition to your pension contributions.
"Simplify, simplify, simplify! I say, let your affairs be as two or three, and not a hundred or a thousand…” - Thoreau
lakpr
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Joined: Fri Mar 18, 2011 9:59 am

Re: Retirement Advice for a Novice 457 vs 403b

Post by lakpr »

L82GAME wrote: Mon May 17, 2021 11:02 am
PatientDH wrote: Mon May 17, 2021 8:20 am The student loan is private, with a monthly payment of $1,500.
At the loan int. rate of 5.5%, and given that:
  • You have an EF;
  • The loan is private and not likely to be included in a federal student loan forgiveness program;
  • The above the line tax deduction is capped at $2500/yr.;
I suggest that you divert your planned tax deferred savings of $15k per year toward aggressively paying down your wife’s loan in addition to the current monthly payments, and close that debt in just over two years, earning an immediate return of 5.5%. Then come back to your dilemma outlined in your OP. At that point, you’d be able to sock away ~15% of gross income in addition to your pension contributions.
+1 to this. Think of paying down the student loan as earning *after-tax* return of 5.5%, which at 29% Fed + state combined marginal tax bracket, is really the equivalent of investing in a 7.75% rate CD.

That is, man, stock-market like returns without the stock market risk. If a bank comes to you and says here is a sweet offer, we will pay you 7.75% rate, but the max you can invest is only $70k, would you or would you not invest?
chikbog
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Re: Retirement Advice for a Novice 457 vs 403b

Post by chikbog »

lakpr wrote: Mon May 17, 2021 11:13 am
L82GAME wrote: Mon May 17, 2021 11:02 am
PatientDH wrote: Mon May 17, 2021 8:20 am The student loan is private, with a monthly payment of $1,500.
At the loan int. rate of 5.5%, and given that:
  • You have an EF;
  • The loan is private and not likely to be included in a federal student loan forgiveness program;
  • The above the line tax deduction is capped at $2500/yr.;
I suggest that you divert your planned tax deferred savings of $15k per year toward aggressively paying down your wife’s loan in addition to the current monthly payments, and close that debt in just over two years, earning an immediate return of 5.5%. Then come back to your dilemma outlined in your OP. At that point, you’d be able to sock away ~15% of gross income in addition to your pension contributions.
+1 to this. Think of paying down the student loan as earning *after-tax* return of 5.5%, which at 29% Fed + state combined marginal tax bracket, is really the equivalent of investing in a 7.75% rate CD.

That is, man, stock-market like returns without the stock market risk. If a bank comes to you and says here is a sweet offer, we will pay you 7.75% rate, but the max you can invest is only $70k, would you or would you not invest?
Wouldn’t the benefits of contributing to a tax deferred plan offset the 5.5% interest rate? They’d be reducing their income taxes by about 25% by doing so
02nz
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Re: Retirement Advice for a Novice 457 vs 403b

Post by 02nz »

chikbog wrote: Mon May 17, 2021 6:20 pm
lakpr wrote: Mon May 17, 2021 11:13 am
L82GAME wrote: Mon May 17, 2021 11:02 am
PatientDH wrote: Mon May 17, 2021 8:20 am The student loan is private, with a monthly payment of $1,500.
At the loan int. rate of 5.5%, and given that:
  • You have an EF;
  • The loan is private and not likely to be included in a federal student loan forgiveness program;
  • The above the line tax deduction is capped at $2500/yr.;
I suggest that you divert your planned tax deferred savings of $15k per year toward aggressively paying down your wife’s loan in addition to the current monthly payments, and close that debt in just over two years, earning an immediate return of 5.5%. Then come back to your dilemma outlined in your OP. At that point, you’d be able to sock away ~15% of gross income in addition to your pension contributions.
+1 to this. Think of paying down the student loan as earning *after-tax* return of 5.5%, which at 29% Fed + state combined marginal tax bracket, is really the equivalent of investing in a 7.75% rate CD.

That is, man, stock-market like returns without the stock market risk. If a bank comes to you and says here is a sweet offer, we will pay you 7.75% rate, but the max you can invest is only $70k, would you or would you not invest?
Wouldn’t the benefits of contributing to a tax deferred plan offset the 5.5% interest rate? They’d be reducing their income taxes by about 25% by doing so
Deferring taxes is only beneficial if one is able to later withdraw that money at a lower tax rate. That is the case for most people but may not be the case for educators with significant pension income.
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