Help understanding 403(b) and 457(b) plans

[patchrex]

I'm a teacher with Chicago Public Schools and I am exploring options for additional retirement savings plans. I currently pay into the Chicago Teachers Pension Fund and have recently opened a Roth IRA account, which I plan to max out.

I was wondering if it would be a good idea to open another tax-advantaged retirement account.

I won't be eligible to get my full pension until I am 67 years old. I'm currently 34. I can't imagine doing another 32 years as a teacher. I love my job and all that, but it is exhausting and I think it might be slowly killing me.

My plan is to stay until I've reached 20 years of service (which is 15 years away), at which point I will leave teaching but will not start drawing my pension until I reach 67, so that I still get the full pension amount. I could technically leave at 10, but my average salary will be a lot higher if I wait until I hit the 20 year mark.

I plan to take part time work and partly live off savings until I am 67. I have been putting money in my Roth IRA, which I will be able to withdraw when I reach 59 1/2 years old.

Chicago Public Schools also offers 403(b) and 457(b) plans (they have Roth and pre-tax versions). However, I have read some very bad things about 403(b) plans. So I tried finding information on the fees AIG is charging for CPS teachers (tbh it's a bit sus to me that it's not anywhere I can find on their website). From Googling, I found a pdf of their disclosures for some completely different employer (which I'm having a hard time understanding), and this post on a blog called 403bWise. I don't really know what to make of those numbers. I have no idea what a normal or "good" fee rate would be. The blog post gives it an "A" rating but I'm not sure if that makes it a good idea for me.

Is it worth having a second tax-advantaged account at all? Would I be better off just investing the money through a normal brokerage account and/or putting it into a high yield savings account?

I really appreciate any advice! Thanks!

Edit: Thank you all so much for your replies! I feel like I have a better understanding of how this all works now.

 

[lisab123]

@patchrex General consensus is to contribute to the 403b up to the employer match (if applicable), then max the IRA, then go back and contribute remaining to the 403b. If your 403b has low-fee investment options, you can go just stick with the 403b. I have some pretty low options in my 401k so I just contribute to that. A good fee is less than 0.20%, from there to 0.50% I consider "meh", and anything higher is a pretty high fee. Consider investing to retirement a total percentage, in the order mentioned above, and then anything over that percentage goes into brokerage.

You mentioned living off your savings after another 15 years, which leaves you at the age of 49, a 10-year gap between your *partial retirement* and when you can withdrawal from retirement accounts. I would put 15% into retirement and then put extra into a brokerage instead of landing more into the IRA. That statement alone requires you to have liquidity, and IRA's do not provide in the interim.

My wife's 403b intentionally hides fee's and makes them very difficult to find, requiring us to manually dive into each fund, click a few more links, and then download the PDF and check the fee. You may have to do that yourself, and we were left with maybe three funds that were decent but requires a three-fund portfolio; no one-stop-shop. Fidelity and others are pretty transparent.

More material:

https://www.reddit.com/r/personalfinance/wiki/index#wiki_retirement_accounts

https://www.reddit.com/r/personalfinance/wiki/index#wiki_investing

 

[patchrex]

@lisab123

You mentioned living off your savings after another 15 years, which leaves you at the age of 49, a 10-year gap between your *partial retirement* and when you can withdrawal from retirement accounts. I would put 15% into retirement and then put extra into a brokerage instead of landing more into the IRA. That statement alone requires you to have liquidity, and IRA's do not provide in the interim.

Thanks. I have been stashing everything I can save beyond what I can put in the Roth into a HYSA. I didn't know my district had any options other than the pension until recently.

Edit: I'm not positive there is any employer match with these plans, since they already contribute to the pension fund. Is it still worth doing if there's no employer match?

 

[lisab123]

@patchrex They may not, so in that case you would contribute to the IRA's up to their max and then contribute to the 403b if you have not met 15% of your gross income. Anything over that 15% would go into a brokerage invested for "partial" retirement purposes.

 

[patchrex]

@lisab123 Cool, thanks. That completely answers my question! I had initially been planning to put everything I can't put into the Roth into a brokerage, but then I found out I can do the 403(b) and save more on taxes. And then I was unsure how much to contribute to a 403(b) vs investing. But this clears it up for me. Thanks again!

 

[patchrex]

@lisab123 Sorry, one more question. Why 15%? Is that just a general rule of thumb, or is there some limit (other than the $22,500 max contribution)? My expenses are pretty low so I'm able to save a pretty good chunk of my income. I'm also married and my husband will also be getting a pension. We're currently saving for a house but both our parents want to help, so we should have a significant down payment and be able to pay it off quickly.

Is there any reason I shouldn't put more than 15% in? If the plan comes with a target-date investment plan, is that good enough for investing, or is it definitely better to have a separate investment account?

 

[lisab123]

@patchrex Just general rule of thumb. The goal is to be setup for retirement but not over contribute. You can be retirement rich but life poor.

 

[patchrex]

@lisab123 Makes sense!

 

[lisab123]

@patchrex With your pensions you might be able to make the argument for 10% in the 403b. I would check with a fee-only advisor in your area to help build a plan too if you want more detailed help. Preferably one that charges and hourly fee.

 

[into_the_wilderness]

@patchrex

Edit: I'm not positive there is any employer match with these plans, since they already contribute to the pension fund. Is it still worth doing if there's no employer match?

There's no match because you get a pension contribution.

But yes, it's still worth contributing. IRA first, then the workplace plan.

 

[patchrex]

@into_the_wilderness Great, sounds like a good plan then. Thanks!

 

[diegonat]

@patchrex You should reach out to your district and/or union rep to try and get information specific to your district's fees. For your scenario you might be better off with a 457(b) given that you could potentially withdrawal from that account penalty free if you "separate from service" i.e. stop teaching. I'm not an expert though and I've seen conflicting info on that possibly changing either for all 457s or maybe just Roth 457s. In the worst case you can start drawing from that account penalty free at 59½.

 

[patchrex]

@diegonat Thank you! I will figure out who to talk to. I'm sure the union has someone who knows about this stuff. The district probably does too, but getting ahold of district people is such a pain in the butt.

 

[diegonat]

@patchrex See you got some other helpful replies here as well, which is good! FWIW, I pay $12.75 /quarter for my 457(b) and then have a collection of indexed mutual funds with ~0.15% total expense ratio including some more costly items like Ex-US Small Value, etc.

 

[patchrex]

@diegonat Okay that actually does sound reasonable.

Do you get an employer match? The "Prime Directive" thing people have linked mentions contributing up to what your employer will match for retirement. I was under the impression there wasn't employer match for the 403(b) and 457(b) accounts. I was thinking to just use it for additional retirement savings after I max out my Roth.

 

[diegonat]

@patchrex My employer doesn't match 457/403s. Everyone I work with is either in the state pension plan or in a self-directed 401a where there's an employer match of sorts. (I'm in the 401a due to being young and un-savvy when I was forced to choose over a decade ago. I'm doing fine but I have ragrets.) It is nice that we also have access to Roth & Traditional 403/457 plans. Personally the bulk of my retirement goes to the 401a (no choice on that any longer), then I max my Roth IRA, then Roth 457b.

 

[patchrex]

@diegonat

I'm doing fine but I have ragrets.

Extremely relatable statement.

 

[diegonat]

@patchrex Final thought, you might reach out to your union and talk to the person who deals with this stuff to find out both a plan for yourself as well as how they got to be the union person who deals with this stuff. Odds are they're closer to retirement than you are and you might like doing that job more than teaching. Good luck either way, you sound like one of the good ones.

 

[patchrex]

@diegonat Ha. I have considered getting a job with the union instead. From what I've heard talking to the union folks, it's whole other type of stressful. It kind of feels like a grass is always greener kind of situation, tbh. I know what to expect with teaching and I know how to do it. My job is secure. It doesn't pay as well as I'd like but it's not totally miserable either. Between teaching and my husband starting as an electrician in a couple months, we should be pretty well set to for at least partial retirement in our 50s, as long as we're careful with our financial planning now.

 

[tch127]

@patchrex If you plan to retire early, 457(b) may be the way to go after you’ve maxed out Roth and 403(b) doesn’t have a match. Perks of 457(b) is that you can start withdrawing right after you are no longer employed with the SD and you can max contribute up to same limits as 401l and 403b.

My husband work for a state and he gets a pension that will pay out fully once he’s 66 (max he will get is roughly 65% of his high five year salary. He also has a 457(b) and through their union, they match a whopping $250 annually .
Our goal is to max out Roth IRA for him starting 2023 and then slowly work on increasing his 457(b) when they get their annual increase.