401k and 403b Q & A

A good friend of mine had some questions for me about her 403b investment fund.  I thought that I would answer her questions on Money Crashers so that everyone could benefit from them.

For those of you who do not know the difference between a 401k and a 403b let me explain that before I go on.  There is really only one small difference.  A 401k is a retirement investment fund set up for employees that work for a for-profit company.  A 403b is a retirement investment fund that is set up for employees whom work for a non-profit organization. 

Questions:

1.   How much should I put into it?  I was told 15% is good for someone my age.  Do you agree and why?

If you are totally debt free — you have no credit card debt, student loans, or car payments then 15% is a great guide for funding your 403b.  However, if you do have debt, then I would focus on eliminating the debt, and funding your 403b at about 7 – 8% of your gross pay.  There will come a day when you will want to start saving up for a down payment on a house.  When you start doing this, I would reduce your retirement contributions at that point as well.  Once you’re in the house, bump it back up to 15%

2.   I am told I get to pick what I invest in.  What should I consider when I make a choice?  Should I be risky or conservative?

This is the most important part of your retirement account — picking your investments.  Your company’s plan gives you a list of mutual funds to pick from ranging from conservative to very aggressive funds.  Because you are so young, my advice is to be aggressive with your picks.  Over the past 80 years, the stock market has averaged a 12% return on your investment.  You have at least 35 years to ride out the waves of the stock market.  If you are conservative in your early years, it will kill your returns in the future.  Pick good GROWTH STOCK mutual funds with a good 10 year track record for returns.  If you want to throw one Balanced mutual fund in there, go ahead.  Stay away from mutual funds that invest heavily in bonds.  It’s a waste of your time at the age of 23.

 I have heard that sales people for 403b plans try to push variable annuities.  These are investments that are linked to life insurance and the returns are HORRIBLE.  The reason sales people push them is because they typically offer high commissions.  Stay away from these gimmicky investments. 

I hope that this helps Casey! 

Here’s something to encourage you to contribute like crazy to your retirement accounts if you are debt free. Starting amount:  $0 Average Annual Return: 10%  (this is being conservative) Number of years: 37 Amount Contributed per month: $500 Balance at the end of 37 years: $2,329,915

If you contribute just 500 bucks a month for 37 years, you can contribute at age 60 with $2,329,915 sitting in the bank!!!!  Now that’s a good deal if you ask me. 

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