# Should I max out contributions to my retirement plan?

1. Sep 5, 2010

### Staff: Mentor

Like many academics in the US, I participate in a 403(b) tax-deferred retirement plan with TIAA-CREF. The college where I work contributes an amount equal to a certain % of my salary, and I conribute my own money through payroll deductions (currently about 20% of my gross salary), which reduces my current taxable income (what the IRS calls elective deferrals). When I take money out of the plan after I retire, I'll have to pay taxes on it then. This is pretty much like the 401(k) plans that more people are familiar with.

5. Sep 6, 2010

### turbo

When I was in 401(k)s through employers, I NEVER got what I would consider competent investment advice. Advisors always seemed to knee-jerk recommended investments (probably because they were the products that returned the most commissions to them). When I decided to roll over all the various retirement funds into a self-directed IRA with Principal Funds, I got a dedicated financial advisor who spent a lot of time working with me to make certain that my investments matched my expectations for earnings and my acceptance of risk. You may have to pay a bit for honest financial advice. My experience is that if you are captive to the retirement plan of your employer, the "advisors" available to you will be assiduously separating you from as much of your earnings as possible. YMMV. Good luck.

6. Sep 6, 2010

### Staff: Mentor

I came into the money right when the financial crisis hit a couple of years ago, so I decided to park it in CDs until things settled down a bit. Then inertia took over. I was getting 2-4% at first, but now CD rates have gotten ridiculously low. Also I've started thinking more about retirement planning lately because my wife is taking early retirement next year. (We've kept our retirement finances pretty much separate; she teaches at the same place where I teach, so she also has a plan with TIAA-CREF, and she inherited some money several years ago so she also has extra resources.)

Part goes into a fixed annuity (TIAA) which now yields 3-3.5% (a couple of points higher in the past), part goes into a mutual fund (CREF Stock) which "seeks a favorable long-term rate of return through capital appreciation and investment income by investing primarily in a broadly diversified portfolio of common stocks." These are the classic TIAA-CREF investment vehicles, and I think a large majority of their clients' money is in these two. I've always allocated my contributions 50-50 between them. Until a few years ago, the stock fund had been gaining more over the long haul, until it got to about 60% of my account. Now it's about 50%. Between the stock market recovery and my continued contributions, I'm now back to where I was about two years ago, overall.

A TIAA-CREF rep comes around once or twice a year, but he/she deals with the various options within TIAA-CREF for investing (they now have more investment options than just the classic annuity and stock fund) and for converting / paying out the money at retirement. It's about time for his/her visit again, so I expect to hear from the payroll office about it soon.

7. Sep 6, 2010

### Borg

My wife has a TIAA-CREF account and we avoided the annuities like the plague. After that, there isn't much left to choose from.

8. Sep 6, 2010

### Astronuc

Staff Emeritus
Tax-Free Investing Basics
http://www.franklintempleton.com/retail/pages/generic_content/education/fund_basic/tax_free/what_are_tf.jsf [Broken]

Fund Overview - Franklin Federal Tax-Free Income Fund
http://www.franklintempleton.com/retail/jsp_app/products/fund_facts.jsp?fundNumber=116 [Broken]

T. Rowe Price Tax-Free Income Fund (PRTAX)
http://www3.troweprice.com/fb2/fbkweb/snapshot.do?ticker=PRTAX

I had some money in an insurance policy that was getting about 5%/yr return. Then it flattened with the economy. I parked the money in CDs getting at least 1.5% or so until I find a better place to put it. I'm also looking at options.

Last edited by a moderator: May 4, 2017
9. Sep 7, 2010

### Staff: Mentor

Right now, after 27 years in TIAA-CREF, splitting contributions 50/50 between the annuity and the stock fund, the two components are just about equal. Besides the recent huge stock plunge and recovery, stocks were basically flat or decreasing during about 2000-03, thanks to the dot-com bust and 9/11. It reminds me of the story of the tortoise and the hare.

I just did a little spreadsheet to study the net result of using some of my non-TIAA money to support an increase in my TIAA contributions. Suppose I add an extra $1000 to my TIAA account this year, to pick a nice round number. After 15 years at, say, 5% annual yield (compounded annually), it increases to$2079. Suppose I take it out at that point. Assume my marginal tax rate is the same then as it is now, which is 32% total federal+state. I pay that on the entire amount, leaving me with $1414. Returning to the present day, the$1000 comes out of my paycheck before taxes, so my current taxes go down by $320. Therefore I need to take only$680 from my non-TIAA investments in order to make up for the decrease in take-home pay. Suppose now that instead of adding the $1000 to my TIAA account, I continue to invest the$680 outside TIAA, and that I get the same annual yield of 5%. After 15 years, the $680 increases to$1414. Now I have to pay the 32% tax only on the gain of $734, which leaves me with$1179.

(This assumes I'm not still using CDs, for which I have to pay tax every time one matures and I receive the interest!)

So, assuming the yield is the same inside and outside TIAA, and my tax rate is the same now and when I take the money out, I come out ahead by putting the extra money in the (tax-deferred) TIAA account.

What happens if my tax rate goes up in the meantime, as I worried about in my original post? It turns out that keeping everything else the same, I have to raise my future total marginal tax rate from 32% to 50% in order to make the two scenarios come out even.

Or, what about if I can get a better annual yield outside of TIAA than inside? Keeping everything else the same (returning the tax rate to its original value), I have to raise the "outside" yield to 6.6% before the "outside" route comes out ahead. That is, I need an "outside" yield that is nearly 1/3 bigger than the "inside" yield, and I need to be able to maintain it for 15 years in this particular case.

10. Nov 3, 2010

### Staff: Mentor

I recently collected data from my quarterly TIAA-CREF reports and constructed a graph showing the performance of both components in my portfolio over the last 20 years. The vertical scale is in arbitrary units. I was interested to see that the two components behaved pretty similarly until 1995, when the stock portion started to diverge upward significantly.

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11. Nov 3, 2010

### Redbelly98

Staff Emeritus
At a minimum, how about increasing your 403b contribution until the extra amount invested equals the amount you recently inherited?

Beyond that, you should probably put as much into your 403b as you can afford. This would require you to figure out what your actual budget is, so you know how much take-home pay you need currently.

Have you finished paying off your home mortgage? If not, will it be paid off anytime soon? (Assuming you own your home.) Once you can stop making those payments, that amount of money could be added to your current 403b contribution rate.

12. Nov 3, 2010

### loseyourname

Staff Emeritus
I was under the impression that professors never retired.

13. Nov 3, 2010

### Moonbear

Staff Emeritus
LOL!

JT, you're in a different situation than I am, because you're closer to retirement, but I only invest as much in TIAA-CREF as my university matches, simply because that doubles what I can invest. Other than that, I invest "surplus" funds in a separate retirement account. The other account I have tends to perform better than the TIAA-CREF investments. I also believe in not putting all my eggs in one basket. It's my colleagues who are retirement age who had most of their investments in TIAA-CREF who are still working because after the stock market plunged, their investments dropped too low to retire on schedule.

I wouldn't invest to the point where it makes your current lifestyle uncomfortable for you, though. One of my colleagues tried that, maxing out what he could put into retirement funds, and after a few months, realized he couldn't afford to live on the remainder, so had to give up on that idea.

14. Nov 3, 2010

### Staff: Mentor

I was going to post a general update to this thread, but just had enough time this morning to post the graph that I attached to my preceding post. I thought it was interesting that the stock market (as reflected in the CREF stock fund) has now regressed twice in the past twenty years to the "slow but safe" pace of the TIAA annuities.

I've always split the contributions to my TIAA-CREF plan 50/50 between the two components. After I started to do this, I became aware that this was generally considered excessively conservative, but I never got around to adjusting the ratio to put more money to CREF (the stock fund). For a long time I considered this to be pure laziness but now I feel somewhat vindicated.

There's enough "extra" money to invest that I won't be able to use it all that way, because of the IRS limit on "elective deferrals" (the amount I can put into a 403b or 401k or IRA per year via pre-tax salary reduction).

For for the rest of this year, I've bumped up my 403b contributions so as to reach the normal annual maximum at the end of the year. In January, I'll adjust them so I contribute my actual maximum next year (and the following years). I still need to check with TIAA-CREF to make sure what my actual maximum is. There are two different kinds of extra "catch-up" contributions, and I need to make sure which one(s) I can make.

So I still have to re-invest a chunk of CDs elsewhere. I decided to go with some stock and bond mutual funds at T. Rowe Price. My father invested his extra money there for many years (since I was in high school), to supplement his fireman's pension. They seem to have a solid reputation, and expenses on the low side.

Last week I finished re-investing the first CD there, and left some money in a checking account. I'll write myself a check from that account each month to cover the extra 403b withholding and (for now) keep my net "take-home pay" the same as it was before. (I use another checking account for day-to-day expenses.)

Over the next six months or so, I'll re-invest most of the other CDs as they mature.

We paid it off a couple of years ago. We don't have any other long-term debt like car loans. We just have the monthly credit-card bills which we pay completely every month.

I go along with the "all the eggs in one basket" bit, so I'm glad I'm now able to go both ways and see which one does better. Also, since I turned out to be more conservative than most people, I ended up not being hit as hard by the recent downturn.

15. Jan 22, 2012

### Staff: Mentor

Time for an update. Last May I finished cashing bank CDs and investing them in mutual funds. I kept one CD amounting to about 1/6 of the original total amount. During the first half of the year, the funds made fairly steady gains. Then the stock market went into a swoon during the second half because of the debt-ceiling circus in Washington and the Euro-zone circus on the other side of the pond. Now I'm back to "even" again. See the first attached graph. The total doesn't include the dividends and capital gains distributions from the funds, which are going into a checking account.

I maxed out my 403b contributions last year, as planned. It turned out I didn't need to pull money out of the checking account that's linked to my mutual funds, to cover the extra withholding from my salary. My reduced take-home pay was still enough to cover expenses. My wife and I live pretty cheaply.

Here's an updated version of the graph in post #10 that compares the TIAA (annuity) and CREF (stock fund) portions of my 403b tax-deferred retirement plan. Similarly to the mutual funds, the CREF part increased significantly during the first half of last year, then fell back during the second half. Now it's on the way up again.

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16. Jan 22, 2012

### Redbelly98

Staff Emeritus
Hey, a couple of weeks ago my wife and I were watching Suze Orman. Her advice was to contribute to your 401k (or similar) plan only up to where your employer matches your contributions, and then to put the maximum you can into a Roth IRA. I don't know that it's quite as simple as she says but the idea is to benefit from both the employer match, and also the fact that you never pay taxes on the money earned in a Roth IRA, only on the initial money you put into the Roth.

It seems to me that you'd want to meet the company match, then put the maximum allowed into a Roth IRA, and then -- if you can -- put whatever additional you can into your company plan. But I'm not sure how contributing to an IRA affects how much can be put into a 401k-type plan. Until Suze Orman said you could contribute to both, I was unaware that you could contribute to both (in the same year).

I'll have to talk to my HR people and/or my accountant to straighten out how this all works.

17. Jan 22, 2012

### Staff: Mentor

I've been looking into Roth accounts myself.

You can contribute only a maximum of $6K per year of "new" money into a Roth, and only while you're still receiving earned income (i.e. a salary, not interest or dividends or Social Security etc.). I'm going to be working for only another five years, so I'd be able to contribute a maximum of$30K total during that time. By itself that wouldn't be enough to bother with, for me.

However, you can also "convert" any amount you like, from a non-Roth tax-deferred account (401k, 403b, IRA) to a Roth account, provided you pay income tax on the amount converted. Basically, it's paying the income tax now (when you convert to a Roth) versus paying it later (when you take money out of the non-Roth account during retirement).

It turns out that beginning next year, my wife and I will probably be in the 15% tax bracket for several years. We have enough money saved outside of our 403b plans, that we can postpone taking Social Security benefits, and withdrawing from the 403b plans, until we're 70, at which point we'll be in the 25% tax bracket.

So I'm tentatively planning to convert some of my 403b money to a Roth account starting next year, just enough so we stay in the 15% tax bracket. Then refrain from withdrawing from the Roth account until I've exhausted my other accounts.

Of course, if tax laws change in the meantime, I'll have to re-evaluate this strategy, but I figure you have to start out working with the laws as they are now.

18. Jan 23, 2012

### Pythagorean

I have a roth IRA, but I keep hearing that saving money is a thing of the past. In today's economy, you reinvest your money into an income earner instead.