How your 403(b) plan works
It’s all about helping you reach your retirement income goal
Relying solely on your CalSTRS retirement benefit is almost certainly going to leave you with an income shortfall in retirement. That could mean living on 40 – 60% less income.
Your workplace 403(b) retirement plan is designed to help you easily take control of your retirement savings path to fill this income gap at retirement.
There are four great reasons
to save for retirement in your plan and do it now.
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Take Advantage of Tax Savings
Your 403(b) plan allows you to choose between making Pre-Tax and Post-tax Contributions. Depending on your situation, either can provide significant tax savings.
Pre-Tax Contributions
- If you contribute on a Pre-Tax basis, these dollars are deducted from our current year income and invested.
- This reduces how much you will pay in federal income tax now.
- Earnings on the investments in your 403(b) account are not taxed each year.
- You won’t pay any income taxes on contributions or investment earnings until you begin withdrawing this money in retirement when you may be in a lower tax bracket.
Post-Tax (Roth) Contributions
- If you contribute on a Post-Tax (or Roth) basis, the money you will contribute is regular income subject to annual income tax.
- Investment earnings in your account will not be subject to annual income taxes.
- Withdrawals you make from your Roth account in retirement are not taxed.
In most cases, you may make both pre- and post-tax contributions if you feel is a better savings strategy for your situation. If you have questions about tax implications of saving in your 403(b) plan, we invite you to talk to one of our financial advisors and/or another tax professional.
Important: the money you contribute and your investment earnings are always 100% yours and you can access these funds anytime.
(Withdrawing funds prior to retirement age is subject to taxes or penalties.)
Payroll Deduction Makes It Easy
The amount you choose to contribute each pay period is automatically deducted from your payroll and invested for you. It’s automatic. There’s nothing to remember from week-to-week or month-to-month. The result is you will almost certainly save more than you would have on your own.
Create an Investment Strategy That Fits You
Your 403(b) plan’s fund lineup (typically mutual funds) offers a range of investments across asset classes and varying mixes of potential investment return vs. investment risk suitable for all types of investors. You are welcome to create your own investment strategy or get help from one of our financial advisors. Either way, it’s all about helping you get on a path to retirement savings success.
Earnings That Compound Over Time Really Add Up
The concept of compound earnings simply means that the investment earnings your contributions make each year also have the potential to earn more. In short, your earnings make you more money. The more years your investments have to compound, the more you’re likely to benefit.
Here’s an example of how big a deal this is:
Let’s say you start saving at age 25 and contribute $500 per month. At age 65, you will have contributed $240,000 to your retirement account. Now assume your investment earns 6% per year over these 40 years. Your hypothetical account balance would grow to over $928,000!
That’s over $680,000 of compounded earnings.
The Cost of Waiting Can Be Huge
It’s especially true when it comes to saving for the long-term. In our example, if you delay just five years and begin saving at age 30 instead of 25, you will contribute only $30,000 less over your working years. But your account balance (assuming the same 6% annual rate) would grow to be just over $668,000. That’s $260,000 less in your pocket at retirement – that’s a HUGE difference.
Start saving now and put the power of compounding to work for you!
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