Exciting news, my wife got a job at a university. And guess what? We already received a faculty discount on tacos during teacher and faculty appreciation week. The public sector may not pay as much, but it does offer some different benefits when it comes to retirement. Let’s take a look at what they are.
403(b) and 457(b)
A 403(b) functions very similarly to a 401(k). You can contribute up to $18,500 for 2018 of pre-tax dollars which will lower your taxes. Like a 401(k) some plans will allow you to borrow from your plan, but try to avoid doing so. And pre-tax dollars is the likely te way to go because you’ll probably have a lower income later or figure out a way how to convert them over time like I did last year.
A 457(b) is a deferred compensation plan. They vary by employer, so I will explain how the University of Texas’ plan works and I strongly encourage you to read your own. There is a limit of $18,000 to put into the plan in either pre- or post-tax contributions. These are able to be invested in a way of your choosing within the brokerage. When you leave UT you have the option to leave your funds in the plan or roll them into an IRA or other qualified plan. If you leave them a 10% tax penalty applies to distributions made before age 59 1/2 as well as normal income taxes. Reading around the web it seems like some plans you can’t roll into an IRA, some you don’t get penalized for early distributions, and all appear to forbid loans.
Pensions
My wife is required to participate in the Teacher Retirement System of Texas. This requires her to put in 7.7% of her pay and her employer contributes 6.8%. At the time of retirement she could receive 2.3% times her years of service. So if at the time she retires she had worked there for 30 years she would get 69% of the average of her last 5 years of salary. There are a ton of nuances about the age you can retire and more that I won’t go into, so read your own plan. Also, if you don’t plan on keeping your money parked there until retirement, when you leave the UT plan allows you to be returned your inputs if you’ve been there 5 or more years.
Social Security
Depending on your system you may not have to pay into Social Security. This could be good as you will only receive a portion of the money you pay into the system. However, Social Security is a forced savings plan, so it doesn’t require discipline. Please look at your paycheck to make sure you are paying into the system because it would be terrible to be counting on the money only to learn that you will be getting none. If you are interested on the ROI of Social Security, Go Curry Cracker has done a nice analysis.
Conclusion
Always be prepared as time is your friend while you are young. Save as much as you can for retirement and your older self will certainly thank you. If you can, try to max out your pre-tax contributions, although if you are in the 12% tax bracket you may want to go with post-tax contributions. Every plan is different, so make sure to read up on them and then choose a low-cost option so you are not giving up returns in fees.