Most CSU employees enroll in a Defined Contribution Plan (DCP) rather than in Social Security. If you’d like to learn more about a DCP, please see our previous blog called Retirement Planning for CSU Employees. Just like people who are enrolled in Social Security, DCP enrollees will probably not be able to afford the retirement they hope for unless they have a supplemental savings program. The most common way to supplement DCP savings is with a 403(b) plan.
In general terms, a 403(b) plan is a tax-advantaged retirement savings plan available for public education organizations (and others) and is similar to a 401(k) plan. Salary deferrals into a 403(b) plan are made before income tax is paid and are allowed to grow tax-deferred until the money is taxed as income when withdrawn from the plan. 403(b) plans can invest in either an insurance company’s annuity contract or in a custodial account made up of mutual funds. (By the way, we do not advise having an annuity plan within a in a plan which is itself tax-deferred.) 403(b) plans may include Roth contributions which are after-tax contributions that permit tax-free withdrawals if certain requirements are met.
Some 403(b) details for CSU follow. You may contribute 100% of your pay up to the IRS limits. If you are under age 50, federal tax law generally limits your contribution limit for deferrals to $18,000 for 2016. If you will be at least age 50 during the year, your plan allows you to contribute an additional $6,000 in “catch-up” contributions. CSU retirement vendors include Fidelity, TIAA-CREF and VALIC. Both traditional (pre-tax savings) and Roth (post-tax savings) accounts are available. CSU will not provide any “matching” to this retirement account.
Let’s take a closer look at the importance of having both a DCP and a 403(b) plan. CSU currently contributes about 11% and you contribute about 8% of salary to your DCP. Let’s assume you are 40 years old, will work to age 65, are an Assistant Professor earning $88,000 per year and that the DCP investments grow at 4.75% annually. Neglecting future increases, you’ll have about $807,000 at your retirement from DCP. That’s about 12 years of after-tax salary. Since there’s a good chance that you and your spouse will live past age 77, additional savings would probably be advisable. A 403(B) plan is the way most faculty members save these additional funds. If you save the maximum contribution of $18,000 from ages 40-49 and $24,000 (taking advantage of the so-called catch-up contributions) from ages 50-65, you will have an additional $1,000,000 at retirement. Now $1.8M is a nice nest egg. We can help you see if that will support you and your spouse during retirement or whether you’ll want to add a personal portfolio to create an even larger retirement fund.
As you can see, there are a number of important decisions to make and they’ll have the biggest impact on your retirement the sooner you’re able to start. Guidepost Financial Planning has experience advising CSU employees on their retirement plans and other financial matters and we’re located right here in Fort Collins. Please visit our website or give us a call at 970.419.8212 so that we can discuss your financial goals in a no-charge, no-obligation initial meeting.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.