Are You Leaving Money on the Table? Supplemental Plans Can Make or Break Your Retirement Goals
- When and how to maximize the available 403b or 457b plans
- How the catch-up provision can positively impact your retirement plans
- Hypothetical University Retirement Savings Plan Projections
Will you have enough money saved to retire comfortably? For many in academia, the answer is unknown. University retirement accounts—through TIAA, Fidelity, or others—can be complicated. Many faculty sign up for some mysterious plan through the university on day one of their tenure never to look at it again, and retirement is treated as a far-off event rather than a targeted action plan to reach goals. There is often money left on the table that could have been managed to reduce taxes, lower costs, and save more to live the retirement life you desire.
Most universities offer a retirement plan that requires participation for certain employees, a trend shifting overwhelmingly from defined-benefit to defined-contribution plans. These are similar to a 401k where both the employer and employee contribute to an account at a defined level—usually a percentage of salary, up to certain limits. Although these plans can be wonderful savings tools, for many professionals this will not be enough to produce the desired level of income in retirement. To counter this, many employers now sponsor “voluntary” or “supplemental” retirement plans.
Supplemental Retirement Plans for University Faculty
Supplemental retirement plans are tax-advantaged savings plans that allow university employees to save for retirement above and beyond any mandatory contributions. Choosing to enroll can be the difference between retiring on your own timeline or being forced to work beyond your desired retirement age.
Some employers offer multiple supplemental retirement plans, such as a 403b or a 457b. To illustrate the benefits of investing in supplemental plans, the tables below depict a hypothetical client, Professor Joe, and the various savings possibilities through his university. The red table depicts Professor Joe’s projected retirement account balance if he never contributes a dime to his plan and only accepts the employer’s mandatory match. With only the mandatory plan, Professor Joe will have $670,193 to live on in retirement, assuming he retires at 65. Note the assumptions made in the table’s legend, including a 2% annual cost of living adjustment (COLA).
Table 1: Hypothetical Retirement Savings Plan Projections
Depending on the structure of the university-specific retirement plan, maximum contributions to a 403b may be up to $26,000/year: $19,500 plus an age-50 catch-up contribution of $6,500. When we apply this option to Professor Joe’s retirement account summary in the gold table, he saves a total of $2,278,051 to live on in retirement.
If offered, a 457b plan also allows for the same $26,000/year maximum contribution (assuming the same catch-up provision). That limit is separate from the contribution limit for a 403b plan. Applying this option to Professor Joe’s retirement account summary in the blue table, he saves over $3 million to live on in retirement! Though these charts are hypothetical, they do represent common options and plans available to academia nationwide. To determine your eligibility for each plan and the maximum contributions allowed, contact your HR/benefits representative or work through a CERTIFIED FINANCIAL PLANNER® who is well-versed in university retirement accounts.
Depending on your age and the rules governing any mandatory retirement plans you participate in, these additional plans could offer the opportunity to contribute up to $26,000 per year ($19,500 if under age 50), per plan on top of any mandatory contributions. That could represent additional tax-advantaged savings of over $50,000 per year!
The Catch-Up Provision and Other Supplemental Plan Benefits
The golden rule of retirement savings is to make the minimum voluntary contribution needed to receive the full employer-matching contribution. Contribution amounts typically can be changed at any time during the year, but your benefits office can give you deadlines for changes that correspond to your pay schedule. Try to make these changes earlier in the year; contributing an extra $26,000 is easier to do over 12 pay periods as opposed to six.
Most supplemental retirement plans also offer a special catch-up provision for those nearing full-retirement-age (usually defined as age 65) where you can contribute more than the $26,000 limit if you had not been making contributions to the supplemental retirement plan in full in recent years. For 403b plans this is typically the age-50 catch-up mentioned in the scenarios above (currently $6,500 annually). For a 457b plan, a catch-up provision can also be the age-50 amount of $6,500 annually, or more in some cases.
On excess contributions: Most universities will automatically stop contributions once the annual limits have been reached. However, if too many dollars are contributed in a given calendar year, the IRS will tax the excess contributions at 6% per year for each year the excess remains in the account.
A relatively new feature, many supplemental retirement plans also offer the ability to make contributions on a Roth basis. In contrast to pre-tax contributions where your taxable income is reduced in the year contributions are made and you are taxed on every dollar withdrawn in retirement, Roth contributions allow you to pay the tax on the contributed amounts in the current year. There is no change to your current taxable income, but funds are withdrawn completely tax-free in retirement.
While no one can predict what income tax rates will be 20-30 years down the road, having the added flexibility of these tax-free distributions will allow you to develop a more tax-efficient retirement income distribution plan. Maximizing the supplemental plans available to you, in addition to the qualified plan sponsored by your university, positions you for a successful retirement. Consult with a CERTIFIED FINANCIAL PLANNER® to find the options that make the most sense for your goals.
- To learn more about navigating university retirement plan changes, read this report: Did Your University Announce Retirement Plan Changes?
- To learn more about maximizing your benefits, read this report: 5 Money-Saving Tips for University Employees During Open Enrollment
Have a Question?
As part of our commitment to promoting financial literacy among university professionals, you can schedule a 15-minute phone call with an expert at Filbrandt & Company to learn how these important topics apply to your own situation.