By Jeremy Wallace and Andrew Hart
The unprecedented uncertainty over the last couple of years (in just about every regard) has undoubtedly led you to assess your future. You know you want to retire someday, but will you have the means to do so on your own terms? As an employee of a university, your greatest tool in preparing for retirement is your 403(b) plan; as such, it’s critical to make the most of it. Let’s discuss how.
The investments you choose in your 403(b) plan will determine the returns you receive. Keep in mind that typically investments with greater potential returns also carry greater risk. The younger you are, the more risk you can afford to take on because you have more time to recover from potential down markets. You still want to mitigate risk, though, and the best way to do that is through diversification. Even if you’re young and have a higher risk tolerance, you should take into consideration all your investment accounts to make sure they’re working together to maintain an appropriate level of risk and mixture between stocks and bonds.
Know Your Limits
The best way to maximize your 403(b) plan is by maximizing contributions. To do this, you first need to know the IRS contribution limits. For 2022, you can contribute up to $20,500 or $27,000 if you are over age 50. (1) By maximizing contributions, you will not only build your next egg faster, but you will also lower your taxable income, which should lower your current tax bill.
Rebalance Your Account
If your 403(b) investments are diversified between stocks and bonds, not all of them will move in the same direction or at the same rate. When stocks drop significantly or go shooting up, it can throw off your asset allocation. For example, if you prefer to have 60% of your account in stocks and 40% in bonds, a strong market recovery can leave you with 70% of your funds in stocks and only 30% in bonds. This exposes you to more risk than you had originally decided you were comfortable with. To counteract that, you need to rebalance your account and move some money from stocks to bonds in order to lower your stock exposure to 60%. Rebalancing accounts at least once a year is a wise way to manage risk and optimize your 403(b) plan.
Perhaps the greatest threat to your investment returns is the fees you pay on those investments. Over a long time horizon, fees can eat away at your returns significantly. Because they can have such a major effect, it’s vital to know what fees you are paying. If you aren’t sure, ask. Your HR department or plan custodian should be able to tell you exactly what you’re paying. Also, since fees can have such a big impact on your lifetime returns, it’s a good idea to utilize low-cost index funds when available.
Seek Professional Help
Your 403(b) plan is your key to a comfortable retirement—so make the most of it. After reading these suggestions, are you feeling empowered or overwhelmed? If it’s more the latter, it may be time to seek professional help. Rather than winging it on your own, a financial advisor can help you analyze fees, determine an investment allocation, and rebalance your accounts on a regular basis. An experienced and knowledgeable financial advisor will also help put together a plan for your future that incorporates every area of your financial life, not just your 403(b) plan.
Jeremy Wallace is founder and chief investment officer at Wallace Hart Capital Management, an independent financial services firm committed to offering comprehensive advice and customized services. Jeremy has 20 years of experience in the financial industry and is passionate about helping clients preserve and enhance their wealth so they can pursue their passions. Jeremy graduated from Emory University with a degree in international economics and a certificate in financial planning. Outside of the office, Jeremy spends most of his free time with his wife, Julie, and their three children, Isabel, Lincoln, and Reid. He is an avid Chicago Cubs baseball fan, and he enjoys golfing with his wife and traveling with his family. Learn more about Jeremy by connecting with him on LinkedIn.
Andrew Hart is co-founder and chief planning strategist at Wallace Hart Capital Management, an independent financial services firm committed to offering comprehensive advice and customized services. Andrew has 15 years of experience in the financial industry and strives to provide new and better strategies and processes to improve his clients’ lives. Andrew graduated from Wittenberg University with a bachelor’s degree in business management and holds a certificate in financial planning from Georgetown University and the CERTIFIED FINANCIAL PLANNER™ certification. When he’s not working, you can find him enjoying the city of Lexington, Kentucky, teaching at the University of Kentucky’s Financial Planning program, and spending time with his wife, Susan, twin sons, George and Ted, and daughters, Merritt and Philippa. To learn more about Andrew, connect with him on LinkedIn.