Learning How to Start a 403(b)

Yesterday, I went to a large family gathering, and many people asked me about investing, the market, different financial questions, etc. While talking with several of my relatives, two of my favorite people (one of my cousins and his wife) asked me about what she needed to do to start planning for her retirement. Well, it just so happens that she is also an educator, so you see how this pertains to you.

The first thing to do is to estimate what you can afford to contribute. Remember if you are going to contribute to a 403(b), it will be a "pre-tax" contribution, thus you will pay less in taxes now. Simply put, a $100 contribution will cost you about $70 on your paycheck. For example, if you think you can afford $200 less a month in "net" pay, divide it by 0.70, and see what you get. The answer will be $285, but let's just round it up to an even $300 contribution. On to step 2...

Next, find out which 403(b) companies you have to choose from. These can vary greatly system by system, and the different companies can have a great impact on your account. Try to find one that does not charge "mortality" fees (insurance fees), has a very simple withdrawal policy that does not penalize you no matter how long you use the company, and lastly... ask questions. Fees do matter.

Once you have the list of companies, have all of your questions answered, and have figured out how much you can contribute, then you are ready to start. Contact your HR department and the company you have selected. You will need to fill out an application and sign up for monthly contributions directly from your paycheck.

I would suggest referring back to the 403(b) Investments blog and remember to diversify!

Congratulations! You are on your way to building a great retirement with your pension and 403(b) working hand in hand!

What more help? Just e-mail me at rschultz@rollinsfinancial.com.

Fed Holds Rates Steady

Yesterday, The Federal Reserve (The Fed) held short term interest rates steady at 2%. This is a move that most economists predicted, and where we move from here is a matter of discussion.

On one hand, the economy does not seem to be on the verge of recession as earlier in the year, but it has still not picked back up. The Federal Stimulus checks have gone out, but they have not shown up in much of the data thus far. Additionally, the June unemployment report surprised everyone with a jump to 5.5% versus the May 5.0% report. These items have more than a few economists predicting that we are currently pausing, but we may need more cuts.

On the other hand, we have seen inflation rise. The Fed's statement was focused on discussing the rise in inflationary pressures that usually means a rise in rates in the not too distant future. The vote today was 9-1 with the 1 being for a rise in rates. Most economists believe that we are currently pausing before a rise in rates some time between this fall and next spring.

The market responded favorably to the news of the steady rates, and commodities across the board dropped with oil giving up more than $2.50 to $134.50 prior to the closing.

Several mutual fund managers discussed inflation as being some thing that The Fed could not really target. They stated it is the growth from India and China that is really to blame for pushing up prices due to production not being able to keep up with demand. When the global economy starts to catch up, inflation will taper off.

403(b) Investments

By law, 403(b) accounts can only use mutual funds as investment vehicles. This means that you cannot owe a stock (Apple, Google, GE, etc.), but a mutual fund that owns stocks (usually 20-100 in one fund). Remember... DIVERSIFICATION! To try and help explain the various mutual funds categories, I came up with the following table:

Overview of Mutual Fund Categories

• Bond – Fixed Income funds that vary by type and rate
• Much less volatile, but reduced return as well
• Contrary to belief, you CAN lose money in bond funds

• Balanced – A mix of bonds and equities
• Usually less volatile than equity only funds, but does not get same returns

• International – Foreign Equity Investments
• Developed and emerging markets – higher returns, but more risk

• Large Cap – Largest US Companies – Dow Jones Industrial, S&P 500
• 3M, American Express, Dupont, GE, Google, IBM, Microsoft, Starbucks, etc.

• Mid/Small Cap – Mid to Small US Corporations
• Mid - Barnes & Noble, CarMax, ManPower, McAfee, Williams-Sonoma, etc.
• Small – Bassett Furniture, Crocs, Gymboree, LA-Z Boy, Shaw Group, etc.

• Growth - Higher returns are possible, but greater risk

• Value - Less volatile usually, but usually lower returns

Don't Forget Your Spouse

We have been discussing your retirement options on this blog, but don’t forget about your spouse! If your spouse is in the business sector then his/her retirement options (401(k), SEP-IRA, IRA, ESOP, etc.) could affect your retirement decisions.

It is always smart to make sure that any “free” money from an employer is received by way of a company match or discretionary contribution. You automatically get 9.28% “free money” from your Georgia Public School System just by contributing to your TRS account. Try to have your spouse receive all of their “free” money too. This can go a long way to securing your retirement.

Also, make your life simpler by “rolling over” any old 401(k) or 403(b) accounts into IRA accounts when possible. The easier it is to keep up with everything the easier it will be to make decisions and know where you stand.

If you or your spouse need or want help in understanding your current position, send me an e-mail, and let’s figure it out. You can e-mail me at rschultz@rollinsfinancial.com.

This summer is a perfect time to start planning your financial future!