I don't have a 401(k).
People who work for tax-exempt institutions get something else. It's called a 403(b), which means that every time I read something about retirement funds, I have to automatically translate the account names to myself in my head.
I worked at a non-profit from 2008 to 2012, and now I have $35,929 in a TIAA-CREF 403(b) account. I feel grateful for that, but it only happened because I followed a couple rules.
First of all, I maxed out my 403(b) contribution and got the largest possible employer match. I didn't get to pick my individual portfolio funds, but I did get to choose how much risk I wanted. I picked a moderate risk portfolio, since it'll be several decades before I retire, and that's enough time to ride the market waves (probably more than once).
I also followed the rule that suggests you can earn more by investing between the ages of 25 and 35 — and then never adding another penny to your investment portfolio — than you can if you start investing after age 35.
I'm 32 now, and I was 26 when I started investing, which puts me ahead of the game even though I haven't added a dime to that account in 2 years. Once I left the non-profit, I stopped making contributions to my 403(b) or any other type of retirement fund.
I'm not saying I recommend doing that, but life worked out that way. I'm hoping to be able to start contributing again at some point, probably through a Roth IRA, but it's hard to predict when that will happen.
That's always the trouble with retirement. It's hard to predict what will happen. On the other hand, it's easy to study what we know for sure.
The benefits of investing early
Between my own paycheck deductions and the company match, I was able to invest $23,807 into a 403(b) between the ages of 26 and 30. This is probably the most important investment I've made to date, and that I may ever make. (And no, I didn't miss a penny of that money from my paycheck.)
My investment has already grown by over $10,000, mostly because I got a whopping 17% return in 2013. If I were able to keep that up, I could be looking at $6,391,216.41 — yes, over 6 million dollars — by the time I turn 65.
Of course, I know better than to predict a consistent 17% return over the next 33 years. So let's say I average 6% between now and age 65. That'll get me to $245,778.36 — not as much as six million dollars, but still not bad.
The really interesting part comes when you consider what might have happened, had I not made this early investment.
Let's say that the younger me who existed in 2008 chose not to invest in the non-profit's 403(b) account. Instead, this version of me played her financial cards a little differently, and decided to start investing at age 32. She'll start up a Roth IRA and invest $2,000 per year until she's 65. And she'll get a 6% return.
That version of me hits age 65 with only $206,367.51 in my retirement account even after investing $66,000 of my own money over 33 years. I give up more salary and earn less from it. Compound interest works in mysterious ways.
So even though I'm not contributing money to my 403(b) right now, I still feel pretty good about my retirement strategy. What happens next all depends on what I do with my allocations.
Knowing when to rebalance
My portfolio at TIAA-CREF, a financial and retirement services provider for the non-profit sector, earned a 17% rate of return last year. That's phenomenal.
This year, it's earning 1.2%. That's less than U.S. inflation, and it's one sign that I should consider rebalancing my portfolio by allocating my savings to other asset classes.
Ideally, you should review your retirement portfolio at least once a year, and consider rebalancing if it is performing below expectations. Last year, I didn't need to touch a thing — my 403(b) was clicking along just fine on its own.
This year, it's time to open up the hood and look inside.
Here's how my portfolio is currently balanced:
- 58% Equities
- 15% Fixed Income
- 12% Guaranteed
- 8% Multi-asset
- 3% Real Estate
- 3% Money Market
A little research on the TIAA-CREF website revealed that my Cref Growth Account, Cref Equity Index, Cref Stock, and Cref Global Equities are doing the bulk of the heavy lifting, return-wise, while the remainder of my portfolio lags behind.
I can technically rebalance my portfolio by going through a very long list of "mid-cap growth funds," "small-cap equity funds," and other terms I don't properly understand, and assigning a percentage value to each. But I'm not going to do that. I don't trust myself to do it right, not even after the hours of research it would require.
Instead, I answered a few questions about the amount of risk I was willing to accept (pretty high risk, given that I've got at least 33 years until retirement), and TIAA-CREF suggested I rebalance to a portfolio that includes:
- 72% Equities
- 13% Fixed Income
- 8% Real Estate
- 7% Guaranteed
So… done. I also set myself up to get an auto-reminder to rebalance once a year, on my birthday.
Good and bad allocation choices
Thinking about all of the different investment options available to me — mid-caps, small-caps, equity indexes, global equities — prompts the question: why do large retirement vehicles like 401(k)s or 403(b)s offer "bad" allocation choices? Why don't they only offer good allocations?
The truth is that it isn't about good or bad. It's about risk. If I were older, conservative investments would sound "good" and high-return, high-risk investments would sound "bad." At my age, it's the other way around.
And, to be honest, I'm just fine with letting TIAA-CREF take the lead on allocating my portfolio. I understand how the market works as a series of broad strokes (buy low, sell high, risk is good when you're young and riskier when you're older) and am happy to draw the broad strokes and let TIAA-CREF make the allocation choices for me. For brokerage accounts and IRAs, companies like FutureAdvisor perform the same services for free.
A final note on fees
The fees associated with your retirement account deserve special attention. When you're playing with big numbers, like $35,000 or, say, 6 million dollars, fund fees can seem small in comparison — but high-fee funds can still cost you more money than you may realize you're paying.
How can you tell what you're paying in fees? You need to look for two words: expense ratio. That tells you what percentage of your assets you pay in fees. This number is hard to find. I was eventually able to break down my TIAA-CREF information to discover my "estimated expense charge;" it looks like most of my allocations are running an estimated expense ratio of around 0.45%.
Not as low as Vanguard's average expense ratio of 0.19%, but much lower than the industry average for mutual funds of 1.08%. Anything over 0.78% is expensive, and even a single percentage point can mean thousands to hundreds of thousands of dollars paid in fees over time.
Why do index funds have lower fees than actively managed funds? Index funds are "passive," which means they track the market automatically. There's no stock picker getting paid to choose the next Google. Most active funds fail to identify the next Google in any case, but they take their pound of flesh regardless.
There's a slim possibility that those actively managed funds will pay off, and an absolute certainty that you will pay the fees.
So that's the story of me and my 403(b). I invested early, I'm going to rebalance every year and slowly lower my risk tolerance over time, and if all goes well, I'll earn high returns for many years.
Everyone's retirement story is different, so let's start a discussion about your own retirement plans — 401(k)? 403(b)? Roth IRA? — and how you're managing your portfolios. Do you rebalance every year? What returns are you earning, and how do you think you can improve them? Leave your thoughts and questions in the comment section, and we'll see what we can learn from each other!