Why Contribute to a 403(b) or 457 Plan?
If you are a member of CalSTRS or CalPERS and meet the requirements for years of service credit and retirement age, you have a guaranteed income once you retire. While you will have a guaranteed income, it is important to know that your CalSTRS or CalPERS pension does not replace 100 percent of your pre-retirement income.
In fact, the average retirement payout for a CalSTRS or CalPERS member is 60-70 percent of your pre-retirement salary.
With rising healthcare and living costs, few can survive on a huge percentage cut to their income once they retire.
So what do you do? As an educator or public employee, you will likely have access to savings plan options which can help supplement your retirement income.
Once set up, you can contribute to your savings plan(s) with pre-taxed income over the course of your employment and withdraw from the accounts once you have retired.
There are two main savings plan options available:
403b Plan– A 403(b) plan is a strictly voluntary savings plan which allows employees to contribute pre-taxed income which will grow, tax-deferred, until retirement.
Once retired and age restrictions are satisfied the employee can draw from the plan to supplement pension income.
The money withdrawn will be taxed like regular income. Most 403(b) plans will have numerous investment options.
457 Plan - A 457 savings plan is voluntary and allows employees to contribute from pre-taxed income.
This contribution will grow, tax-deferred, until retirement. The 457 plan may allow the employee to access the funds before the age of 59 1/2 without a penalty.
Typically there are fewer investment options in this plan.
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These unique savings plans are specially designed to allow employees to save money in preparation for retirement.
A 403(b) or 457 plan will help grow your savings over time thanks to tax-deferment and earnings like interest.
This savings will later be used to supplement retirement benefit from your CalSTRS or CalPERS pension. By contributing to a savings plan, you can live comfortably during retirement.
One of the greatest benefits of a 403(b) or 457 savings plan is that all taxes are deferred until money is withdrawn from the account during retirement.
This means that any earnings in the account will remain in the account until you begin withdrawing money during retirement. Of course, you will have to pay taxes on the money once you withdraw it.
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However, you will benefit from many years of compounding interest that is not taxed. You will also be able to control the amount of money you withdraw from the plan during retirement, which allows you some control over your tax bill.