Retirement Savings in Academia and Non-Profits

If you are a postdoc or newly minted faculty working in academia, or if you’re working for a non-profit, you may be able to contribute to a retirement savings account known as a 403(b). It is similar to the 401(k) in terms of contribution limits and benefits. You can contribute to it using pre-tax income, lowering your taxable income. You pay taxes when you withdraw the money after retirement age (59.5 years). Or, if the institution offers it, you can contribute after-tax money to a Roth 403(b). When you withdraw after you turn 59.5, and as long as the account has existed for at least 5 years, you can withdraw the money tax-free.

Benefits of a 403(b)

The benefits are similar to contributing to a 401(k). Your employer can also provide a match to motivate you to save for retirement. If that’s the case, contribute up to the match. You can invest in mutual funds, or annuities. Annuities are essentially contracts between the you and an insurance company to give you a payout in the future, e.g. when you retire. If possible, you should invest in mutual funds with low expense ratios below 0.1%. If that’s not offered, the next best thing would be fixed annuities, which give you a guaranteed fixed interest rate. The variable annuity would be the last best thing, since the interest rate is not guaranteed but dependent on the performance of the annuity itself.

No employer match

What often happens to postdocs is that your employer won’t provide a match to your contributions. It’s up to you to decide if it makes sense to contribute to the 403(b) account, which can help lower your taxable income and provide a decent return. The next best thing would be to open a Roth IRA and contribute to your retirement that way. Aim to max out your Roth IRA account, then, if you’re able to save more for retirement, invest in the 403(b), even if there’s no match.

Conclusions

If your employer matches your contribution, consider contributing at least up to the match. Then, max out your IRA, which can be Roth or traditional. Afterwards, if you still want to save more, increase your 403(b) contribution. Retirement these days are up to the individual, unfortunately, so aim to save (and invest) at least 15% of your income.

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