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To Be or Not to 403(b)

Jeffrey K. Actor

I BEGAN MY CAREER at a small startup biotech company, only to realize the place had too much office politics, plus not enough credit was given for new discoveries. That was at odds with what I wanted, which was to be a research scientist focused on the basic principles underlying diseases.

Fortunately, I was offered a tenure-track academic position at a large medical school in Houston. I never looked back. Indeed, I consider myself one of the fortunate few who woke early each and every day to pursue their life’s passion.

Amid this career switch, a quirk of fate led to a fortuitous financial commitment. The university was part of the Texas educational system. Texas had—and still has—some unique and arcane rules. For instance, it remains against the law to carry wire cutters, thanks to a mid-19th century law aimed at reducing cattle rustling.

Some of these unique laws also extend to retirement savings within a state-funded organization. When I sat down with human resources during my first week at the new job, I was told I had to commit to a retirement pathway and I needed to make that decision before I got my first paycheck. The pathway chosen was irrevocable.

I’d never previously given retirement a second thought.

While the starting salaries for faculty were low, the school’s benefits were substantial. The default retirement choice was automatic enrollment in a program where 6.65% of my base salary was automatically shunted to TIAA-CREF, a leading manager of teacher retirement funds. Alternatively, I could opt out and instead fund a self-directed 403(b) that included investments from numerous different financial firms.

TIAA-CREF embraced a magic formula that was dependent on years of service, but where you could potentially receive some 80% of your final salary. Retirement benefits also included health care at the regular employee subsidized rate. Basically, the TIAA-CREF option I was offered was an annuity with golden bells and whistles.

Nearly 90% of incoming faculty took the TIAA-CREF option. The school made it quick and easy to enroll.

Meanwhile, the self-directed plan was presented as the poor stepchild. The plan also had the 6.65% required pretax investment. The school would kick in an additional 8.5% to combat market uncertainty. This represented an immediate investment gain equal to approximately 125%. The self-directed plan also included the same benefits package for post-retirement health care.

I found the mandatory investment and employer contribution appealing. The catch with the self-directed plan was that it held enormous market risk. But, hey, it was my dream job. What’s a little risk when you enjoy what you do?

I did a quick back-of-the-envelope calculation. Throw the savings into a portfolio with a 90% stock-10% bond asset allocation. Assume a 25-year career with 3% average annual salary growth. Factor in a conservative 7% annual Dow Jones Industrial Average increase. Take the final savings and apply a 4% withdrawal rate upon retirement.

I truly thought my brain would explode. My quick estimate produced only 65% of salary at retirement, well below the 80% offered by the TIAA-CREF option, plus there were tons of risks to consider. Increases in salary weren’t guaranteed, percent from my employer could change at the whim of politicians, and market performance is never certain. And who knows if I could even survive in the academic world for 25 years?

I now understood why most people chose the TIAA-CREF option. But when it came time to sign on the dotted line, I still chose the self-directed plan. It was the second-best financial decision I’ve ever made. In case you’re wondering, my best financial decision was to marry—and stay married to—someone with money values compatible with mine.

For me, the deciding factor was that the TIAA-CREF option essentially represented an annuity, and an annuity meant that there was no pot of gold to pass to my heirs. On top of that, the annuity was limited if I didn’t meet the school’s magic formula for years of service. The 403(b), on the other hand, was something that was tangible as a legacy. While the pot might not be as full of gold at the end of the rainbow, it would still have my name engraved on the container.

At the time, I didn’t know enough to pick sectors or specific asset classes, so I simply invested in a large-cap value stock fund that nearly mimicked the broad market. I kept investing in this manner through thick and thin. Indeed, I vividly remember the 2008-09 meltdown, when friends bailed out of stocks, and into bonds and cash. I had read that someone with a long time horizon should just sit tight. I convinced myself that my contributions were purchasing shares at fire-sale prices. Admittedly, it took way more convincing on some days than others.

You know what they say: Time in the market beats timing the market. When my salary increased, my savings also automatically increased. It wasn’t sexy, and at times it wasn’t pretty. I lost lots of sleep some years, although in hindsight it also allowed me to define my risk tolerance. Yes, I did alter fund allocations along the way, mostly because the university would periodically change the lineup of investment options. At every change, I tried to lower fund expense ratios, although unfortunately management fees never dropped below 1%.

I just retired at age 62, which is relatively young for an academic. My friends ask me how I could possibly retire early, especially after a career in academia. I could say that I got lucky with a generally robust stock market. But instead, I tell them that life’s outcomes are an accumulation of making the right choices at the right time. Luck and consistency pair well together. You just have to stick to the plan.

Jeffrey K. Actor, PhD, was a professor at a major medical school in Houston for more than 25 years, serving as an academic researcher with interests in how immune responses function to fight pathogenic diseases. Jeff’s retirement goals are to write short science fiction stories, volunteer in the community and spend time in his garden. Check out his earlier articles.

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