Can Your 403(b) Plan Make You Wealthy?
Let’s Get You To The Wealthy Side
Reaching retirement wealthy is not a unique desire. However, accumulating enough money to do so is a unique accomplishment. Everyone is not cut out to retire wealthy because everyone is not qualified to make the extreme sacrifices necessary to get there. And there are many financial sacrifices that need to be made during your working years if you want wealthy retirement years. Even though you may have investment tools available to you, an IRA, a 401k or a 403(b) plan, for example, retirement planning is still hard work. Not impossible, just hard. But do not ever let that discourage you. People retire wealthy everyday simply by diligently following some basic, simple investment rules. And you can too.
It’s As Easy As 1-2-3
If retiring rich were as easy as it looks, everyone would be doing it, but they’re not. Why not? Well, usually it’s on account of poor cash flow.
Think about it, you need to make ends meet during your working years while at the same time accumulate enough money to last throughout your retirement years. And your retirement years could be 30 years. That’s a lot of time. Saving enough money for 30 yeas is a big job. Are you up to the challenge? Do you want to reach retirement wealthy? Do you want your 403(b) plan to get you to the wealthy side? If you do, then take the time to learn about your approach to retirement planning. What have you done so far? If any, what, mistakes have you made? What could you do better? What can you change or improve upon? If you do your due diligence, you can turn your desire for wealth into reality.
Focus On The Top Three: cash flow, investing and taxes
Rule #1 – Control Your Cash Flow
Remember, it’s not what you “make”, but what you “keep” that will really count in the end.
If you want to reach your retirement as a wealthy individual, you need to be strict with yourself about the management of your money. What does that really mean? It means, control your spending. How do you do that? By changing your spending habits.
It’s nearly impossible to earn enough money to make retirement plan contributions as well as live an expensive lifestyle. That’s simple financial common sense. The more you spend, the less you have leftover to invest. If you want to maximize the contributions to your 403(b) plan, you need to check our your spending habits. Are you spending more than you make? If you are then you are in debt. There is no other way to say it. Be careful.
Debt can sneak up on you and will strangle any chance you have to retire wealthy. Do whatever you can to control your debt, it’s a big money waster. The interest and fees paid on debt just makes your creditors rich and you poor. That money could be put to better use. The money you waste on debt interest could be used as contributions to your 403(b) plan. And that will make you rich, not your creditors. You need to take care of you.
Rule #2 – Invest Wisely
The first step to investing wisely is knowing what your investment objectives. Do you know what your investment objectives are? Why are you investing? If you have not thought about that then start there.
Your personal investment objectives will determine the type of investments you are comfortable with. These objectives will also determine the other parts of smart investing which is your asset allocation and your investment diversification.
Everyone’s objectives are different.
You could have the goal of growing your retirement investments large enough to leave some money to your heirs. Or you may be interested in generating enough retirement income from your investments to retire early. You may want to preserve your current investments by protecting those investments from the damaging effects of inflation. There are many investment goals. Understanding your personal investment goals is the key to knowing where to invest your personal retirement plan contributions.
Your Diversification Mix
Have you ever determined the diversification of your investments? In other words, what’s your investment mix made up of? Is your 403(b) plan 100% in bonds or the money market? Are you split 50/50 between international and large company stocks?
It is important to know your investment mix because when you spread your investment money around you limit your exposure to loss.
The different choices include cash (money market) or stocks and mutual funds invested in large cap, mid cap, small cap and international investments. Each of those different types of investments will respond to market conditions in different ways. So if you spread your retirement plan contributions around within those choices you have a better chance of keeping your losses to a minimum.
Remember, you are trying to be smart with your retirement contributions. So limiting your losses will help you keep more of those contributions working for you.
Your Asset Allocation
You want your money making money for you, right? To do that you need reach the highest possible rate of return of your investments. And you do that by spreading your investments amongst different market sectors. Investing in different market sectors is what is referred to as asset allocation. There are basically 3 market sectors to invest in and they include stocks, bonds and cash equivalents.
Your asset allocation is best determined by your personal investment objectives, risk tolerance and time horizon. In other words, your level of comfort with risk and how much time your investments will be in the market before you need to make any withdrawals will help you determine where to allocate your assets.
Let’s talk about risk tolerance.
Risk tolerance is a personal thing. Only you will know how much risk you are willing to take with your investments. Typically the greater the risk, the greater the return on an investment. Cash equivalents such as money market or certificates of deposit generally pay little because the return is guaranteed and there is no risk.
Obviously, there is a greater risk of market fluctuation with stocks than cash equivalents.
Your time horizon plays a key role in how you invest your 403(b) plan contributions. If you are in your twenties, you have more than 40 years to go before you will need to make withdrawals. With that in mind, you can choose a bit more risk. However is you are only 10 years away from retirement, you want to invest on the more moderate or conservative side.
If you are just not the type of person who likes to choose investments you can always invest in lifestyle mutual funds, index funds or target date funds. With lifestyle and target date funds the manager of the fund actually selects investments that are in line with your risk tolerance and investment objectives and time horizon.
For example, if you invest in a moderate lifestyle fund, the risk is moderate and the investment objectives are moderate. A target date fund targets the investments to perform based on the time horizon you select. Let’s say your retirement is 20 years out so you pick a 20 year target date fund. The manager of that fund will invest your money with a 20 year time frame.
Rule #3 – Manage Your Taxes
You work hard for your money and even harder to find some extra money for your retirement plan contributions. Unfortunately taxes have a way of chipping into your investment money. You can control some of the effect taxes have on your retirement investments by choosing the proper investments.
Some investments are tax-exempt while others are tax-deferred. Your investment objectives will help determine which type is better for you. Tax-exempt investments and tax-deferred investments have different objectives thus different purposes.
These include municipal bonds. The income you earn on a tax-exempt investment is not taxed.
These include a 401k and 403(b) plan, traditional IRA’s plus some types of annuities. The beauty of tax-deferred investments is that even though they are taxed, it is not until you withdraw the money at retirement. This way, all of your contribution money is growing for all of the years it is invested. That long-term growth opportunity is one of the key benefits of tax-deferred investing. The financial logic is that when you do withdraw your money, you are usually retired so no longer earning a paycheck and therefore, in a lower tax bracket. So you win in two ways. Your money has a long time to grow and in the end, you pay less in taxes.
What Will Be There At Your Retirement?
One last point about accumulating enough money to retire wealthy. Don’t forget about your employer. Your employer may help boost your retirement investments. How? How can your employer possibly help you with your retirement? By matching your personal contributions. If you have a 403(b) or 401(k) plan through your employer, they may have that plan set up to match the amount of your personal contributions. Check it out, it is free, that’s right, an employer match is free money.
Never forget that the only money that will be there when you retire is the money you sent ahead. If you do not invest for your retirement, who will? No one, because no one cares about your retirement more than you do.
Don’t delay, get started today, you will be so glad you did.