403(b) Retirement Plans: Mutual Funds, Annuities and Other Key Terms

An overview of what Texas school employees should know about 403(b) and Roth 403(b) plans and other terms relevant to this retirement savings.

From the first bell of the school day to time spent well after the buses leave, school employees work long days focused on students with little time for anything else. Schedules are tight year round and there are no extra minutes to spare.

Yet when it comes to your retirement planning efforts, time can be your best friend — provided you make the most of savings plans and solutions. By starting a 403(b) retirement plan early in your career — or at least as soon as you realize that the option is available — you may be able to make the most of your time and money.

Pensions alone may not cover your retirement needs

Income replacement ratio is a term you often hear about retirement planning. That’s simply your retirement income reflected as a percentage of your pre-retirement income, or what you’re making now while you’re still working. The replacement ratio tells you what you’ll need your investments to provide to cover your financial needs in retirement.

The Texas Teacher Retirement System (TRS) estimates a school employee’s pension from TRS will cover only about 69%² of a retiree’s financial needs. That means you’ll likely want to consider other income sources to help you live comfortably in retirement.

What else should Texas school employees keep in mind?

Since most Texas school districts do not participate in Social Security, many school employees can only rely on their TRS benefits and their other financial investments to fund retirement. It is important to know that if you are eligible for Social Security due to other employment, your Social Security benefits may be reduced due to a federal statute called the Windfall Elimination Provision (WEP). (Texas school employees, retirees and lawmakers are hoping to change WEP, so stay tuned to see how that may impact your future Social Security benefits.)

Of course, Texas educators aren’t the only ones facing these challenges. State public school pension plans throughout the United States are facing challenges. One recent survey estimated that pension funds have a $700 billion⁶ shortfall in assets nationally. As of late 2022, only seven states have saved at least 90% of the money that will be needed to pay for school employee retirement benefits.

How 403(b) plans can help Texas school employees

School employees who work in Texas school districts have the option of enrolling in a retirement plan known as a 403(b). Named after section 403(b) of the Internal Revenue Code, this type of investment plan is specifically designated for teachers and other employees in the nonprofit sector to build retirement funds and achieve their financial goals.

Enrolling in a 403(b) plan can be a simple way to help bridge the financial gap between your TRS pension and your financial goals for retirement.

How can 403(b) plans help with retirement?

403(b) plans offer a range of investment options and you can start a plan at any age. For 2023, school employees under 50 years old can contribute up to $22,500 annually to their 403(b) plan. If you are 50 years or older, you are allowed to contribute $30,000 annually. For those closer to the retirement age, these additional funds can help boost your retirement fund as you count down to the successful end of your career.

403(b) investment choices: mutual funds or annuities

If you opt to add a 403(b) plan to your retirement investments, it’s important to understand your investment choices and how mutual funds and annuities can work within them.

Mutual funds are investment vehicles that:

• Pool assets from many investors to purchase securities such as stocks, bonds and short-term debt.
• Offer diversity and flexibility.
• Are managed by professional money managers.

However, it's important to know that some funds can have high expenses.

Annuities are contracts sold by insurance companies and distributed by financial institutions that may:

• Guarantee the buyer a future payout amount, offering a fixed-income stream similar to a pension.
• Be either variable or fixed.
• Tend to have higher fees upfront.

Choosing when to invest: 403(b) versus Roth 403(b)

To choose the right investment path to retirement, you’ll also want to consider the tax implications of your investments – and when you’d rather pay those taxes. A financial advisor can help you decide what would be suitable for your individual situation.

• Pre-tax Contributions are deducted from your paycheck and transferred into your 403(b) plan before federal and state income taxes are paid. This allows your taxable income to be smaller as you contribute to your retirement. You’ll ultimately pay taxes, but that occurs when you withdraw your money from your 403(b), usually during retirement.
• Post-tax Contributions are available through Roth 403(b) plans and you can contribute to retirement savings after you've paid income taxes. Additionally, once you retire, qualifying withdrawals from your 403(b) will be tax free.

Whatever retirement solution you choose, taking time now to understand your options can help ensure you are prepared when you’re ready to step away from your career in education. And we’d be happy to help you become more informed.

To learn more about your options and retirement planning for Texas school employees, contact the RBFCU Retirement Program today for a no-cost, no-obligation initial consultation by calling 1-833-291-1310, emailing retirement@rbfcu.org or scheduling online.

¹Purcell, Patrick. (2012, August). Income Replacement Ratios in the Health and Retirement Study. Retrieved from https://www.ssa.gov/policy/docs/ssb/v72n3/v72n3p37.html.

²Teacher Retirement System of Texas. Why Save in a 403(b) Plan? Retrieved from https://www.trs.texas.gov/Pages/403b_active_why_save.aspx.

³Social Security in retirement. SSA. (n.d.). Retrieved from https://www.ssa.gov/retirement.

⁴Windfall elimination provision - social security administration. (2023, January). Retrieved from https://www.ssa.gov/pubs/EN-05-10045.pdf.

⁵Reeves, K. (2022, December). Texas teachers and retirees lobby for Social Security fairness. Texas teachers, retirees lobby for Social Security fairness. Retrieved from https://spectrumlocalnews.com/tx/south-texas-el-paso/politics/2022/12/15/texas-teachers-and-retirees-lobby-for-social-security-fairness-.

⁶Equable Institute. (2019, October 29). National Survey on Teachers' Retirement Perspectives. Retrieved from: https://equable.org/wp-content/uploads/2019/10/National-Survey-on-Teachers-Retirement-Perspectives-Equable.pdf.

⁷Internal Revenue Service. (2023, January 3). Tax Code, Regulations and Official Guidance. Retrieved from https://www.irs.gov/privacy-disclosure/tax-code-regulations-and-official-guidance.

⁸Internal Revenue Service. (2022, November 7). Retirement Topics – 403(b) Contribution Limits. Retrieved from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-403b-contribution-limits.

⁹Internal Revenue Service. (2022, October 26). Retirement Topics – 403(b) Catch-Up Contributions. Retrieved from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-catch-up-contributions.

¹⁰Hayes, A. (2022, June 28). Mutual Funds: Different Types and How They Are Priced. Investopedia. Retrieved from https://www.investopedia.com/terms/m/mutualfund.asp.

¹¹Kagan, J. (2023, January 4). Guide to Annuities: What They Are, Types, How They Work. Investopedia. Retrieved from https://www.investopedia.com/terms/a/annuity.asp.

¹²Ghanti, A. (2021, April 30). Variable Annuity: Definition and How It Works, Vs. Fixed Annuity. Investopedia. Retrieved from https://www.investopedia.com/terms/v/variableannuity.asp.

¹³Sammut, Hannah. (2021, December 9). K-12 Teachers—Think Twice Before Investing Annuities Inside Your 403(b). The Street. Retrieved from: https://www.thestreet.com/retirement-daily/planning-living-retirement/the-403-b-why-annuities-may-not-benefit-teachers.

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