You’d think adding an extra $250k over the next 23 years to my Mrs FIRE Ready Aim’s 403(b) would have been the best early Christmas gift a husband could give, but you’d be mistaken. In reality I got little more than a “that’s pretty good” shrug and appreciative nod as she looked up from nursing our one-week old. But she’s a tough crowd, and she doesn’t geek out over FI and RE, so honestly I’m not surprised that something else won out.
A little back story
Mrs FRA is a professor at the local community college, and we signed up for our 403(b)s with Voya over 12 years ago just as soon as we started working (I know, smart move to save, except we idiots about fees…) In that time period, she’s saved and grown $150k in the 403(b).
Realizing that her 403(b) is one of the few accounts we hadn’t optimized for fees, I looked more closely and found a whopping 1.75% in fees per annum – 1% in base fees, and 0.75% in fund fees.
I immediately sent out emails to every 403(b)/457(b) provider and got quotes.
A big improvement in 403(b) fees (but not 100% wonderful)
The first quote came back as 1.25% in BASE FEES alone, along with a long winded explanation as to ALL THE GOOD THINGS that I was getting with these fees, and that LOOKING AT FEES ALONE IS NOT THE WHOLE STORY. Sigh. As a matter of fact, all of the vendors (except one) came in with 0.75% – 1.25% in base fees, and I ALMOST bought them all copies of JL Collins’ Simple Path to Wealth, but they were just too far gone to be helped.
Thank goodness we found TIAA-CREF. Their S&P 500 tracker had only (only!) 0.51% in fund fees, with no base fees. We added a Russell 2000 tracker at 0.53%, and split the allocation 50/50 – I wanted to get as close to a whole market tracker as I could. Fees are the same in the 457(b) and 403(b). Relatively speaking, this is great!
But let’s be perfectly honest here: 0.52% in fees is not wonderful. It’s not even OK. But it is a helluva lot better than 1.75%. Sadly, we sometimes have to take what we can get. But to the good, all new funds will now go into a 457(b) instead of a 403(b), and a 457(b) is by far my preferred public service investment vehicle. I’m simplifying the story just a smidge, but for all intents and purposes a 457(b) is the same as 403(b)s except you can start withdrawing money prior to 59.5 years without penalty as long as you have separated from your employer (of course you still pay the appropriate tax). And that’s a strong proposition for you, FIRE reader. Check out this post from me and this one from the Millionaire Educator for more information.
We’re also rolling the Voya 403(b) into the TIAA-CREF 403(b), going from 1.75% to 0.52% in fees. Again, not great, but the savings are tremendous. Using this lovely little calculator at Dinky Town (who the hell is in charge of marketing over there?), I calculated how much extra money Mrs Fire Ready Aim will have in 23 years at age 59.5.
Starting with the current $150,000, I assumed that she would be adding $1000/month to her to 457(b) account, and I assumed a 7% annual return (I expect the amount added to increase over time, and the return to be higher, so I view this as conservative estimates).
Under these assumptions, an account with 1.75% in yearly expenses would have
at the end of 23 years, and an account with 0.52% in fees would have
At the end of 23 years.
That’s a delta of
(OK, not QUITE a quarter million, but close enough).
At a 3.5% safe withdrawl rate (Big ERN has me converted), that’s an extra $706/month. That’s our monthly grocery budget 23 years from now (taking into account inflation). Of course, as soon as Mrs Fire Ready Aim retires, all that money will be rolled into low cost vanguard funds, saving us even more on fees. But speaking of fees…
You need to ask about:
Surrender fees! If you are thinking about rolling over your 403(b) into another 403(b) or traditional IRA, enquire first about surrender fees. Fees are often tiered based upon how long your money has been in the account, and some tiers can be as high as 4% or 5%. Newer money has higher surrender costs. You may need to roll your money over in chunks.
Also to note…
We do plan on bumping up the monthly savings in the 457(b) to the maximum, but that will be in a few years. Usually Mrs Fire Ready Aim teaches extra classes for an “overload” and extra cash, but with FRA Child #3 having just arrived, she is going to be working full time but ALL ONLINE for the next year or two, and will take it easy and not take on extra classes.
So the upshot is…
If you are in the public sector, you probably have choice of 403(b) and 457(b) providers. In many situations (as in Mrs Fire Ready Aim’s community college) none of the options are wonderful, but there are clear winners. Take the best of what you can get – where the best is the provider with the lowest fees on VTSAX or its equivalent. (and if you’re not sure why VTSAX, then get thee to JL Collins’ Stock Series).
Side note: I have much better 403(b) and 457(b) options, but I work for a public university, so I’m considered a state employee (interestingly, my wife is not considered a state employee, and does not have the same benefits options. But yet we both contriute to the Florida Retirement System. Welcome to Florida!). The state folks did a much better job negotiating fees. I just opened a 403(b) with Fidelity in 15 minutes online (didn’t have to slog through with a representative) so that I could capture a one-time bonus (in lieu of a raise). Fidelty’s S&P tracker fund has fees of only 0.015% (beating TIAA-CREF, with fees of 0.04% – still great!), with no base fees. Institutions MUST do better. But I digress…
Only second best?
So yeah, after about two hours of work – research, opening the accounts with the representative walking us through the self evident process over the phone, and more paperwork for the rollover – we saved almost $250k (well, will have saved 250k in 23 years. let’s not quibble over tense). That’s nearly $125,000/hour. We’ll never make that much money in such a short time ever again.
The best early Christmas gift?
You may have guessed that it’s our third child (yes, congrats to us!). We’re three out of three on little girls. And they are all blessings, and one may even argue they are gifts. But they aren’t gifts from me. That just sounds a little…creepy. Rather, the gift was…
Something for the kitchen. Something that is normally kind of expensive, but something that Mrs FRA will still be using when she retires 23 years from now. Something that she can bond with the kids over. Something that will kick her baking up a notch.
That something is – a Sur La Table marble rolling pin and marble pastry board!
For those that don’t know, Sur La Table is a fancy pants brand, but high quality. I got the pin and pastry board for about $75 total (one from amazon, one directly from Sur La Table), which is about 25% off normal prices. Mrs FRA had had her eye on these items for a few years, but the prices were always too high to justify. Even with the discount this is still a bit expensive, but we don’t buy many kitchen gadgets, and when we do spend we try to buy quality items that will last a long time. Plus, we buy things that we will truly use.
And oooooh will this be used. A baker’s gonna bake, and Mrs FIRE Ready Aim loves to share the embrace of baking with our two (now three!) growing girls. And judging by the smiles and (urp) delicious sugar cookies, I’ll at least stipulate that it was a draw…
A note about gifts: Mrs Fire Ready Aim and I generally don’t give each other gifts for holidays and birthdays. Our birthdays are within two weeks of each other, so our gift to each other is a nice dress up meal at a fancy restaurant. For Christmas we keep it fairly low-key and not over the top with the girls, and only stuff each others’ stockings with some chocolate and candies, except in these rare occasions.