How To Invest in 403(b) For Professors

I am often asked by professors, “How should I invest my 403(b)?”  For the majority of the professors that I meet with, their 403(b) is the biggest component of their nest egg.  This makes it extremely important to invest it intelligently and efficiently.  First, I will lay out some things NOT to do and then I’ll share with you some smart ways to invest your 403(b).  Let me help you to remove the guesswork when investing in your retirement plan.

Things To Avoid While Investing 403(b)

#1. Dn’t Let Your 403(b) Rep Pick Your Funds

These reps do not know your total financial situation, so how can they accurately make any recommendations?  When you first set up your 403(b), were you ever asked about how you want to spend your retirement?  How about an analysis of what portion of your retirement success is based upon your 403(b)?  Don’t base important investment decisions on a rule of thumb.

#2. Do not pick all of the best-performing funds from last year 

This is not uncommon at all.  Be honest…you’ve thought about it, right?  One year’s winners are often next year’s losers.

#3. Do not invest in an annuity within your 403(b)

Many 403(b) plans are run by insurance companies that offer an annuity as an option within the plan.  The fact is, very few of you will choose to annuitize at any time.  Annuitizing makes the distribution of your assets less flexible to you.  Fees can actually sometimes reach 3% or more when using an annuity within a retirement plan.  

“I simply cannot understand why putting annuities with insurance expenses of 1.4 to 1.5% into qualified plans is still so prevalent.” -Roy Diliberto, CFP from his book “Basic Truths for Financial Life Planners”

How to Invest 403(b)

#1. Take a Big Picture View

Would you hire 4 separate landscapers to cut and maintain each quadrant of your yard?  Of course not.  When you view the yard up close it would look great.  But take a look at an aerial view and it would be disjointed and wouldn’t make any sense.  It is the same with finances.  

Your 403(b) is just one component of your overall investment portfolio.  It is important that this account works efficiently with your other investment accounts (i.e. spouse’s work retirement plan, IRA’s, Roth IRA’s, etc.).  This way, your accounts are all working towards the same goals and are working efficiently together.

Most of us would never rely on guessing when it comes to which car to purchase, which hotel to stay in on vacation, or what to wear to a big event; but will guess when it comes to investing our money.  Establish an investment policy statement for your household that drives your investment decisions.  This statement takes into consideration your risk tolerance and your financial goals.  This statement will act as your investing GPS, making sure you are making decisions that are continuing to keep you on the right track.

#2. Diversify

A key determinant of long-term portfolio performance is asset allocation.  It is important to make sure that you have a strong mix of asset classes in your overall portfolio.  Many 403(b) plans have limited access to certain asset classes. You may be able to access other asset classes that are needed in accounts outside of your workplace retirement plan (i.e. Roth IRA, Traditional IRA, etc.).  You know the old adage, “Don’t put all of your eggs in one basket.”

#3. Rebalance and Review 

I often meet with folks that have not spoken with their 403(b) rep or changed any options within their plans in 10+ years.  This is not a set it and forget it proposition.  It’s important to review and rebalance your portfolio at least annually because as time goes on, your portfolio will be skewed away from your original investment policy due to market swings.   

#4. Work with a Financial Advisor

The best thing you can do is to work with a financial advisor that believes in comprehensive financial planning.  Working with an advisor can help you to avoid behavioral investing mistakes that rob investors of investment returns year after year.  

Many higher ed institutions are now offering the ability for you to work with an advisor within your 403(b) plan. It is a great way to ensure that you are making wise financial decisions.  Most of all, we know that a 403(b) plan is just one component of your overall financial picture.  Finding a trusted advisor can help you to remove the guesswork from your financial life.

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