Retirement – Aspiring Nirvana

What is a 403(b) Plan?

A 403b is a retirement plan offered by non-profit companies in which the employees contribute part of their salary with employers usually offering matching contribution.

Introduction

A 403(b) is a retirement plan offered by non-profit companies to their employees. Employees can contribute part of their salary to the plan, invest in various investing options, and let it grow tax-free until withdrawal time. Contributions to 403(b) are tax-free (up to an annual limit) which will lower your taxes. On top of that, most companies provide matching contribution.

403(b) plans are usually available for public schools, government offices, healthcare agencies, and religious organizations.

Difference between 403(b) plan and 401(k) plan

For all practical purposes a 403(b) plan is very similar to a 401(k) plan. You can invest in a basket of mutual funds or bonds. However, there are some unique differences between the two as noted below:

Benefits of 403(b) over 401(k)

Shorter vesting periods
Option for additional contributions after 15 years of service

Drawbacks of 403(b) over 401(k)

Less choices of investment options
Less protection from creditors
Annuities and other insurance products may not be optimal choices for some

Final Verdict

For salaried people working in non-profit companies, contributing money to 403(b) account is one of the best way to save for retirement, get free-money from employers, reduce taxes and comfortably save for retirement.

The key is to start early, contribute regularly and let your money grow over time!

We hope the information in this post will be helpful in your journey of aspiring nirvana!

What is the Difference between Mutual Fund and ETF

Both Mutual funds and ETFs are basket of individual stocks, however, ETFs are actually a hybrid between mutual funds and stocks, with a main caveat that one can buy or sell ETFs throughout the trading day unlike mutual funds that only trade once after stock market closes.

As both Mutual Funds and ETFs are basket of individual stocks or bonds, they are overall considered safer investments than individual entities. There really is no substantial difference between the two if you are investing for long-term time frame. However, there are some fundamental differences between the two as noted below.

Trading Time

ETF can be bought or sold at any time while stock market is open. If you are looking for a precise entry and exit time-point then ETF are better than mutual funds which can only be traded after stock market closes.

Fluctuating Price

ETF prices fluctuates throughout the time stock market is open. If you are looking for a precise entry and exit price-point then ETF are better than mutual funds which can only be traded after stock market closes.

Choice Flexibility

Mutual Funds have much longer history and provide lot more choices to invest than ETFs. However, ETFs are becoming increasing popular lately.

Fees Impact

ETFs generally have lower management fees compared to mutual funds. A small difference in fees can have huge impact for those investing for long-term time horizon.

Periodic Returns

Mutual funds generally provide returns (profit) in the form of capital gains and dividends. ETF on the other hand provide returns mainly on dividends.

Tax Implications

ETFs are considered more tax efficient than Mutual funds. Mutual funds generally have more transactions (buying and selling shares) that may result in capital gains that are taxable, even for those who may not have performed such transactions. Thus it is preferable to invest in ETFs in a taxable account and Mutual funds in tax-friendly accounts like 401k, IRA and Roth IRA.

Advance Trading Techniques

ETFs can be purchased on margin or sold short. These are advanced trading techniques that have unique risks and thus are not recommended for beginners.

Final Verdict

Though both Mutual Funds and ETFs investment is considered safer than individual company stock or bond investment, there are fine differences between the two. Make sure you discuss your financial situation with a registered financial advisor before making any investment decision.

We hope the information in this post will be helpful in your journey of aspiring nirvana!

Is investing in 401(k) a good idea for Retirement?

A 401k is a retirement plan offered by companies in which the employees contribute part of their salary with employers usually offering matching contribution.

Introduction A 401k is a retirement plan offered by companies to their employees. Employees can contribute part of their salary to the plan, invest in various mutual funds, and let it grow tax-free until withdrawal time. Contributions to 401k are tax-free (up to an annual limit) which will lower your taxes. On top of that, most companies provide matching contribution.

Pros

401k money grows tax-free until withdraw time post retirement, thus providing better returns compared to taxable account
Employer matching contributions are like free money
Contributions are automatically deducted from your salary
You will probably be in a lower tax bracket when you take money out during retirement

Cons

The 401k plan investment choices may have mutual funds with high fees
You will eventually pay taxes when you take the money out
There are early withdrawal penalties if money is taken out before retirement

I am not sure if I can save part of my salary

What if your employers offers you a 5% raise. Will you ever say No? Never!

That is effectively you are doing by not contributing part of your salary to 401k, assuming your employer matches your contribution. Even if there is no matching, you are still saving money on taxes while securing your retirement.

I am afraid of losing money in stock market

It is a valid concern! Although no one can predict the future, US stock market has always bounced back after every crash.

Money invested in 401k is for the long-term retirement purpose. There will be short-turn bumps but if you stay the course and not panic, then you will come out a winner in the end.

Additionally, there are various strategies (Ex. Dollar cost averaging) to overcome unique risks to your situation that allows you to invest money in higher or lower risk options.

What happens to my money if I change jobs

When you change your job, you can:

(1) Rollover money from previous employer plan to new employer 401k plan

(2) Rollover money to IRA (Individual Retirement Plan)

Remember, 401k money belongs to you! You have full control over what to do if you change your job.

Action Items to start 401K

Decide what percentage of your salary you can contribute to your 401k
1. At a minimum, contribute to take full advantage of your company matching
Work with your company HR to set up your 401k Account
Select which mutual funds to invest in
1. Start by investing in target-date funds as they choose allocation per your retirement age
2. As you get comfortable, you may want to invest in a mix of Index Funds and Bond Funds
Set up to automatically deduct money from you salary

That’s it! Sit back, relax and watch your money grow over time!

Final Verdict

For salaried people, contributing money to 401k account is one of the best way to save for retirement, get free-money from employers, reduce taxes and comfortably save for retirement.

The key is to start early, contribute regularly and let your money grow over time!

We hope the information in this post will be helpful in your journey of aspiring nirvana!