The order of saving/investing

Investing
#1

Hi, Jeremy. First of all, I want to thank you so much for the education you are putting out there. I’ve learned so much from your IG!

I am a healthcare professional in SoCal. My hospital offers Cash balance (match up to 5% with fixed yearly interest at 6%) and 403b (roth or traditional with no employer match). I have been saving in this order.

  1. Contribute 5% to my cash balance (up to match)
  2. No HSA since my employer offers awesome medical insurance with $200 deductible (everything is pretty much free :blush:)
  3. Max Roth IRA
  4. Max my Cash Balance (additional 20%)
  5. Roth 403B (10%, which comes about 12k a year, yes I am not reaching to max for this account and this is where I wanted to question)

So according to the projection of my Cash balance from our company website, if I contribute to the max (25%) til I reach 48 (I am 36 btw) then convert to the match only after 48 (5%, and my balance will be at 1M) I can reach 3 million by 65 and get about 25k/month indefinite payment til I die.

I will of course invest those 20% after 48, to 403b and taxable brokerage. I actually love my job and am not gonna try to retire early. (So weird huh? :roll_eyes:)

I am not planning to use my roth ira or 403b account for retirement money. Probably inherit some to my daughter and donate the rest for the good cause.

So my question is, am I doing it wrong putting money away to the max in my cash balance instead of my 403b? What do you think about my retirement plan?

#2

Hey @Mamabear!

Welcome and thank you!

So a cash balance plan is a type of pension plan. Pension plans can vary dramatically, although I’ve never met one I didn’t dislike. Basically, I think a person who has even a baseline knowledge of investing will likely be much more wealthy if they buy and hold index funds, rather than turn over their money to the pension plan and hope for a payout later in life.

You mention a fixed 6% rate of return. If you put $500/month into an account guaranteeing 6% interest from June 1980 until June 2020, you would have about $928,000.

If you put $500/month into an S&P 500 index fund from June 1980 to June 2020 it would have returned about 10.5% per year and you would have about $3,217,983.

Also if the money is in your own 403b or IRA, you eliminate risk of that pension going broke or otherwise defaulting on their promise.

That said, if your employer is actually offering a MATCH (like the free money kind) then it may still be worth it (although possibly not… I’d still do the math. Giving up 3 doubles of your money to get 1 is a bad deal).

So without knowing the exact details of your cash balance plan, I’d probably just eliminate step 4 from your plan, push that extra money into your 403b, THEN I’d probably go to a taxable brokerage account. I’d rather have to pay tax on $3.2M then deferred tax on $928K you know?!

I’d dump your Roth IRA, 403b and taxable brokerage in some index funds and leave it for a few decades. Anything your pension pays out is bonus. :slight_smile:

BUT, broad strokes, you’re killing it. You’re putting away a ton and if you stick with your plan exactly as is you will be in very great shape. Keep it up! :slight_smile:

#3

Although their annual funding reports had been looking great… I have never thought about The possibility of my pension going broke :scream: I definitely need to adjust my strategy. Thanks for the advice!

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