So you've decided to start saving for retirement in your company's 403(b), great job! The earlier you start saving money, the easier it becomes to reach your goals. Early investments have more time to grow, ultimately reducing the total amount of money you need to save for a comfortable retirement. Before making a 403(b) investment, you need to choose between your company's various mutual fund options. By taking the time to properly research your options, you can build your perfect portfolio and make sure your retirement plan stays on track.
A 403(b) is a retirement account for nonprofit organizations like public schools, hospitals, and other tax-exempt organizations. Investing in your 403(b) account is an effective way to grow your money because of this account's tax advantages. When you invest money into your 403(b), you can deduct your contributions from your income for tax purposes. In addition, you get to delay taxes on the investment gains until you start making withdrawals in retirement. This makes the after-tax return of a 403(b) account much higher than the return on a regular stock account.
When you invest in a 403(b), you are responsible for planning your portfolio. You need to choose the mutual funds that best fit your investment goals and tolerance for investment losses. Your 403(b) investment options depend on your company. Every organization offers a different variety of mutual funds. To learn about your plan's options, you need to contact your 403(b) plan administrator. The plan administrator will send you a printout of your options or refer you to your 403(b)'s investment website. If you don't know your plan administrator, ask your human resources rep.
Measuring Risk Tolerance
Before you start comparing mutual funds, you should estimate your risk tolerance. Your risk tolerance measures how you handle losses in your investments. Can you stomach market downturns or would a market downturn cause you to start tearing out your hair? Your plan administrator should offer some sort of quiz to help you determine your risk tolerance. If not, you can easily find one online. A high risk tolerance means you can accept short-term losses with an eye on long-term gains. A low risk tolerance means you should accept a lower rate of return in exchange for safer investments.
Listing Your Goals
Another important step in picking the right mutual fund is listing your retirement goals. How much money do you need in retirement and at what age do you want to retire? If you are looking for higher growth and have a long time to invest, you should look for riskier funds with more stocks. If you have a shorter investment horizon and don't want to lose money, you should look for less risky funds with more bonds and money market accounts.
Picking a Fund
Once you know your risk tolerance and retirement goals, you can start looking at your plan options. Your 403(b) should explain the riskiness and goals of different funds to help you make a decision. Your plan may even help you further by recommending funds for different age groups. By keeping these points in mind, you should be able to invest properly in your 403(b). You only have one shot to save for retirement. It is a good idea to review your investment decisions with a financial professional.
David Rodeck has been writing professionally since 2011. He specializes in insurance, investment management and retirement planning for various websites. He graduated with a Bachelor of Science in economics from McGill University.