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Question for the Money Doctors

Question submitted on Mar 31, 2012.

Question

I am 30 years old and teach for public schools and have a 2 year old. I am single. Assuming there will be money in my pension (TPAF)how much should I be contributing monthly to my 403b if i plan on retiring at 65? What should be my target $ amount? Should I be contributing to a Roth IRA in addition to 403b?

Answer

As a general rule you should contribute as much as you can afford.  Your tax picture and employer match will determine which is better for you between the 403(b) and a Roth IRA. If there is a match on the 403(b) in your district, you should at a minimum contribute to the extent of the match.  If you are in a low tax bracket and there is not a match on the 403(b) plan, there may not be a tax benefit to going into the 403(b) so the Roth may make more sense if it is tax neutral (I.e. you are eligible for either earned income credits or child tax credits that offset your tax liability).

If you are in a mid range tax bracket the 403(b) might make more sense because you will be in a position where the contributions are subsidized by reduced Federal income tax withholding in your W-2 and possibly state, depending on your state of residence (and if it has state income tax).

Your target amount should be calculated as follows:  Estimate your target annual living expenses when you retire and subtract your estimated social security and pension incomes.  Then divide that figure by 4%, which is a general target withdrawal ratio of a retirement portfolio.  This will give you an estimate of the targeted funds needed to retire.  Then you will have to back out an estimated annual rate of return and number of years saving to determine how much to contribute annually.  There are a number of online calculators to help with these figures and of course, you can always seek the assistance of a CPA PFS credential holder in your local area.


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