When you’re saving for retirement, it can be difficult to know whether you’re saving enough. Even if you think you’ve got it covered, there’s little accounting for how much you’ll actually spend in retirement or how long your retirement will be.
That’s where annuities come in. These unique combinations of insurance and investment features help investors save for retirement and offer assurance they won’t outlive their hard-earned assets.
Learn more about annuities below and what you’ll want to take into consideration before you add them to your portfolio.
What is an annuity?
An annuity is an investment you buy in exchange for periodic payouts, typically during retirement. You can make a single premium payment or a series of payments, and choose whether your annuity payouts are made in a lump sum or over time.
How do annuities work?
A modern-day annuity is a contract between you and an insurance company. In order to get an annuity, you’ll need to pay a premium – usually a large lump sum – and then the insurer invests it. Afterward, the insurer provides you with a stream of payouts for a predetermined number of years or even the remainder of your lifetime.
An annuity has two phases: the accumulation phase and the annuitization phase. The accumulation phase of an annuity is the period of time when you’re making payments. Those funds may be split among various investment options.
The annuitization phase is the period of time when you receive payouts from the annuity, much like a regular paycheck. This can last for a set amount of years or for the rest of your life. The payouts include the principal amount along with any investment gains.
Annuities provide a stable investment option for savers who worry about market volatility or outliving their retirement savings. Annuities are known for three main benefits.
Reliable income for a set amount of time. Once you’ve made your payments, you’re guaranteed to receive payouts for the rest of your life or someone else’s life, like your spouse.
Death benefits. You may also designate a beneficiary on your annuity. This beneficiary will receive the payouts if you die beforehand.
Tax-deferred savings. Before you start receiving payouts, annuity income and investment gains grow tax free. “Annuities complement other retirement plans in that they provide opportunities to grow without heavy taxation,” says Rob Williams, managing director of financial planning, retirement income, and wealth management at Charles Schwab. You pay taxes on annuity income when you receive its payouts.
What are the different types of annuities?
Different types of annuities vary in how your money is invested.
Fixed annuities place your money in a general account of the insurance provider which promises a minimum rate of interest and fixed amount of periodic payouts. Check with your state insurance commission to confirm your insurance broker is registered to sell fixed annuities.
Variable annuities place your money in various investments, like mutual funds, much like a 401(k). The payouts from variable annuities will vary depending on how much money you pay, the rate of return on your investments, and any expenses of those investments as well as the annuity. Variable annuities are regulated by the Securities and Exchange Commission (SEC).
Indexed annuities provide the positive investment potential that variable annuities offer. The return of an index annuity is based on a stock market index, like the S&P 500. Like fixed annuities, these are regulated by state insurance commissioners.
Pros and cons of annuities
At their core, annuities are full of advantages:
Regular payments. They provide a guaranteed source of income throughout your retirement.
Low-risk returns. Annuities are generally a more stable investment, unless you have a variable annuity.
Tax-deferred growth. Earnings in your annuity are untaxed as they grow over time.
Unfortunately, there are major drawbacks to consider as well:
Big fees. Annuities typically have high fees and commissions which can really cut back on the long-term earning potential. Because of this, annuities aren’t a great place to grow money, but fixed immediate annuities take a smaller fee hit while generating a lifetime income stream.
Illiquidity. Variable annuities don’t offer access to your money until after several years, typically six to eight years but sometimes longer. If you do withdraw funds or cancel your annuity contract before that surrender period ends, you incur a surrender fee that can initially reach as high as 10% of your contributed funds, decreasing by one percentage point each consecutive year. Once your payouts start, it’s next to impossible to change them or access more of your principal.
Taxable income and tax penalties. Annuities aren’t totally tax free. As a source of income, annuity payouts are subject to income tax as you receive them. If you withdraw from your annuity before you’re 59 ½, you’ll face a 10% penalty on top of your ordinary income tax as well.
Guaranteed retirement income
Payouts last through your lifetime
Typically high fees
No short-term access to variable annuity funds
Tax penalties on early withdrawal
The financial takeaway
Annuities are a great addition to your retirement savings plan if you’re always maxing out your 401(k) contributions and if you can afford the fees. They provide steady income throughout your retirement, they grow tax-free, and your beneficiaries can benefit from the payouts, too.
Since annuities aren’t free, however, be sure to weigh their costs against their promised benefits to determine whether it’s the right choice for you.
Few crypto-trading platforms are as popular as Coinbase. But like all other trading and investing platforms, it has its risks. Case in point: At least 6,000 Coinbase users were hacked and had funds stolen from their accounts earlier this year, the platform disclosed to customers in early October.
Instances like this serve to shake users’ confidence in platforms like Coinbase, which leads to an obvious question for many: Is Coinbase safe? For most users, the answer is “yes.” But as always, there are some things users should know in order to gauge the risk for themselves.
Is Coinbase safe?
In a general sense, Coinbase is safe to use – or, at least as safe as any other crypto-trading platform, says Roman Faithfull, a photon cyber threat intelligence analyst with Digital Shadows, a company specializing in digital risk protection. “It [entails] the same risk as investing,” he says.
Related Article Module: Coinbase review: Crypto investing for individuals and institutions
To create an account on Coinbase, users need to supply some basic information, much as they would if they were opening a brokerage or bank account. For prospective users, that includes your full legal name, an email address, a password, a phone number, and a valid government-issued photo ID, which includes your date of birth, address, and the last four digits of your Social Security number, too.
Again, fairly standard stuff for opening an account of almost any type.
As for the rules and regulations that Coinbase abides by, it depends on the jurisdiction, according to the company. But in the US, Coinbase complies with the Bank Secrecy Act, the USA Patriot Act, and local state laws and regulations. “Aside from security protocols, cryptocurrency exchanges in the US and the UK must abide by anti-money laundering (AML) and know your customer (KYC) policies,” says Faithfull. This requires financial service providers to try and verify the identity of users.
The risks of using Coinbase to buy, sell, and trade crypto
As with any trading platform, there are risks associated with using Coinbase. Here are a handful of them:
Cybersecurity threats: From losing your credentials in a phishing scam to a cyber security breach, there’s always a chance that users could end up having their information, or holdings, exposed to an unauthorized third-party.
Questions abound regarding regulation: In the US, regulation regarding cryptocurrency is still up in the air. But at some point, new rules are likely to land, and depending on what shape and form those rules take, it could have big implications for crypto investors.
Getting in over your head: While Coinbase does provide educational materials to users, it can be easy to get in over your head with little or no experience. For new users, or crypto newbies, take the time to learn the lay of the land, or consult a professional before making an investment.
There are risks associated with cryptocurrencies: Crypto is inherently risky, speculative, and volatile. There’s a chance that your purchase today could plunge in value tomorrow. That’s an important thing to remember, especially for budding crypto investors.
Can you get scammed on Coinbase?
Yes, you can get scammed on Coinbase – and almost any other platform, too. That’s something to keep in mind: You’re almost always assuming some level of risk when using an investing platform, whether it’s concerning cryptocurrencies or stocks. But aside from that, experts say there aren’t necessarily special risks associated with using Coinbase.
“There’s no inherent risk” to using the platform, Faithfull says, adding that much of the risk users do assume mostly “depends on the credentials you use.”
A phishing scam involves tricking unsuspecting users into supplying their usernames and passwords to a hacker, often using an email or text message that appears to be from a platform on which they have an account. While often not very sophisticated, it’s a common scam, and with a user’s username and password, a third-party can, in many cases, defeat the two-factor authentication system and access a user’s account.
From there, a hacker can change the account’s credentials or transfer the account’s holdings. And phishing is, of course, just one possible course for scammers. Faithfull says that using an authenticator app, along with two-factor authentication, could “significantly increase users’ security.” But even that wouldn’t be invulnerable, he adds.
The best and perhaps easiest thing to do to keep your account safe, Faithfull says, is to create a new email address – one that you don’t use for anything else – and a password you’ve never used before, anywhere. Also, he says don’t broadcast that you have crypto holdings. “It’s similar to bragging about having cash in your wallet,” he says, and could attract unwanted attention.
Coinbase is one of the biggest and most popular crypto-trading platforms out there, and in terms of safety, using it puts users at no more risk than using most, if not any other platforms. Users can take security into their own hands, too, by creating hard-to-crack passwords and using novel email addresses.
And while there’s always risks associated with investing (especially when investing in cryptocurrency), Coinbase users and prospective users would do well to research what they’re getting into before opening an account.
In September, wholesale used-car prices surged and vehicles sold faster than they did in August.
A shortage of new cars is driving secondhand prices up.
The worldwide supply of cars may not recover until 2023, industry analysts say.
Looking to buy a secondhand set of wheels for a reasonable price? You may want to wait a couple of years.
Used-car values have surged during the pandemic as a chip shortage reduced the flow of new vehicles off of production lines to a trickle. It looked like prices were starting to come down after hitting a peak this spring, but now that relief appears short-lived.
According to Manheim Auctions, the largest wholesaler of used vehicles, wholesale used-vehicle prices hit a record high in September of 27.1% above the prices from the same month last year. Retail prices tend to lag slightly behind wholesale, so consumers will likely feel the price hikes soon, too.
Even amid the inflated prices, demand for vehicles is high. The sales-conversion rate jumped to 65% in September, according to Cox Automotive, indicating that buyers are getting more aggressive. It was 52% in September 2019.
Used cars are selling extraordinarily quickly, and buyers will have to act fast if they want to get their hands on a particularly popular model, according to a new study from iSeeCars published Tuesday.
In September, the average used vehicle sold 32.8 days after being listed for sale online, according to iSeeCars. That’s compared with 34.6 days on average in August. In the months preceding March 2020, the average was 68.9 days.
Some of the fastest-selling used vehicles were the Tesla Model 3 (on the market 16 days on average), the Mitsubishi Outlander (19.7 days), and the Toyota Prius (20.7 days).
In light of the worsening chip crisis, forecaster IHS Markit projected in September that global vehicle production will be severely diminished through the rest of 2021 and throughout 2022. Production will also take a hit in early 2023, the firm forecasts.
That means the shortage of new vehicles that’s driving up prices will be with us for quite a while.
IHS Markit forecasted in October that the global supply of cars will start to stabilize in the second half of 2022 and begin to recover in the first half of 2023, Automotive News reported.
While I’ve always considered myself relatively frugal, I started spending money in what felt like “luxurious” ways once the pandemic hit. Blame cabin fever or existential dread; it was also a fact that – thanks to pandemic unemployment insurance – I had a little more disposable income.
Now, even though things in my community are relatively back to normal and pandemic unemployment benefits have come to an end, my spending habits remain the same. Because I realized that what felt like splurges were actually relatively modest purchases, and because of these products and services dramatically improved my life, the following pandemic spending habits just might be here to stay.
1. I stockpile cleaning supplies
While I’ve definitely never been one of those toilet-paper hoarders, at the start of the pandemic I did pick up a couple extra bottles of bleach spray, sanitizing wipes, and everything else we’d need if someone got sick. Eighteen months later, I’ve kept up the habit. I love never running out of dish detergent or laundry soap.
2. I support local farmers
When the grocery store in town shut down, I started patronizing a hyper-local delivery service called Two Birds Provisions. This past spring, I became a patron. This means that I get a cooler full of locally grown produce, butcher shop items, and other locally produced goods delivered weekly straight to my door. Everything is super fresh, I’m supporting a family-run business, and it all costs less than what I’d spend at the supermarket.
3. I have a flower subscription
When I signed up as Two Birds patron, I went buck wild and tacked on a weekly flower subscription. It feels like a total indulgence, but a bouquet of locally grown flowers and foliage delivered weekly from the Parcel Flower Co. costs less than a large deluxe pizza – and fresh flowers seriously brighten a home.
4. I regularly refresh my wardrobe
My kids get an entirely new wardrobe every six months; you’d think I’d splurge on at least one pair of matching socks! Not so until last fall, when I looked down at my COVID wardrobe and realized it was time to retire the bleach-stained sweatshirts, house dresses from when I was pregnant, and worn-out leggings with holes in the crotch. Now, every time I shop for my kids, I pick up some new gear for myself as well.
5. I’m amassing a collection of actual pajamas
Back in December 2020, the Washington Post declared that pajamas are having a moment. I couldn’t agree more. Instead of falling into bed every night in a t-shirt and sweats, last Spring I surrendered to my inner granny some time and began amassing a collection of cotton and flannel nightgowns similar to this amazing number (with pockets!).
6. I hire household help
As if a global pandemic wasn’t stressful enough, last July I was hit by a car while crossing the street. Miraculously, I was mostly okay. But a fractured wrist made completing housework nearly impossible, so we hired a housekeeper to take over most chores. Sure, it isn’t cheap, but in situations when you physically can’t do something, or when time is truly of the essence, it’s well worth the money to hire outside help. These days, we keep our housekeeper’s number on file in case of emergencies, and – just as soon as we were vaccinated – we put Biden’s child tax credit towards hiring the nanny of our dreams.
7. I’m investing in kitchen gear
Months of eating in put my love of cooking to the test. It also tested my cookware. The past year or so, we bought at least one new pot, and invested in actual glassware (although I still prefer drinking out of an old jar). But my favorite culinary purchase so far? A KitchenAid mixer to indulge my inner Stepford wife. Brand-name stand mixers are notoriously pricey, but you can find one for half the price like I did if you shop secondhand.
8. Skin-care products galore
If it sounds like I started spending a lot of money on me, that’s only because I didn’t used to – ever. Now, thanks to the pandemic, caring for myself has become the norm. Take my skincare regimen, for example: infrequently washing my face has morphed into multi-step routine that includes a liquid exfoliant, Retinoid serum, and this Vitamin C serum recommended by the dermatologist that does my Botox – and oh, yeah, I started getting Botox, because you can’t hide your “elevens” behind a face mask.
We’re extremely fortunate that the pandemic has left us with more discretionary income instead of less, and I’m happy to spend it by supporting local businesses as well as treating myself. It shouldn’t take an existential threat to invest in new underwear or adequate childcare, but here we are.
Thanks to massive shortages and high demand, buying a car now is trickier than ever.
Shoppers should be extra flexible on just about every aspect of buying a car, experts told Insider.
There are also pros to leasing a vehicle or delaying a purchase until this all blows over.
If you’ve been following the news, shopping for a car probably feels incredibly daunting right about now.
Between a computer chip shortage, booming demand for cars, and a rat’s nest of other pandemic-related factors, vehicles are in short supply nationwide. Practically all cars – from the latest models to decade-old clunkers – cost significantly more than they did a year and a half ago.
It all means that the decisions surrounding buying a car have become more challenging than ever before. Successfully navigating this difficult market means resetting your expectations, expanding the options you’ll consider, and possibly even deciding not to buy a car at all, experts told Insider.
Flexibility is key
There’s a good chance you won’t find exactly what you’re looking for at precisely the price point you’re used to. Being open to a variety of brands, models, and options is the way to go in today’s market, Brian Moody, Autotrader’s executive editor, told Insider.
“The person who’s probably going to do the worst in terms of finding what they want is the person who’s very rigid,” he said.
People looking to buy secondhand should broaden their search to include older models than they’d normally consider, says Benjamin Preston, an automotive reporter at Consumer Reports. On the new side of things, being open to less-popular vehicle types like sedans, hatchbacks, and smaller SUVs could pay off, he added.
Prepare to pay up
Whether you’re shopping new or used, expect to fork over much more than you’re accustomed to, Ivan Drury, senior manager of insights at Edmunds, told Insider. New vehicles are selling at or above MSRP. And used cars, even older ones, are worth thousands more than before the pandemic. Some lightly-used vehicles are selling for as much or more than their new counterparts.
And don’t go in expecting to negotiate thousands off of a vehicle’s sticker price, Drury said. While that may have worked before, right now there are way more customers than cars – and dealers know that.
If you decide to stomach the astronomical used-car prices, be sure to keep that vehicle for the long haul, Drury said. One of the worst things you can do for your wallet right now is to buy a vehicle at today’s prices and dump it in a year or two.
Leasing may be your best friend
If you’re having trouble finding what you’re looking for or can’t afford the eye-watering price tags of some in-demand models, consider leasing until it all blows over, Drury said.
“Just borrow something you’re okay with instead of buying something you don’t love,” he says.
Leasing costs less per month than paying off a car loan, but the trade-off is you have to return the vehicle after the two- or three-year lease period. People who go this route should check automaker websites for lease specials on certain models and trims, Drury said. Customers afraid of exceeding the mileage limit on a lease should see if they can add miles at the beginning of their contract.
“Bottom-line shoppers” who are leasing as a last resort should hunt for vehicles with the lowest monthly cost and the lowest up-front payment, Moody said.
Work with what you’ve got
With prices the way they are, investing in an existing vehicle could make more financial sense than it did just a few months ago, Preston, of Consumer Reports, said. Even expensive repairs may be worth it in the long run if they allow you to delay a purchase and escape today’s chaotic market.
“Our advice is if you can wait, that’s probably your best bet,” Preston said.
Tom Corley: What I found in my research is that in the morning, this is where self-made millionaires really create a lot of their wealth. They invest in themselves in the morning and what do they do? They do things like meditation. They do things like brainstorming – they’re brainstorming over obstacles, problems, issues that they are having either in pursuing their dreams or their goals or in their business or in their career.
They’re also reading what I call facts. They’re studying facts. And the reason to why they study the facts is they do this so that they can maintain their knowledge base and improve their knowledge base. They’re also trying to read uplifting, motivational, inspirational things to get them in the right mindset and this is so important. I’ve mentioned several times in my articles, if you have a positive mental outlook, then you have a greater chance of being successful in life and in order to get that positive mental outlook, sometimes you got to do certain things to put you over the top and one of them is meditation, the other one is reading inspirational, uplifting information.
EDITOR’S NOTE: This video was originally published in December 2017
Welcome to Personal Finance Insider, a biweekly newsletter that connects you with the stories, strategies, and tips you need to be better with money.
Here’s what: How Insider’s personal finance team budgets to live well
Allow me to make a confession that may horrify you: I love budgeting. It’s not that I’m a masochist or even a numbers nerd. I just love the power I feel when I look at my spreadsheet and see how I can make important purchases fit into my family’s budget, or see the number rise in our savings account until it finally hits its target. To put it simply, I love being able to exercise control over my income instead of allowing it to control me.
If you’re the kind of person who’d rather do 4,000 hours of housework than deal with your finances, I hear you. I have been you. But I’m here to say it doesn’t have to be this way – and budgeting is your best chance at slaying the beast that is your financial fear.
It won’t surprise you to learn that Insider’s personal finance team is made up of a bunch of people like me – people who love talking and thinking about money. And our brain trust is full of smart ways to manage your money to save thousands and live well. I’d like to use today’s newsletter to share some of our best advice.
My best budgeting tip is a simple one: Use a spreadsheet to track your spending. Knowing where your money is going now is the first step to spending it with purpose.
I have a Google spreadsheet where I track every penny I spend. When I grocery shop on Saturdays, for instance, I get back in my car, whip out my phone, and add my Trader Joe’s total to my “grocery” line item for the month. Each tab in my spreadsheet represents a new month, and I list out all of my monthly bills and have categories for variable spending with limits for each (like $200 a month for “personal care and household items”). I built my spreadsheet and set my category limits by looking back at a few previous months of credit card and bank statements, and figuring out where and how I was spending.
When I need more money in a certain category, or need a new category all together, I make adjustments. My budget is a living document that evolves right alongside me.
Personal Finance Insider’s executive editor, Libby Kane, says being honest with yourself about your spending is critical to building a living, breathing budget that supports you (instead of suffocating you). “Fudging spending categories or amounts to be ‘good’ or ‘better’ will only work against you in the long term,” she says, so set up your budget however it makes sense for you. “I used to have a spending category entirely for buying chocolate!”
Jasmin Baron, our associate credit cards editor, shares a good hack for spending less at your favorite shops: Always join (and use) the loyalty/rewards program of the stores and restaurants you frequent. “It’s amazing how much free or discounted stuff these programs offer – from free fries and other goodies at McDonald’s (we may take advantage of that a lot around here) to digital coupons at grocery stores and drug stores,” she says. “No coupon clipping required.”
Trying to save and invest your way to long-term wealth? Take a cue from Ellen Hoffman, editor-in-chief of Insider’s Service Journalism team: “I have a few direct deposits set up that split up every paycheck I earn between my high-yield savings account, investing account, and checking account,” she tells me. “This has been a game-changer – it helps me save and invest with minimal effort. My hope is to be able to increase the amount I’m able to save and invest every year.”
Sophia Acevedo, a fellow on the personal finance team, says keeping her savings separate from her spending money ensures she meets her goals every time. “When it comes to saving money for a long-term goal or emergency fund, I need it be out of sight and out of mind,” she says. “I initially had one savings account and always felt guilty when I took money out. I decided to move my money to a CD and that significantly improved my attitude on savings. If people are struggling to save, they should look into why it’s a struggle and see if there’s an account or tool that better addresses this problem.”
Cheers to budgeting and saving your way to a life you love.
– Stephanie Hallett, senior editor of Personal Finance Insider
Writer Michelle Chikaonda thought she wanted to buy a house this year, but after seeing way too many overpriced homes in a hot market, she decided to focus on paying off her five-figure credit card debt – and fast.
The way we think about and relate to money has a profound impact on how we spend, save, and hoard cash (and objects). Writer Laura McCamy confronted this truth head-on when she started decluttering her home.
Kyle used to be a HENRY, short for “high earner, not rich yet.”
Now, the 34-year-old tech worker, who didn’t want to publish his last name for privacy reasons, is well on his way to building wealth thanks to the world of remote work.
He spent the last five years hopping around the tech scene as a big data specialist in California after finishing his PhD. He was earning $120,000 at his first job in 2016, according to a pay stub reviewed by Insider, and increased his salary at his next company after moving to the Bay Area.
“My personal anecdote is that some people are too ensconced in the patterns of their current lifestyles,” he said. “Sometimes, it has nothing to do with material cost.”
He said his money typically went to sky-high rent, $2,500 in student loans a month, and putting big-ticket items like furniture and kitchenware on his credit card. He was caught in a vicious debt cycle.
After spending a few years paying everything off, he said, the pandemic hit. It opened up a game-changing opportunity: He landed a new job with permanent remote work and a base salary of $175,000, per his pay stub. It enabled him to trade in the Bay Area for his hometown of Phoenix last September, shedding his HENRY lifestyle.
“I was able to more than halve my living costs,” he said. Whereas he typically saved of $5,000 to $10,000 a year while living in California, he added, he socked away $80,000 last year. “Work-from-home offers an unprecedented opportunity for young people to break out of the debt cycle.”
Confessions of a former HENRY
Kyle said he can’t imagine going back to work in the Bay Area after the pandemic.
“Looking back, I can’t believe how unreasonably expensive everything was,” he said. “The cost didn’t seem like much of an issue at the time since I was able to get by on a tech salary, but I was certainly priced out of upwardly mobile asset accumulation like homeownership.”
A friend of his, he added, has been struggling to a buy a home in the area for over a year, and recently lost a bid for a townhouse after putting in an offer at $60,000 over asking price.
Boxed out of the housing market, Kyle said he spent $4,300 a month renting a two-bedroom, two-bathroom condo in the Bay Area. He finally became a homeowner after moving to Phoenix, one of the pandemic’s migration hot spots, where he pays $1,043 a month for his mortgage on a three-bedroom, two-and-a-half bathroom house.
His other monthly costs have also dropped immensely since moving. Based on his bank statements, he estimated that he was spending $3,700 a month in addition to rent in the Bay Area, which now looks more like $1,500 a month in Phoenix.
Kyle said he still pines for California, missing the food and social activities, but doesn’t miss the cost of living and the traffic.
“For those with work flexibility, there is a huge financial opportunity to be had from migrating to lower-cost-of-living metros,” he said, adding that it’s still hard to convince people otherwise.
But Kyle points out that everyone views utility – an economics term referring to the degree of happiness that comes from consuming a product or service – differently.
“Measuring cost of living (or lack of savings) without measuring utility is telling only half the story,” he said. “I managed to increase both in the last year, but for others it is still a strict trade-off.”
Whether we want to think about it or not, retirement will come for us all at some point in our lives. When it’s your turn, will you have enough money to sustain you for the rest of your life? That’s the question every adult has to answer for themselves and the reason so many of us choose to participate in some kind of retirement savings program.
The two most common are the 403(b) and 401(k) plans. These are savings programs offered by employers that enable you to allocate some of the money you earn into a special account where it will be invested and possibly matched by contributions from your employer. Here is a closer look at how both of these plans work and in which situations you might want to consider enrolling in one.
403(b) vs. 401(k): At a glance
Both 403(b) and 401(k) are employer-sponsored retirement plans aimed at helping workers invest their earnings and see them grow into a pot of money they can live on once they retire. There are some differences between the two that make each appropriate for different kinds of investors.
403(b) plans are tax-sheltered annuity plans offered by nonprofits and other tax-exempt employers.
401(k) plans are qualified profit-sharing plans offered by for-profit companies to enable employees to save for retirement.
What is a 403(b) plan?
A 403(b) plan is a type of retirement plan that can only be offered by qualifying tax-exempt employers. It’s also known as a tax-sheltered annuity, though money can be invested into both annuities and mutual funds. These plans enable employees to contribute pre-tax money from their earnings directly to their plan. That money is then invested in annuities or mutual funds that are likely to gain in value over time.
Earnings grow tax-deferred until you start taking dispersals. You need to be at least 59 ½ to begin to withdraw funds from a 403(b) without paying a penalty, unless you qualify for a special circumstance, such as financial hardship or disability.
403(b) plans are only offered by tax-exempt employers, such as 501(c)(3) nonprofits, public schools, cooperative hospitals, and some religious organizations. The employer is the 403(b) plan sponsor and usually hires a provider to develop the options it will offer employees and to administer the plan itself.
Every plan is different and tailored to what the employer chooses to provide, such as the ability to take out loans or contribute after-tax dollars. You are generally eligible to participate in a 403(b) when your employment begins, though some employers set their own rules for eligibility and may opt to automatically enroll you in a plan.
Employees usually get to choose how much to contribute to the plan and employers may or may not provide additional contributions. Depending on what options your employer offers with its 403(b) plan, you may also be able to add post-tax dollars to your account. Because you’ve already paid taxes on this money, you won’t have to do so again when you collect dispersals of these funds once eligible.
In 2021, you can contribute up to $19,500 in salary to a 403(b) if you are under age 50 and up to $26,000 if you are older than age 50. The most both an employee and employer can contribute this year is the lesser of $58,000 or an employee’s total includible compensation for their most recent year of service.
403(b) plans can also offer special provisions for employees to catch up on their retirement savings. This is one of the main advantages they have over 401(k) plans. If you’ve worked for a qualified organization for at least 15 years and meet specific requirements, you could add up to a maximum of $15,000 in contributions to your 403(b) over the course of five years. Otherwise, the 403(b) is very similar to the 401(k).
Tax-deferred retirement investments that may have employer contributions
Option to add up to $15,000 in catch-up contributions if you meet qualifications
Lower taxable income while contributing to the fund
Money is constantly growing
May be able to add post-tax dollars
May be allowed to take a loan
Have to pay taxes on disbursements
Have to pay a 10% penalty and taxes on early withdrawal of money
Funds can only be invested in annuities and mutual funds
Can only use employer-approved service providers, which often come with high fees
What is a 401(k)?
A 401(k) is a retirement plan offered by many private employers that allow participants to divert pre-tax money from their pay into an investment account. Employers often provide additional funds to 401(k) plans in addition to what employees contribute. There are three kinds of 401(k) plans:
1. Traditional 401(k): This plan enables employees to designate how much of their pay is added to the fund per pay period and employers to provide matching funds as well as set up a vesting schedule. These plans must pass nondiscrimination testing that proves company contributions don’t favor highly compensated employees. Companies of any size can offer this kind of plan and they can be offered in addition to other retirement plans.
2. Safe harbor 401(k): This plan is similar to the Traditional 401(k), but requires employer contributions to be 100% vested. Safe harbor 401(k)s are not subject to nondiscrimination testing. However, they do have rules about notifying employees about their rights and obligations regarding the plans. Companies of any size can offer this kind of plan and they can be offered in addition to other retirement plans.
3. SIMPLE 401(k): This type of plan is aimed at enabling small businesses with fewer than 100 employees to offer retirement benefits and maintain cost efficiency. Employer contributions have to be fully vested, but the plans don’t have to meet annual nondiscrimination testing.
You may be automatically enrolled into a 401(k) or have to contact the appropriate person in your company to participate. It all depends on what your employer’s policies are regarding eligibility and participation.
Employers can also decide what kinds of benefits they choose to offer with their 401(k) plans, companies to administer the plan, and types of products you can invest in. Options may include shares of company stock, individual stocks, bonds, or securities, variable annuities, or mutual funds.
401(k) plans have an income limit. In 2021, no more than $290,000 of an employee’s income can be considered when calculating contributions based on a percentage of compensation.
The same individual contribution limits for 403(b) plans apply to traditional and safe harbor 401(k) plans in 2021: $19,500 if you are under age 50 and up to $26,000 if you are older than age 50. For SIMPLE 401(k) plans, the limit is $13,500 if you are younger than 50 and $16,500 if you are older than 50.
401(k) contributions are pre-tax, thereby lowering your taxable income in the years contributions are made. Taxes are paid upon withdrawal of funds once you reach an eligible age, have a special circumstance that allows penalty-free withdrawals, or opt to withdraw funds early and pay a 10% penalty. A plan may also have provisions that allow after-tax contributions, which will not be subject to taxation upon withdrawal. All taxes on 401(k) withdrawals are calculated as regular income tax.
“Sometimes, employers will permit loans on 401(k) plan balances,” says Cassandra Kirby, a Certified Financial Planner and wealth advisor with Braun-Bostich & Associates. “This allows up to 50% of the vested balance to be loaned up to a maximum of $50,000. You must repay the loan within five years. There are some exceptions to this rule if the loan is for a first-time homebuyer. ”
Though most people don’t have a choice between a 401(k) and 403(b), the former generally offers participants more flexibility for choosing how your money is invested than you get with 403(b) plans. Many employers offer 401(k)s as a way of providing profit sharing to employees, which isn’t possible with a nonprofit that offers a 403(b). Fees may also be less with a 401(k) than with a 403(b), but fees are common in general.
“Unfortunately, historically the 401(k) and the 403(b) plan markets have been dominated by higher fee providers,” says Katharine Earhart, partner and co-founder of Fairlight Advisors. “It’s important to understand and know the fees for your plan, including the fees associated with the investments inside your plan. Plan sponsors (typically the employer) should be sending an annual participant fee disclosure document which clearly and transparently displays the fees for the funds.”
Tax-deferred retirement investments
Employer contributions are common
Lower taxable income while contributing to the fund
Money is constantly growing
May be able to add post-tax dollars
May be allowed to take a loan
May have flexibility in choosing investments
Have to pay taxes on disbursements
Have to pay a 10% penalty and taxes on early withdrawal of money
May have to wait for employer contributions to be fully vested
May be subject to high fees
The financial takeaway
Both 403(b) and 401(k) plans are vehicles offered by employers to help employees save for retirement. Because one is only for nonprofit organizations, you will likely not have the option to choose one over the other. However, they are very similar in how they work, each offering some advantages over the other.
It’s always a good idea to consult with a financial advisor if you’re considering participating in a retirement plan such as these. And any opportunity to save for the future will be beneficial, especially if your employer offers matching contributions. That’s free money that will grow in a plan like a 401(k) or 403(b). Either way, they’re both worth considering if they’re available options to you.
Values plummeted early on in the pandemic as economic uncertainty and the fear of infection kept buyers at home. But since then, demand has exploded and prices for both new and used cars have surged higher and higher.
Several new vehicles are selling for above MSRP and used models on the wholesale market are going for over 40% more than they would have in February 2020, according to Manheim Auctions. It’s gotten so bad that nearly half of people interested in buying a car are calling it quits for now and are waiting for prices to come down, a recent Kelley Blue Book survey suggests.
That’s probably a good idea, according to Consumer Reports.
“Our advice is if you can wait, that’s probably your best bet,” Ben Preston, an automotive reporter at the nonprofit outlet, told Insider.
With car prices at unprecedented levels and set to stay there for the foreseeable future, Preston recommends that consumers hang on to their existing vehicles rather than hoping for a deal. The global shortage of computer chips that’s at the heart of the ridiculous pricing doesn’t seem like it will resolve itself anytime soon. That means new cars will be in short supply and used ones will be in high demand for months – possibly years – to come.
An expensive repair that would’ve forced someone to ditch their car for a new one 18 months ago could make financial sense nowadays, Preston says. Replacing an old vehicle is pricier than ever, so a $3,000-$4,000 transmission, for instance, could make sense depending on how long the owner plans to keep driving that vehicle. If coming up with the cash is an issue, owners can shop around for repair shops that offer short-term financing.
The same goes for leases.
If you are nearing the end of a lease, it could be a good idea to hang on to the vehicle by buying it out, Preston says. Lease agreements stipulate a price that the lessee can buy the vehicle for at the end of the two or three-year term based on its projected residual value. Because nobody could have predicted how values would spike in 2020 and 2021, buying out a lease could be a good way to secure a vehicle at below-market prices.
Shoppers who can’t wait should look for less popular models and be prepared to make some sacrifices on age and options, Preston says.
“It’s going to be tricky to buy a car right now,” he said. “It’s not impossible.”