FAQ – 403(b)/457 Costs and Surrender fees

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I am 36 years old and would like to start a 403(b) or 457 plan. I would like to put $200 a month into the plan that I choose. I don't know whether to get a variable annuity, fixed annuity or mutual funds.

Congratulations on choosing to participate in a 403(b) or 457 plan. This is an important step toward taking control of your financial future.

The type of investment you choose depends largely on your goals (how much money you want to accumulate), your timeline (how long you have until you need the money) and your risk tolerance (how much volatility – ups and downs in value over time – you can handle).

There are three types of plans offered in a 403(b) or 457 plan: fixed annuity, variable annuity and custodial account mutual funds or 403(b)(7) plans.

Mutual funds generally invest in stocks, bonds, other mutual funds (called a fund of funds) or a combination. Mutual funds are not guaranteed, and your return will depend on how the mutual fund performs over time.

A variable annuity, like a fixed annuity, is issued by an insurance company. However, unlike a fixed annuity, it offers no guarantees. Your return generally depends on the performance of the investments underlying the variable annuity, which are usually mutual funds made available through the insurance company. Note that, in many cases, you may be able to invest in mutual funds that are the same or similar to those in the variable annuity at lower cost.

Of these three choices, a fixed annuity is the most conservative. It offers a guarantee of principal (the amount you contribute to the annuity) and a guaranteed rate of return for a specific period. However, these guarantees are dependent on the financial strength and stability of the issuing insurance company. Fixed annuities generally offer a low rate of return, which may not keep up with the rate of inflation over time. At your age, if you are in good health and don't anticipate retiring for 20 years or more, you may want to consider a mutual fund. You should also know that variable and fixed annuities often charge surrender fees that can make it difficult to get out of the contracts once you are in them. View a video about fixed annuities here.

Finally, regardless of which type of investment you choose, be sure to investigate all the fees charged by the investment.

Putting $200 into your 403(b) or 457 plan each month can give you a great start, especially if you don’t plan to retire for another 25 years or so. For example, if you invested $200 a month for 25 years and received an average annual return of 2.5%, such as you might expect from a conservative investment such as a fixed annuity, you could accumulate a total of $83,235. If you invest more aggressively in a mutual fund and earn an average annual return of 6%, you could accumulate $138,599. Note that these rates of return are for example only and do not represent the return of any specific investment. Your return will vary, and investing in a 403(b) or 457 plan cannot guarantee a profit or protect against loss in a declining market.

You can estimate your retirement savings based on different potential earnings rates using the 403(b) calculator.

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