We all have a “someday” list. Maybe you want to see one (or more) of the Seven Wonders, attend culinary school to perfect your technique, or rebuild a classic car like the one your dad used to own.
Retirement might be the time your “someday” becomes “today.” It also might be the grandest savings goal of your life, and UC is here to help.
For starters, you might be eligible for a pension benefit from the UC Retirement Plan (UCRP). The amount your pension benefit will be worth depends on your years of service, your highest average pay, and other factors. In addition to your UCRP benefit, you may need to save some of your own money to maintain the standard of living you’re used to.
While it may seem like UC’s pension benefit can meet all of your needs, keep in mind that the average UC retiree has roughly 20 years of service. For most employees, that equates to a UCRP pension benefit at age 60 of 50% of their highest average pay. If you’re like many people, you’ll work for several employers during your career, and you might not stay at UC long enough to build your UCRP pension benefits to a level that can meet your needs.
That’s where the UC Retirement Savings Plans (UCRSP)—your UC 403(b), 457(b), and DC Plans—comes in. Together, UCRP and the UCRSP give you the best chance for financial security when you retire.
So make this the year you commit to saving for your “someday.” Here are three healthy habits to develop today.
Most people are aware that the longer you save, the more you’ll potentially accumulate.
What you might not know is that saving steadily over the years is especially powerful when you do it in a tax-advantaged retirement savings plan, such as the UC 403(b) and/or 457(b) Plans. That’s because you pay no taxes on your contributions or any investment earnings until you withdraw them, giving your money the chance to grow more than it would in a taxable savings account.
Year over year, that means more of your money works for you. It’s called “compounding,” and it can make a substantial difference over time.
You don’t have to make a lot of money to have a healthy retirement savings balance by the time you retire. How much—and how long—you save is key. Experts suggest you may need to put away at least 10%–15% of your pretax income each year to have a good chance of meeting your retirement income needs. The earlier you start saving, the less you may have to save to help reach your goal.
Of course, we’re not suggesting that everyone can save 10%–15% of their pay. But the good news is that your UC 403(b) and/or 457(b) Plan contributions are made before taxes, which lowers your tax liability. And that means it costs you less to save more.
Here’s an example. Imagine you’re 45 years old, earn $50,000 annually, and are in the 25% federal tax bracket. If you contribute $2,500 (5%) annually to the UC 403(b) Plan, your actual annual income is only reduced by $1,875.
The IRS allows you to defer up to $18,000 of your pay into the UC 403(b) Plan as well as the UC 457(b) Plan in 2017, up to $24,000 in each plan if you’re age 50 or older.
Finally, look for ways to help your savings pull part of the load toward your retirement goal through investment gains. This is particularly important if you haven’t chosen investments for your UCRSP account. Until last year, the default fund for the UC 403(b), 457(b), and DC Plans was the UC Savings Fund. This means contributions may be invested in one of the most conservative options available in the UCRSP fund menu.
Too low an allocation to stock funds can limit how much money you have when you retire. From 1965 to 2014, stocks have returned an average of almost 10% annually, bonds 7%, and short-term investments 5%, before inflation.* Of course, past performance is no guarantee of future results; there will always be ups and downs in the investment markets. But in general, stocks typically offer more potential for growth over the long term.
Of course, how much stock is right for you is a personal decision. Stocks can be more volatile and carry higher risks than bonds, especially in the short term. How you invest your savings depends on your personal risk tolerance, your investment horizon, and your financial situation.
The UC 403(b) and 457(b) Plans offer a range of funds so you can create a diversified mix of investments that helps spread out your risk. If you prefer a more hands-off approach, you can select a UC Pathway Fund, which automatically adjusts the percentage of stocks based on an estimated retirement date.
* Data source: Ibbotson Associates, 2015. Past performance is no guarantee of future results. The asset class (index) returns reflect the reinvestment of dividends and other earnings. This data is for illustrative purposes only and does not represent actual or future performance of any investment option. It is not possible to invest directly in a market index. Stocks are represented by the Standard and Poor’s 500 Index (S&P 500® Index). The S&P 500 Index is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance. Bonds are represented by the U.S. Intermediate Government Bond Index, which is an unmanaged index that includes the reinvestment of interest income. Short-term instruments are represented by U.S. Treasury bills, which are backed by the full faith and credit of the U.S. government. Stock prices are more volatile than those of other securities. Government bonds and corporate bonds have more moderate short-term price fluctuations than stocks but provide lower potential long-term returns. U.S. Treasury bills maintain a stable value (if held to maturity), but returns are only slightly above the inflation rate.
Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments.
Note: The investment risks of each target date Pathway Fund change over time as each fund's asset allocation changes. Assets held in the Pathway Funds are subject to the volatility of the financial markets, including equity and fixed income investments in the U.S. and abroad, and may be subject to risks associated with investing in high-yield, small-cap, and foreign securities. Principal invested is not guaranteed at any time, including at or after their target dates.
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