If you are a teacher or any member of the educational community, there is a high likelihood that you are supplementing your retirement plan with a 403(b) or tax-sheltered annuity. If that is the case, pat yourself on the back because you are taking steps to secure your ideal retirement. That stated, you also probably have a 403(b) because it was the only option presented to you. By the time you are done reading this, I hope that you will explore other options and implore your friends and colleagues to do the same.

How a 403(b) works

The purpose of a 403(b) is to set aside a portion of your income now so you will have more income during your retirement.  There are three stages of retirement when you use a 403(b) as your savings vehicle. In this hypothetical example, we will use 30 years as the time-frame to prepare for retirement.

Stage 1 – Contribution

If you decided to place $500 a month toward your retirement, you would have contributed $6,000 ($500×12) that year towards retirement, and $180,000 ($6,000×30) that you have invested. The contribution simply is the amount of money you take out of your pocket to invest.

Stage 2 – Accumulation

Accumulation is the amount of interest that the contributed money yields over time because of compounding interest. For example, if you contribute $180,000 over 30 yrs, that interest earning 10% ( I know it may not seem realistic these days, but it’s just an example to illustrate the concept) would yield $1,139,663.

Stage 3 – Distribution

After you have contributed your $500 each month to watch it accumulate over the years, retirement is the reward. The money you live on during retirement is the distribution. Typical rule of thumb is to live on not more than 5 percent of your total nest egg to ensure that you don’t outlive our money. There are some definite benefits and drawbacks that people should consider when you invest in a 403(b).

Advantages of a 403(b)

• pre-tax contribution
• Deferred taxes

Disadvantages

• taxes paid upon distribution
• you don’t know the rate that your money will be taxed upon distribution
• the money you take out in retirement may be taxed at a higher rate than the amount you saved on the money you put in years earlier

As teachers started to realize that their nest eggs were going to be depleted by taxes, they decided to explore other options that gave them more favorable tax treatment. With tax sheltered annuities, you simply delays taxes. Therefore, a more fitting name would be tax delayed annuities.

My objective was to simply open your eyes to explore other options that have:

• No loss of principle in the stock market
• More favorable tax treatment
• No taxes upon withdrawal – if structured properly
• No contribution limits

When you are able to find retirement investments that offer these benefits, you should take advantage of them because any investment that is missing any of the benefits above has the potential to diminish your long-term wealth building capacity.

Recently, I was watching a television show called Open Court, which is a basketball show that features retired basketball players who had great professional careers.   I just returned from Italy and wanted to catch up on the NBA finals. This show is great because it gives casual fans and basketball enthusiasts an opportunity to gain insights about the mindset and lifestyle of professional athletes. These players on the show shared some interesting perspectives about why professional athletes end up broke even after making millions of dollars.

Shaquille O’Neal made an interesting comment that in my estimation should have been discussed more in detail. He said, “…The best word I learned is annuity. The way it was explained to me was, guys make a lot of money and then when you finish playing, you get some of that money back after you finish playing… We need to educate ourselves”. The great lesson in O’Neal’s comments is that the information is within our grasp, but we have to take an active role to acquire knowledge and then apply what we learn.

What Is An Annuity?

An annuity is an investment that you make that provides tax-deferred growth, guarantees, safety, a death-benefit, flexibility, and the option to have a monthly stream of income that you cannot outlive. In other words, an annuity is like having a pension plan that is not tied to your job, but potentially pays you for the rest of your life. If you are a Baby Boomer and you are ready to retire, an annuity is a great option for your hard earned money to grow without market risk if you structure it properly.

How You Can Use An Annuity

If you were born in the post Baby Boomer era, chances are you have little or no intention to stay at your current job for 30-plus years. However, if you have a nest egg that you have been growing through your previous (or soon to be previous) employer, you have the option to place that money in an annuity and continue to grow your nest egg until you are ready to retire. Just make sure that you don’t get too anxious and spend the money early because you will make Uncle Sam very happy. When you have an annuity, the tax code currently requires you to leave the money in the account until after you turn 59 ½ to avoid a 10 percent early withdrawal penalty.

Long-Term Value Of An Annuity

Shaquille O’Neal pointed out that if pro players take 50 percent of their income and put it into an annuity, they would be able to survive financially after their NBA career. To put this in perspective, if an “average” NBA player starts at age 22 and makes $10 million (after taxes) over the course of his career, and places half of it in an annuity for 30 years, this is what it could hypothetically look like:

• $5,000,000 earning 6% for 30 years  = $28,717,455.86 –(Accumulation from Age 30 until 60)
• At age 60, if he lives on 5% per year = $119,656.07 per month.

The challenge of O’Neal’s idea is to convince people to value the idea of deferring gratification, which is a virtue that American culture seems to appreciate less these days. Those of us who follow basketball know that O’Neal is a big kid at heart, but I also recognize that he took some wise steps to remain relevant even after his playing days stopped. He still receives millions of dollars from a combination of commercials, product endorsements, and his work as a basketball commentator.

Although Shaq has earned more than most, he also saves more than most. For people who have the vision and discipline to take steps now to ensure a financially stable future, Shaquille O’Neal provides a great example by using an annuity to fulfill that objective.