Getting Started with Retirement Investments

Lots of early or even mid-career academics have no idea how to get started with retirement investment. This post will help you get going, and includes links to lots more posts for more information if you want to learn more.

Increase and automate your savings rate

First and most obviously, you need to put some money aside if you want to save for retirement. Remember that you’re playing catchup here (compared to people who started saving in the early 20s), so especially early in your career you’ll want as high of a savings rate as you can afford (ideally 25-60% of your income) to get on a solid financial foundation. (If you’re a new PhD, check out Keep Living Like a Grad Student for details.)

I calculate my savings rate as the percentage of my total cash-equivalent compensation (salary, employer retirement or health care match, etc) that goes toward long-term financial goals like retirement or a house down payment. (Others calculate this based on after-tax income, but how much you save affects how much of your nominal income is after-tax, so this way is clearer.) Right now it’s 52%, but that’s the highest it’s ever been.

Of course, you may not be in a position to hit these high savings rates now, and maybe not ever — my savings rate is very high now, but I wasn’t anywhere close to that for several years after starting my first professor job, and I’ve had decent-to-good paying academic jobs and no children in medium cost of living areas. Whatever your circumstances, just do as much as you can this year, then look for ways to increase your savings a little more each year thereafter — if you keep making progress, I promise it will really add up.

Second, you should save automatically, every month, without ever touching the money. Think of your savings habit like a workout habit — if you decide each day whether/when you’ll go to the gym, you’ll go a lot less often than if you pre-commit to going on a specific schedule. For employer-sponsored accounts (explained below), your employer will withhold the amount you designate to deposit in your retirement accounts, making this as easy as possible. For other accounts, you’ll need to setup an automatic transfer for the day after each paycheck is deposited. Regardless of the method, automating your investments means you’ll find it less painful and you’ll be less tempted to skip this month (and the next, and the next…).

Maximize your employer match

If you’re in a defined-contribution rather than a defined-benefit retirement plan (or both), your employer will often match your contributions to your retirement plan up to a certain percentage of your salary. The employer:employee match ratio and the max employee salary percentage they will match varies a lot between employers, so be sure and check your university’s human resource employee benefits page if you aren’t sure what yours is. Think of this match as part of your income — if you don’t donate the max amount, you are reducing your income. Don’t do it except in a dire emergency.

Maximize tax-advantaged accounts

Here’s where we get into random strings of numbers and letters corresponding to tax code sections, but bear with me because this is important! Your university probably offers one or more of the following types of tax-protected, employer-sponsored tax accounts:

1. 403(b): This is probably the most common tax-protected retirement account for academics. Think of it as the non-profit equivalent of a 401(k), if you know what that is. If you don’t, just know that it’s an account that your employer sets up for you (and often contributes to), that saves you a lot of money on taxes if you contribute to it.
2. 457(b): These accounts are very similar to 403(b)s from the employee’s perspective. Like a 403(b), 457(b)s are for non-profit institutions, offer significant tax advantages, can be configured to allow pre-tax, post-tax, or both contributions, and are employer-sponsored. The employee contribution limits are identical. However, many of the details are different.
3. 401(a)s: These also are very similar to 403(b)s. They have the same total contribution limit ($66,000 for employees and employers combined) and employers are required to contribute to them for all their employees if they have this plan. Typically employee enrollment is also mandatory. My sense is these are more common at academic medical centers than at undergraduate-serving institutions within the academic universe.

Get through those tax code sections ok?? Good, but there’s a little further to go. Here are two more retirement accounts you’ll want to know about:

1. IRAs: This stands for Individual Retirement Accounts. There is a much lower annual contribution limit — $6,500 in 2023. There are ‘traditional’ (pre-tax) and ‘Roth’ (post-tax) versions of these accounts. Unlike 403(b)s and 457(b)s, these are not employer-sponsored, and anyone who meet the income eligibility requirements can contribute to them.
2. HSAs: Technically, these are Health Savings Accounts, and aren’t intended for retirement savings per se. However, they have a huge advantage: If, as intended, you ultimately withdraw these funds to pay or reimburse yourself for qualified medical expenses (which are broadly defined), you will never pay a cent of taxes on your contributions to these funds. Plus, you can invest your contributions in the stock and bond markets until you need them. Finally, you can withdraw funds even decades later to pay for medical expenses in the past. All of these features combined make this an awesome retirement investment account type. However, at $3,850 for individuals and $7,750 for families, the annual contribution limits for these accounts are lower than for other account types.

For more details on 403(b)s vs 457(b)s, see Differences between 403(b)s and 457(b)s you will want to know.

How to choose your asset allocation

Ok, so you signed up for the retirement account and deposited some money there. But where the heck should you put it? Soon I plan to write a post about academic-specific asset allocation by career stage, but for now here’s some basic advice that no personal finance guru worth their salt will disagree with:

1. Avoid speculation: You probably shouldn’t be picking individual stocks or dabbling in crypto if you’re reading this page. Sure, your cousin or your buddy from HS made a killing in crypto and wants everyone to know it, but remember: People generally don’t brag about the money they lost on speculative investments. Plus, lots of research shows that most Wall Street managers don’t beat the market, and those who do are no more likely to do it next year. You probably aren’t going to do better than the professionals.
2. Index funds FTW: Instead, the bedrock of your portfolio should be diversified, passively-managed index funds with low expense ratios including a mixture of stocks and bonds and maybe other asset classes. You’ll save on management fees and transaction costs, and you’ll outperform actively managed funds or individual stock day traders the vast majority of the time. The easiest way to get this diversification is to buy it in 1-2 funds like Vanguard’s Total World Stock Index Fund (in which you essentially buy every company) and equivalent bond index funds. More on this in posts linked below.
3. Don’t sell: The easiest way you can shoot yourself in the foot with your retirement investments is to try to time the market. In practice most individual investors who do this sell when the market crashes and buy when it’s on the way back up — in other words, they sell low and buy high, which is not a recipe for wealth accumulation. Instead, focus on the long-term. Stocks and even bonds go up and down in value, but the long-term trend is up, and you’re in this for the long-term unless you’re near retirement. Act accordingly!
4. Set it and forget it: Let’s say you want to make this choice once and never think about it again. Well, your brokerage almost certainly has the perfect option for you: a target date retirement fund. All you have to do is decide what year (usually rounded in 5-year increments) you’re most likely to retire, choose the corresponding fund, and you’re done! The fund manager will automatically shift your investments from nearly all stocks early in your career to a progressively higher share of (more stable, lower average yield) bonds as you age, in line with lifecycle investment theory.

There’s a lot more to cover here. Luckily, the broader personal finance internet has lots more resources to help you here. As do I: Keep reading through the blog, and let me know if there are academia-specific issues you’d like addressed that I haven’t gotten around to yet!