Academia has lots of great perks for those who make it on the tenure track:
- You can study whatever you want! …If, that is, you somehow happen to have time and energy leftover after grading the latest pile of AI-authored papers to learn a new literature or research method.
- You can work whatever hours you want! …As long as they are sufficient to complete the normal workload of 1.75 actual humans and you’re available to answer students’ questions whose answers are on the syllabus 5am-midnight Sunday to Saturday.
- You can pursue your passion! …If you can still remember why you decided to study the viscosity of snails’ slime trails in the first place after the 37th consecutive night of 5.3 hours’ sleep this semester.
To this thrilling list of academic perks, allow me to add an additional entry:
- You can contribute twice as many employer-sponsored retirement funds as people with regular jobs! …Or you could, if you could actually afford to max your governmental 457(b).
Before we dive into why I say that, let’s do some brief review.
Remedial Academic Retirement Accounts 101
Let’s back up and remember what kinds of employer-sponsored retirement accounts academics typically have access to through work:
- 403(b)s: These are the government and non-profit sectors’ answer to 401(k)s. Like 401(k)s, in 2024 they have an annual employee contribution limit of $23,000, can be either pre-tax or (if your plan allows it) Roth, and is probably where the bulk of your retirement funds are, paltry though they may be. Notably, if you have multiple ERISA accounts like 403(b)s, employer-sponsored 401(k)s, solo 401(k)s, etc, they are collectively subject to the same $23,000 limit in employee contributions – you can’t double dip.
- 401(a)s: These seem to be less common than 403(b)s. But if you have one, it works very similarly to 403(b)s, except they are often mandatory, voluntary employee contributions are capped to a percentage of income instead of a fixed dollar amount, and the available investment options are often more conservative. These are sometimes associated with a pension-like retirement plan.
- 457(b)s: Like the above, this is an employer-sponsored retirement account often available to employees of governmental or tax-exempt organizations. These have the same annual contribution limits as 403(b)s (currently $23,000), albeit with some different catchup provisions. Unlike 403(b)s, you can access these funds tax-free immediately upon severance from employment (or age 70.5, whichever comes first). This is because technically, these are deferred compensation plans, not retirement plans.
For more details, see Getting Started with Retirement Investments and Differences between 403(b)s and 457(b)s You Will Want to Know.
Governmental vs. Non-Governmental 457(b)s
On the 457(b) front, note there are two different types with some significant differences that I failed to address in my previous post on the topic. Governmental 457(b)s have several key advantages over non-governmental 457(b)s:
- Like a 403(b), governmental 457(b)s can be rolled into an IRA, 403(b), or 401(k) after you’ve stopped contributing to it – tax free (until disbursement). Non-governmental 457(b)s can only be rolled into other non-governmental 457(b)s, though sometimes you can leave your funds with your old employer’s plan for a specified number of years.
- Recent tax law changes mean you can take in-service distributions (while still employed) beginning at age 59.5 (instead of 70.5, the previous limit). Neither of these features apply to non-governmental 457(b)s – if you have one of those, you have to wait until 70.5 for in-service withdrawals and will have to pay taxes on your deferred compensation upon severance from employment.
- Governmental 457(b) plans can include Roth contribution options, but non-governmental 457(b)s can’t.
- Employees aged 50+ enrolled in governmental 457(b) plans can use a $7,500 catchup provision, but those enrolled in non-governmental 457(b)s can’t.
All of these differences run in favor of government employees – take THAT, Ivy Leaguers!
Governmental 457(b)s: Academics’ Financial Superpower!
Several features of the governmental 457(b) account make it a candidate for the public school academic’s superpower status.
Double the Employer-Based Tax-Protected Contribution Limit!
Effectively, a governmental 457(b) is like having an second 403(b) with slightly different features.That’s the most obvious reason it’s an academic’s superpower – you have twice the pre-tax (or Roth) retirement contribution limits of anyone without access to a 457(b) or similar plan beyond their 403(b) or 401(k).
That can really add up. In a Google Sheet you can see here, I do a quick calculation of how much difference this can make over a full career of maxing out your pre-tax governmental 457(b) versus contributing the after-tax equivalent to a taxable brokerage account. The exact results will depend on real expected investment growth rate, assumed tax rates while working and in retirement, long-term capital gains rates, and expected tax drag on investments in your taxable account, but the difference with the pretty reasonable assumptions I made are instructive. If you max out your 457(b) fully for 40 years, you’ll be pretty well off either way, but will end up with about $500k more in this account than you would with equivalent behavior in a taxable brokerage account without sacrificing a cent of takehome pay.
Age | 457(b) Pretax | Taxable Brokerage | Difference |
30 | $20,240 | $18,852 | $1,388 |
35 | $137,671 | $126,375 | $11,295 |
40 | $287,545 | $259,856 | $27,689 |
45 | $478,828 | $425,562 | $53,265 |
50 | $722,958 | $631,273 | $91,685 |
55 | $1,034,536 | $886,646 | $147,890 |
60 | $1,432,198 | $1,203,671 | $228,528 |
65 | $1,939,727 | $1,597,232 | $342,496 |
70 | $2,587,477 | $2,085,805 | $501,671 |
(As a side note, if you assume that you’ll pay the same 22% marginal tax rate on 457(b) withdrawals in retirement as I assume you do now, and assume you can wipe out all tax drag in your taxable brokerage for instance by investing in municipal bond funds but somehow getting the same return, taxable brokerage accounts actually come out ahead of pre-tax accounts due to the 0% long-term capital gains tax rate I assume you’ll be subject to, which has pretty high upper limit. I think that combination of assumptions is pretty unlikely, though.)
Access to Funds Before Age 59.5!
403(b) fund access is limited to those age 59.5 and older except for withdrawals subject to the rule of 55 (basically, you can access your current job’s 403(b) funds before age 59.5 if you leave work the year you turn 55 or later, but you can’t access any other 403(b)s without incurring the 10% early withdrawal penalty). 457(b)s are not subject to these rules; once you leave your employer, you can do whatever you like with that money.
I can think of a number of situations where that feature could be beneficial for an academic, with the caveat that funds from a taxable brokerage account are usually preferable in each of these circumstances:
- You want to retire early. In particular, if you want to setup a Roth conversion ladder to fund your retirement until Social Security eligibility, 457(b)s are one way to fund the 5-year waiting period.
- You want to take a lower paying job or one in a higher cost of living area, but don’t want to change your lifestyle.
- You want to take a full year sabbatical at reduced pay but don’t want to change your lifestyle. If your 457(b) allows penalty-free in-service withdrawals for this circumstance, this could be one way to handle this.
I don’t love withdrawing 457(b) funds for any of those circumstances if you have other options (it’s generally preferable to delay paying taxes as long as possible on these accounts), but the flexibility of 457(b)s relative to 403(b)s is definitely an attractive feature – even if you never use it, it’s always better to have options than not have them.
For more on FIRE-style partial or total early retirement options for academics, see Academics on FIRE: Is the Financial Independence, Retire Early Movement for Academics?
…But You Probably Can’t Maximize It 🙁
Here’s the crux of my argument: The problem is that few academics (outside of academic hospitals) will be able or willing to take full advantage of this superpower.
To see this, consider the plight of an academic with pretty good benefits (5% employer 403(b) match, HSA through a high deductible health insurance plan, supplemental 403(b) and 457(b)) making $75k per year, and one with identical benefits who is married to another academic with the same benefits and income. Let’s assume that our intrepid academic(s) make retirement contributions in the following priority order:
- Employer match (free money!)
- HSA (potential to never be taxed)
- 403(b) or 457(b) pre-tax (only minor differences, so pick whichever you like)
- Roth IRA (tax diversification)
- 403(b) or 457(b) pre-tax (whichever you didn’t fill before)
Some people might prefer to put the Roth IRA higher, but as long as filling the 2nd account out of 403(b) and 457(b) is last, it doesn’t matter for the conclusion.
Filing Single | Filing Jointly | |||||
Limit | Cumulative | % Income | Limit | Cumulative | % Income | |
5% 403(b) Match | $7,500 | $7,500 | 10% | $15,000 | $15,000 | 10% |
HSA | $4,150 | $11,650 | 15% | $8,300 | $23,300 | 15% |
403(b) or 457(b) | $23,000 | $34,650 | 44% | $46,000 | $69,300 | 44% |
Roth IRA | $7,000 | $41,650 | 53% | $14,000 | $83,300 | 53% |
403(b) or 457(b) | $23,000 | $64,650 | 82% | $46,000 | $129,300 | 82% |
The point is this: To fully maximize all of these tax-advantaged accounts, our intrepid academic would need to invest 82% of their gross income. Of course, that conclusion will vary based on the income, but the percentage is very high at any reasonable value:
- Double the income assumption to $150k and it’s still 41%, which is much higher than most people’s long-term savings rate.
- Half it to a paltry $37,500 and there obviously isn’t enough money to cover it all regardless of desired savings behavior (but you have bigger problems than this if you’re in this situation).
- At the 95th percentile of full professor at doctoral universities’ average pay, it’s still 27.5% of gross income.
- You would need to make $431,000 a year per professor to have this total be the often-recommended 15% of gross income.
To take advantage of this as an assistant professor, you would need to be earning an excellent salary taking my advice to keep living like a grad student while you catch up with your counterfactual non-academic self. Do this for a few years and you’ll be on excellent financial footing, but few will be able to do this, and fewer will be willing.
Which really raises the question:
Who Are These 457(b)s For, Then?
Let’s assume you aren’t willing to live drastically below your means and at most will invest 25% of your gross earnings for retirement. In that case following the table above, you won’t invest your first dollar in your 457(b) until you earn at least $166,600 a year.* What academics make that much? Going back to the tables from last year’s AAUP faculty compensation survey discussed here, the following groups make enough to benefit from this account under the 25% retirement investment assumption:
- Full professors at doctoral universities in the 70th percentile or higher in average pay.
…That’s literally it for rank-and-file professors. Who’s left then? Administrators. According to Tables 11, 13, and 14, most of our leaders enjoy salaries at this level (all figures are averages within AAUP institutional categories):
- Presidents (Survey Report Table 11):
- Doctoral: $648,195
- Master’s: $376,397
- Baccalaureate: $365,770
- Associate’s with ranks: $307,276
- Associate’s without ranks: $263,453
- Chief academic officers (Survey Report Table 13):
- Doctoral: $411,377
- Master’s: $230,933
- Baccalaureate: $195,327
- Associate’s with ranks: $203,561
- Associate’s without ranks: $159,901
- Chief financial officers (Survey Report Table 14:
- Doctoral: $369,319
- Master’s: $222,027
- Baccalaureate: $211,847
- Associate’s with ranks: $189,773
- Associate’s without ranks: $155,266
Except for those poor chief academic/financial officers at associate’s universities without ranks, the average administrator at each of these institution types could max out all of the above accounts with 25% of their gross income.
So, in practice, only a small group of academics could take full advantage of the 457(b) superpower: full professors at highly-paid doctoral universities, less well-off super savers willing to invest >25% of their income, and our academic overlords.
*Note: At this point, you may or may not still qualify for Roth IRA contributions depending on your marital status and any spouse’s income.
One More Important Detail
If you’re not in one of those groups, you may still be able to take partial advantage of 457(b)s eventually. This is because 457(b)s include one more killer feature that 403(b)s do not: the ability to backfill contributions.
Both 403(b)s and governmental 457(b)s include catch-up contributions for investors age 50+ – in 2024, this additional limit is $7,500. However, governmental 457(b)s offer a far more generous alternative: In the three years before normal retirement age as dictated in the plan, instead of using the $7,500 catch-up contribution, you’re allowed to use ‘special’ 457(b) contributions to backfill any 457(b) contributions you didn’t make in prior years up to each year’s limit. However, this opportunity is capped at the annual 457(b) contribution limit. Still, the ability to contribute up to $46,000 a year to your 457(b) in the three years before retirement is pretty awesome. Of course, once again, this provision is only realistic for people who are extremely well-paid, such as our academic overlords or any of us rank-and-filers who happen to marry rich.