Employer suspending retirement match. Should I do the same?
May 23, 2020 2:48 PM Subscribe
I work at a private, non-profit University in the US where one of our best benefits is a 2:1 retirement match up to 5% (meaning, I put in 5%, they put in 10%). It was a no-brainer to max it out as soon as I was eligible. However as part of a cost-cutting measure, our uni is suspending match for the next FY, beginning July 1. Is it foolish to consider cutting mine back as well (or cutting it entirely) until match returns at least in some form?
To reiterate: I am not looking to cash out any of my current retirement fund, just cut back or suspend my contribution while employer match is null. I have my doubts that we'll go back to that sweet, sweet 2:1 any time soon, but even if they just go back to 1:1, I'd max it back out (I'm not going to leave money on the table).
Some possibly relevant details:
- our retirement package is through TIAA-CREF
- I work in research and am typically 90%+ funded by NIH Grant money at any point in time, so my position isn't directly impacted by fluctuations in enrollment. I feel very secure in my position.
- I would use the extra funds for purposeful things: pay off my car loan a bit faster, pay off some incoming (non covid-related) medical bills, build up my savings which is currently ~1 month salary to 3-6 months, etc. I do not have any credit card debt.
- If I ever get there, I'm at least 25 years away from considering retirement
- I'm not very prone to impulse or extravagant purchasing, so I'm not worried about self-control with extra net salary
Are there any pitfalls to this I'm not considering?
Bonus question if it's allowed (if not, feel free to delete, mods): assuming my uni isn't the only one doing this, TIAA is likely going to see a significant reduction in incoming funds. Does this spell potential danger for their funds in the short-term, or are they big enough that they can easily absorb it?
To reiterate: I am not looking to cash out any of my current retirement fund, just cut back or suspend my contribution while employer match is null. I have my doubts that we'll go back to that sweet, sweet 2:1 any time soon, but even if they just go back to 1:1, I'd max it back out (I'm not going to leave money on the table).
Some possibly relevant details:
- our retirement package is through TIAA-CREF
- I work in research and am typically 90%+ funded by NIH Grant money at any point in time, so my position isn't directly impacted by fluctuations in enrollment. I feel very secure in my position.
- I would use the extra funds for purposeful things: pay off my car loan a bit faster, pay off some incoming (non covid-related) medical bills, build up my savings which is currently ~1 month salary to 3-6 months, etc. I do not have any credit card debt.
- If I ever get there, I'm at least 25 years away from considering retirement
- I'm not very prone to impulse or extravagant purchasing, so I'm not worried about self-control with extra net salary
Are there any pitfalls to this I'm not considering?
Bonus question if it's allowed (if not, feel free to delete, mods): assuming my uni isn't the only one doing this, TIAA is likely going to see a significant reduction in incoming funds. Does this spell potential danger for their funds in the short-term, or are they big enough that they can easily absorb it?
I'm assuming this is a tax-deferred account, like a 403(b) or 457(b), correct? With a generous match like that, I agree that you were right to claim every last dollar of it while available, and also right to reconsider your options under new circumstances. If the interest rate on your car loan (or any other debt, such as those medical bills) is more than a few percent, I would pay down as quickly as I could. Then I would build up my emergency fund to 3-6 months. This is really an unprecedented time, and having some significant liquid savings can make all the difference. You can get a bit more interest by building a "CD ladder". Then I would start saving again for retirement. If you think your income is more or less going to stay the same after inflation, that your expenses in retirement will be considerably lower, or that tax rates are going to drop in the future, just keep saving in your current account. If you think your income is likely to rise a lot in the future, you'll spend as much or more in retirement than you do now, or you think tax rates are likely to go up a lot in the future, then you'd put some of the money in a Roth IRA, through a reputable low-cost company such as Vanguard. In either case, ideally you'd be saving a total of 10% of your income, 15% if you're risk-averse. (Percentage of pretax for tax-deferred, post-tax for Roth.) I know it's a lot but retirement is really expensive.
The TIAA-CREF funds are great options, by the way. To answer your last question, you should only worry about the performance of the market, it doesn't matter per se about the company or even if they go bankrupt. Every $1 you put in your account is used to purchase $1 worth of stock that is held in an account. If other people draw from their accounts, they get exactly their share, no more, no less. There can't be a "run on the bank" with a mutual fund company (pension, yes). Investment choice is far, far more important. If you have access to a "target date" fund, go for that one and do your best to forget about the account. We're in a for a wild ride and there's no reason to be checking it. In fact, Vanguard did a study where the best performing number of trades for accounts was literally zero.
posted by wnissen at 4:34 PM on May 23, 2020 [7 favorites]
The TIAA-CREF funds are great options, by the way. To answer your last question, you should only worry about the performance of the market, it doesn't matter per se about the company or even if they go bankrupt. Every $1 you put in your account is used to purchase $1 worth of stock that is held in an account. If other people draw from their accounts, they get exactly their share, no more, no less. There can't be a "run on the bank" with a mutual fund company (pension, yes). Investment choice is far, far more important. If you have access to a "target date" fund, go for that one and do your best to forget about the account. We're in a for a wild ride and there's no reason to be checking it. In fact, Vanguard did a study where the best performing number of trades for accounts was literally zero.
posted by wnissen at 4:34 PM on May 23, 2020 [7 favorites]
This is a good idea, and if I were in your shoes, I would do the same. I would resolve, though, to revisit the decision every few months (assuming your employer hasn't yet restored a match) just to make sure it's still the right call.
On preview, wnissen nails it.
posted by minervous at 4:37 PM on May 23, 2020 [2 favorites]
On preview, wnissen nails it.
posted by minervous at 4:37 PM on May 23, 2020 [2 favorites]
> Is it foolish to consider cutting mine back as well (or cutting it entirely) until match returns at least in some form?
If you have some upcoming larger unusual medical expenses and don't have much cash on hand, it seems safer to ensure you have a large enough emergency fund / cash buffer to see you through the next few months even if there's another unexpected expense, and prioritise that over both accelerating paying off debt & investing for retirement.
Once you've got a decent emergency fund in place, the decision of funding retirement vs doing something else with the money just depends what alternatives you have for putting the money to work. E.g. suppose you have $1000 debt from car loan at 9% interest rate, and have the choice of putting $1000 cash to fund your retirement or pay off the loan. Your retirement fund will be (approximately) investing your money into the stock market, so the best return on investments to reasonably expect in the long run are around 6% / yr (before subtracting 2% inflation, say). So, ignoring tax, investing $1000 cash to make 6% = 60$ /yr for future-retired-you seems like a worse deal than using the cash to pay off $1000 of car debt that's costing you 9% = 90$/yr interest right now. This isn't quite right as it ignores the tax situation -- you probably pay less tax on money if it is directly invested in retirement account, but I don't live in the US & don't understand the details.
> TIAA is likely going to see a significant reduction in incoming funds. Does this spell potential danger for their funds in the short-term, or are they big enough that they can easily absorb it?
I doubt this is something to worry about: expenses required to run an investment fund are generally covered by taking a management fee of the assets under management, which is subtracted from investment returns of those assets. Even if new money flowing into the fund slows down or stops for the next year or two or more, the assets that the fund has under management (the _stock_ of money accumulated from previous deposits & investment returns, rather than the incoming _flow_ of new money from new deposits) will be essentially exactly the same, returning similar investment returns (subject to market fluctuations etc).
If you have the time, consider signing up to the Bogleheads investment advice forum & ask this question there. Bogleheads forum members can give pretty good advice on how to improve how your retirement funds are structured (e.g. helping to flag any investments you may have that are accruing high annual management fees & suggesting cheaper alternatives), or helping talk through trade offs between funding retirement vs paying off debt / maintaining an emergency fund. See https://www.bogleheads.org/wiki/Getting_started . For example of the kind of information requested when asking for advice, see Asking Portfolio Questions
posted by are-coral-made at 4:37 PM on May 23, 2020 [2 favorites]
If you have some upcoming larger unusual medical expenses and don't have much cash on hand, it seems safer to ensure you have a large enough emergency fund / cash buffer to see you through the next few months even if there's another unexpected expense, and prioritise that over both accelerating paying off debt & investing for retirement.
Once you've got a decent emergency fund in place, the decision of funding retirement vs doing something else with the money just depends what alternatives you have for putting the money to work. E.g. suppose you have $1000 debt from car loan at 9% interest rate, and have the choice of putting $1000 cash to fund your retirement or pay off the loan. Your retirement fund will be (approximately) investing your money into the stock market, so the best return on investments to reasonably expect in the long run are around 6% / yr (before subtracting 2% inflation, say). So, ignoring tax, investing $1000 cash to make 6% = 60$ /yr for future-retired-you seems like a worse deal than using the cash to pay off $1000 of car debt that's costing you 9% = 90$/yr interest right now. This isn't quite right as it ignores the tax situation -- you probably pay less tax on money if it is directly invested in retirement account, but I don't live in the US & don't understand the details.
> TIAA is likely going to see a significant reduction in incoming funds. Does this spell potential danger for their funds in the short-term, or are they big enough that they can easily absorb it?
I doubt this is something to worry about: expenses required to run an investment fund are generally covered by taking a management fee of the assets under management, which is subtracted from investment returns of those assets. Even if new money flowing into the fund slows down or stops for the next year or two or more, the assets that the fund has under management (the _stock_ of money accumulated from previous deposits & investment returns, rather than the incoming _flow_ of new money from new deposits) will be essentially exactly the same, returning similar investment returns (subject to market fluctuations etc).
If you have the time, consider signing up to the Bogleheads investment advice forum & ask this question there. Bogleheads forum members can give pretty good advice on how to improve how your retirement funds are structured (e.g. helping to flag any investments you may have that are accruing high annual management fees & suggesting cheaper alternatives), or helping talk through trade offs between funding retirement vs paying off debt / maintaining an emergency fund. See https://www.bogleheads.org/wiki/Getting_started . For example of the kind of information requested when asking for advice, see Asking Portfolio Questions
posted by are-coral-made at 4:37 PM on May 23, 2020 [2 favorites]
You could always do a dump at the end of 2020 if things suddenly get better.
posted by wenestvedt at 6:03 PM on May 23, 2020
posted by wenestvedt at 6:03 PM on May 23, 2020
Missing the match is unfortunate. If you continue to be employed at your full pay, keep contributing. You are probably have diverse investments, but I think now is a great time to buy into the stock market. This is a weird recession caused by Nature. The market will recover. You will be happy to have retirement funds.
posted by Mom at 6:40 PM on May 23, 2020 [1 favorite]
posted by Mom at 6:40 PM on May 23, 2020 [1 favorite]
I say keep paying your 5% because you are already doing it and probably won't miss the spending money as you are used to not having it. It's too bad they are cutting this benefit. While currently back in school full-time abroad, I taught at a public high school in the US for 12 years. We have always had to put 5% of our paycheck towards the state retirement system, and our local district used to pay part of it. It sucks that they stopped contributing for so many reasons but, when I left my job last year, I was soooooo glad to have been vested into the system -- and grandfathered into the better plan at that. I did not realize how grateful I would be for this at age 36 with 18+ years before I could even consider retiring but I really am. You're on a really good financial path in life: congratulations, and keep it up!
posted by smorgasbord at 3:01 AM on May 24, 2020 [1 favorite]
posted by smorgasbord at 3:01 AM on May 24, 2020 [1 favorite]
This thread is closed to new comments.
posted by Candleman at 3:31 PM on May 23, 2020 [4 favorites]