How Much Will My 457 Be Worth?

By Matthew Frankel Markets Fool.com

A 457 is a type of tax-advantaged retirement plan offered by government employers and some non-government employers. 457 plans work similarly to 401(k) plans, and allow employees to contribute a portion of their salary on a tax-deferred basis. While there's no way to predict the exact performance of your 457, here's a good method and calculator to estimate it.

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What is a 457 plan?

As I mentioned, a 457 plan is a type of deferred-compensation retirement plan, mainly offered by governmental employers, but also available to certain non-government employers, specifically non-profit organizations. For example, I teach part-time at a community college and elect to have some of my pay deferred into the state's 457 plan. (Note that most, but not all, 457 plans are officially known as 457(b) plans.)

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For the most part, 457 plans are similar in structure to more well-known retirement plans such as 401(k) and 403(b) plans. Employees can choose to contribute a percentage of their salary on a tax-deferred basis, there is a selection of investment funds the employee can choose to allocate their contributions to, and their investments grow tax-deferred until the money is withdrawn.

One major difference between 457 plans and other employer-sponsored plans is that you don't need to be 59 1/2 to use your money. In other words, you are free to withdraw from your 457 plan at any time and for any reason, without penalty. However, keep in mind that your withdrawals will be considered taxable income, no matter when they're initiated.

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Contribution limits to your 457

457 plans have the same maximum elective deferral amount as 401(k) and 403(b) plans. For 2017, employees can choose to defer up to $18,000 of their compensation into their employer's 457 plan, with an additional $6,000 catch-up contribution allowed for employees age 50 or older.

Employees within three years of retirement can choose a higher catch-up provision that effectively doubles the standard contribution limit, so for 2017, this would allow for a total of $36,000 in elective deferrals. However, this must come from unused deferrals from previous years, so an employee who has contributed the maximum to their 457 every year would not be allowed to use this.

Unlike 401(k) and 403(b) plans, employers do not contribute to 457 plans on their employees' behalf. 457 plans are generally offered in addition to another retirement plan, such as a 401(k), and employees are permitted to contribute their elective deferral maximum to both plans each year.

Estimating your 457's value at retirement

Obviously, the amount you choose to contribute to your 457 plan is the variable that's within your control. If you contribute $10,000 per year to your plan for 20 years, you'll have deferred a total of $200,000 of your compensation.

On the other hand, there's no way to accurately predict the performance of your chosen investments, which is the other major variable that determines what your 457 will be worth. However, we can use historical trends to get a good estimate what your account might be worth.

Over long periods of time, stock-based investments have averaged 9%-10% annual returns and bond investments have averaged 4%-5%. So, it's entirely reasonable to expect a properly allocated 457 plan to generate long-term annualized returns in the 7% ballpark. If your plan does better, great. I'm just saying to keep your expectations reasonable.

Having said that, here's a calculator that can help you estimate how much your 457 could be worth by the time you retire, using your account's current value, time until retirement, and your contribution rate. Remember to change the employer match in the calculator to 0%, since 457 plans don't have employer matching contributions.

* Calculator is for estimation purposes only, and is not financial planning or advice. As with any tool, it is only as accurate as the assumptions it makes and the data it has, and should not be relied on as a substitute for a financial advisor or a tax professional.

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