401K for New Pharmacist

[coffee4drug]

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I just started my job and am doing as much overtime as possible. Another pharmacist warn me that I will end up paying a lot of taxes because of all the extra income. He also advised me to max out my 401K. I have never signed up for 401K before, so I have no idea what % of income to contribute. Does anyone know how much a typical single pharmacist usually contribute to his 401K?

 

[PumpkinSmasher]

I just started my job and am doing as much overtime as possible. Another pharmacist warn me that I will end up paying a lot of taxes because of all the extra income. He also advised me to max out my 401K. I have never signed up for 401K before, so I have no idea what % of income to contribute. Does anyone know how much a typical single pharmacist usually contribute to his 401K?

The limit is $16,500/year. At the very least you should put in the maximum amount that your employer will match. Do some reading and decide how you want to arrange your investment/retirement portfolio. If you feel lost or uncomfortable, it may be worth it to sit down with a professional and learn the basics and get some advice.

 

[WVUPharm2007]

ALWAYS at minimum match your employers contribution. It is literally free money.

 

[Momus]

If I were you, I will do maximum contribution you can do EARLY during the year (for me it's 70% of paycheck). This year market is so bullish (a year before the election). Historically, the year before the election, market is NEVER down.

I already contributed $10,000 this year just because the market is going bullish. Our economy is growing slowly but steadily. We have good news since the end of last year, and it will continue in 2011. Dollar cost averaging is not a good idea this year. Get your money in the market fast before you miss the ride.

Next year, scale back to 15% of your paycheck for dollar cost averaging. At 15%, you will reach $16,500 before the end of the year assuming you make at least $110k.

 

[WVUPharm2007]

If I were you, I will do maximum contribution you can do EARLY during the year (for me it's 70% of paycheck). This year market is so bullish (a year before the election). Historically, the year before the election, market is NEVER down.

I already contributed $10,000 this year just because the market is going bullish. Our economy is growing slowly but steadily. We have good news since the end of last year, and it will continue in 2011. Dollar cost averaging is not a good idea this year. Get your money in the market fast before you miss the ride.

Next year, scale back to 15% of your paycheck for dollar cost averaging. At 15%, you will reach $16,500 before the end of the year assuming you make at least $110k.

Yup. The economy will grow this year. Lots of good things going for it. An increase in manufacturing jobs for cripes sake. We haven't seen that since like 1998 or some ****. That what really fuels an economic expansion. As long as the idiots in Washington don't **** it all up by trying to be too conservative or too liberal....

 

[museabuse]

I just started my job and am doing as much overtime as possible. Another pharmacist warn me that I will end up paying a lot of taxes because of all the extra income. He also advised me to max out my 401K. I have never signed up for 401K before, so I have no idea what % of income to contribute. Does anyone know how much a typical single pharmacist usually contribute to his 401K?

Don't ever be afraid to make more money, any one who says that is stupid. That pharmacist doesn't understand taxes. A lot of people think if you make too much and go into a higher tax bracket that your whole income is taxed at that rate, not true. Only money you make within a tax bracket is taxed at that amount.
I personally would put what company matches, then use extra money for debt(student loans). Once your out of debt except for mortgage, then focus on retirement and investing.

 

[Old Timer]

Here is my 2 shekels:

Until you pay off student loans you should do the following before you invest anything:

1. Match your employers contribution to your 401K. As WVUPharm2007 pointed out, it's free money.
2. Make sure you have six months salary in a money market or other liquid investment in case of emergency.
3. If you have substantial debt or a family, make sure you have adequate short term and long term disability.

After these things are accomplished, you can consider investing. Use the interim period to read up on investing and decide if you want to do it yourself or hire a financial adviser.

 

[coffee4drug]

 

[confettiflyer]

Yep, OldTimer has it right.

If you have any debt at all, view the interest rate as = to the return on investment on it. So a $1000 credit card balance at 12% paid off = a 12% annual return on your money.

But save money for yourself first, after matching with the 401k, keep some money in a simple savings account you can access easily for emergencies. Cash is king!

 

[Aznfarmerboi]

Yup. Do not listen to your friend. Posters here are spot on. Every situation is different.

However as a rule, always match a min to what your employer will contribute. I put 5 percent into my 401k because my employer matches 5 percent. This is a 100 percent return guarantee!!!

After that, it is up to you. Personally, I rather use the extra money to pay off my student loans. If your loan is at 6-7 percent, that is a guarantee 6-7 percent return on your money tax free!!!!

The only exception is during your first year, if you think you will be making more than 75k.. (bonus, worked a lot as an intern, overtime, investment incomes from stock), etc.. try to open up a roth IRA; contribute some more to your 401k so that your income wont be more than 75k. The reason for this is so then you can deduct other things that your normally cant like student loans.

The last thing I got to comment on is I would never contribute more than what my employers match into my 401k. 401k is tax deferred and unless you are making less than 6 figures and can deduct enough to take advantage of government tax deductions, chances are that you are better off opening a business or investing in something else. 👍

 

[type b pharmD]

The last thing I got to comment on is I would never contribute more than what my employers match into my 401k. 401k is tax deferred and unless you are making less than 6 figures and can deduct enough to take advantage of government tax deductions, chances are that you are better off opening a business or investing in something else. 👍

yes. if you think about it, putting money in a 401k is a bet that taxes are going to be lower in the future when you withdraw from it than they are now. Hint: this is a BAD BET (leaving aside the idea of the free employer contribution ,which by all means you should take) .. also 401k's arent usually able to be managed in the wisest possible manner. From what i've heard a lot of times their prepackaged "strategies" you can choose from are not always super hot market bets (ie you will lose if the market goes down where you could have won by actively trading)

getting the money taxed now and investing it for later may be a better bet (look at roth ira for example)

 

[Old Timer]

yes. if you think about it, putting money in a 401k is a bet that taxes are going to be lower in the future when you withdraw from it than they are now. Hint: this is a BAD BET (leaving aside the idea of the free employer contribution ,which by all means you should take) .

NO, NO, NO. You are betting YOU will be in a lower marginal tax rate when you retire because you will not be working and hence have less income...

 

[Momus]

It's all about compound interest. You basically get to keep about 20% more of your income that would have been axed today and deferred the income growing tax free for say ~30 years.

(max contribution $16,500 X ~20% effective tax rate of $130k income) = $3300/year)

Assuming the cap is $16,500/year forever (unlikely):
$3300/yearly saving from taxes compounded for 30 years with just a modest annual return of 5% would have netted you $230,000 of additional income that would otherwise be taxed.

How many managers out there can beat S&P 500?
http://mutualfunds.about.com/od/activevspassivefunds/a/indexvsactive.htm

"According to Vanguard, for the 10 years leading up to 2007, the majority of actively-managed U.S. stock funds underperformed the index they were seeking to outperform. For instance, 84% of actively-managed U.S. large blend funds underperformed their index, and 68% of actively-managed U.S. small value funds underperformed, as well. The case is even worse for actively-managed bond funds. In that case, almost 95% of actively-managed bond funds underperformed their indexes for the 10 years leading up to 2007."

If you think you are better than these professional managers, think again...

"Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it." — Einstein

If you think you are going to be in a higher tax bracket when you retire, put them in IRA -> convert to Roth IRA... Downside it's capped at $5000/year and contribution is not tax deductible for single pharmacist...

I personally have both 401k maxed out and Roth IRA maxed out yearly.

 

[Momus]

.Also asset allocation is important here to further minimize taxes. You should place your bond holdings in your 401k accounts and your efficient stock funds in taxable. The Roth can hold what is left. This minimizes taxes and keeps more money in your pocket. If you put your bond investments in the 401k account you don't pay taxes immediately on the earnings like you do by holding the cash in the taxable account.

Remember that all 401k accounts are always taxed like personal income when you start taking money out while the stocks in taxable accounts can benefit from the lower capital gains tax rates. No reason to take a low tax rate and voluntarily turn it into a higher tax rate. You need to think your strategy by starting with the correct asset allocation then determining where to place funds. .

 

[type b pharmD]

NO, NO, NO. You are betting YOU will be in a lower marginal tax rate when you retire because you will not be working and hence have less income...

cool thanks for correcting this

 

[Dr Wario]

Just wanted to say that there is some extremely good information on this thread, I'm quite impressed with a few of the posters. One quick note however, be careful about putting 70% of your salary into your 401K at the beginning of the year to ride market gains, don't put so much in that in later months you won't be able to contribute 5% of your salary otherwise you will lose the employer match.

A quick note about Roth IRA's, they are a good choice for those people who qualify for them <115k AGI if I recall correctly, however you can contribute to a non-deductible IRA and later do a roth conversion as a sort of back door method if your income is too high.

 

[Dr Wario]

.Also asset allocation is important here to further minimize taxes. You should place your bond holdings in your 401k accounts and your efficient stock funds in taxable. The Roth can hold what is left. This minimizes taxes and keeps more money in your pocket. If you put your bond investments in the 401k account you don't pay taxes immediately on the earnings like you do by holding the cash in the taxable account.

Remember that all 401k accounts are always taxed like personal income when you start taking money out while the stocks in taxable accounts can benefit from the lower capital gains tax rates. No reason to take a low tax rate and voluntarily turn it into a higher tax rate. You need to think your strategy by starting with the correct asset allocation then determining where to place funds. .

A slight addition to this if I may, many employers do not have individual bonds or stocks in their 401k plans, and for most of us bond funds are not a good option because the associated fees makes returns comparatively poor. As stated though, it is probably not a good idea to hold individual stocks in your 401k because you will not see the benefits of the lower long term capital gains tax rate.

As an example, if you worked for CVS and wanted to own stock in the company, it would be much better to own the stock in your taxable accounts and hold the stock for at least one year so the gains will only be taxed at 15% (the current LTCG rate) instead of ordinary income rates as they will be when you withdrew the stock from a 401k.

 

[doublehh03]

Hi, I'm a newbie so need some advice (as this thread provides a lot of good info)

so CVS offers 16 different investment funds (varies from stocks--not individual/bonds/stable cash funds). I'm totally illiterate in all of this so some help would be welcomed.

So I "hear" that investing around 75-80% in stocks, rest in bonds/stable cash funds is best?

So this is how I'm diversifying my portfolio:

5% - stable value fund
5% - diversified bond
5% - inflation protected
10% - aggressive lifestyle
15% growth and income
10% core equity
15% mid cap index
10% international equity index
20% small cap index
5% cvs stock

And I'm putting in 5% for now, as CVS matches 5%.

What do you guys think? Any advice would be appreciated.

 

[pezdispenser]

So I "hear" that investing around 75-80% in stocks, rest in bonds/stable cash funds is best?

How old are you or how many years do you have until retirement? Assuming you're just starting your career, then 80% stock, 20% bonds is fine.

So this is how I'm diversifying my portfolio:

5% - stable value fund
5% - diversified bond
5% - inflation protected
10% - aggressive lifestyle
15% growth and income
10% core equity
15% mid cap index
10% international equity index
20% small cap index
5% cvs stock

I'm just going by the names because I don't know what's in these funds, but it looks like you're doubling up on some things, and possibly paying a higher expense ratio than you need to. For example, aggressive lifestyle and growth and income are probably actively managed funds (with higher expense ratios) that contain a mixture of stocks and bonds.

I would follow the Vanguard Target Retirement Fund formula, and try to choose the lowest expense ratio index funds. So until you are 40 years old:

0% - stable value fund
10% - diversified bond
0% - inflation protected
0% - aggressive lifestyle
0% growth and income
38% core equity (assuming this is a S&P 500 index fund)
28% mid cap index
18% international equity index
6% small cap index
0% cvs stock

Then from 40-60 years old, move 1.5% each year proportionately from the four stock funds to the bond fund, then after 60 also add a bit of inflation protected and stable value fund.

 

[Dr Wario]

Hi, I'm a newbie so need some advice (as this thread provides a lot of good info)

so CVS offers 16 different investment funds (varies from stocks--not individual/bonds/stable cash funds). I'm totally illiterate in all of this so some help would be welcomed.

So I "hear" that investing around 75-80% in stocks, rest in bonds/stable cash funds is best?

So this is how I'm diversifying my portfolio:

5% - stable value fund
5% - diversified bond
5% - inflation protected
10% - aggressive lifestyle
15% growth and income
10% core equity
15% mid cap index
10% international equity index
20% small cap index
5% cvs stock

And I'm putting in 5% for now, as CVS matches 5%.

What do you guys think? Any advice would be appreciated.

As a CVS employee, I would highly suggest not owning CVS stock in your 401k. It is much better to own CVS stock with the employee stock purchase plan (ESPP) in that you get at least a 15% discount on the market price. You can contribute up to 15% of your salary into the plan with after tax dollars. I did this 2 years ago at the max contribution and I've made a profit of $20,000 with a total market value of around 55k.

 

[doublehh03]

As a CVS employee, I would highly suggest not owning CVS stock in your 401k. It is much better to own CVS stock with the employee stock purchase plan (ESPP) in that you get at least a 15% discount on the market price. You can contribute up to 15% of your salary into the plan with after tax dollars. I did this 2 years ago at the max contribution and I've made a profit of $20,000 with a total market value of around 55k.

Thanks for that advice. Any advice on how I should allocate for the other investment funds?

Also, 401k, do you change where you allocate your investments much? Or do you just keep them where they are, and just alter your contributions?

Secondly, anything I should be aware of in terms of benefits for CVS? I've been put into the loop immediately and hasn't had much chance to read up on things. For instance, do we need liability insurance or does CVS cover you for that?

Thanks much Dr. Wario.

 

[Dr Wario]

Thanks for that advice. Any advice on how I should allocate for the other investment funds?

Also, 401k, do you change where you allocate your investments much? Or do you just keep them where they are, and just alter your contributions?

Secondly, anything I should be aware of in terms of benefits for CVS? I've been put into the loop immediately and hasn't had much chance to read up on things. For instance, do we need liability insurance or does CVS cover you for that?

Thanks much Dr. Wario.

I'm not going to tell you exactly how you should allocate to your funds, but assuming you are a young pharmacist, general guideline would be 30% small/mid cap index funds, 15-20% international, 20% core equity, 0-5% bonds and the rest in whatever you like. I usually examine my contributions once a year and change the % to rebalance my portfolio.

As to CVS benefits, CVS insures for liability, pays for short term disability completely after one year and has decent medical/vision/dental options. A benefit to really look at are some of the group discounts CVS employees get with external companies, such as 20% off Verizon services. They will send you many guides detailing all of the benefits and your rxsup should explain them all to you at your annual review, especially detailing bonus structure and stock options.

 

[doublehh03]

I'm not going to tell you exactly how you should allocate to your funds, but assuming you are a young pharmacist, general guideline would be 30% small/mid cap index funds, 15-20% international, 20% core equity, 0-5% bonds and the rest in whatever you like. I usually examine my contributions once a year and change the % to rebalance my portfolio.

As to CVS benefits, CVS insures for liability, pays for short term disability completely after one year and has decent medical/vision/dental options. A benefit to really look at are some of the group discounts CVS employees get with external companies, such as 20% off Verizon services. They will send you many guides detailing all of the benefits and your rxsup should explain them all to you at your annual review, especially detailing bonus structure and stock options.

Thanks a lot! Very informative

 

[BMBiology]

The market crashed today. Anybody planning to put more money in your 401 k? If you increase your % contribution, how long do you have to wait before this comes in effect?

 

[PegIntron]

I am about to start working for CVS as a pharmacist. I have a few questions about 401k:

(1) Matching: I know CVS matches $1 per $1 for the first 3% of your salary, then $0.5 for the next 2%. It is already August. Can you still get the full matching? Can I contribute 10% so I would get the match? When does the matching start and end? (e.g., jan to dec?)

(2) Enrollment: If I enrolled this week, when will my 401K start? (e.g,. next pay period?).

I have read the 401K plan guide but I can't find answers to these questions. Any advise is greatly appreciated!

 

[PharmDstudent]

My strategy is pretty simple.
I've kept my company "profit sharing" in bonds, the group that has had the highest average yield this year. I could put my money elsewhere, but I don't feel like it. Meh... If it ain't broke, don't fix it.

 

[wezvidz]

For CVS, your company match gets deposited quarterly.

You are getting matched on 5% of your earnings. Look at it on a paycheck per paycheck basis, if it shows xxx$ is deducted for your 401k (let's say 5% of your check) then that's what you'll get matched from the company and deposited at the end of the quarter. You can't "catch up" by contributing 10%. You'll just be out of luck for 6 months of this year's match because you weren't working those 6 months.

This is assuming you've been a full time employee for a year... my 401k was able to be contributed to 90 days after I started full time employment (hired on as a grad intern) but the company match didn't kick in until 1 year of full time.

 

[xtsukiyox]

The market crashed today. Anybody planning to put more money in your 401 k? If you increase your % contribution, how long do you have to wait before this comes in effect?

I don't work in a pharmacy, so my answer would be "no" to adding more money - I am contributing to the employer match limit and can't really afford to add more. However, if I could afford it, at this point I would seriously look at making sure I maxed out my 401k over the year (that may mean increasing the contribution).

I'm sure it depends on your company and your payroll department, but I believe mine is 1-2 pay cycles, depending on what part of the pay cycle I change it during.

 

[BMBiology]

has anyone withdrawn money from their 401k to pay for a house down payment? Is this a smart move?

 

[lorain]

has anyone withdrawn money from their 401k to pay for a house down payment? Is this a smart move?

wait i thought tapping into the 401 b4 retirement is bad due to the taxes you have to pay on it?

 

[Kansas Pharmer]

wait i thought tapping into the 401 b4 retirement is bad due to the taxes you have to pay on it?

There are certain "one time" withdrawals that are allowed and are only charged a small penalty if any at all.

OP - Unless someone on here is or was a licensed CPA, that is where I would suggest you seek advice. While it is allowed like I said above, there are definite rules and steps that have to be taken to keep the IRS out of your personal business and your wallet.

 

[awval999]

has anyone withdrawn money from their 401k to pay for a house down payment? Is this a smart move?

No. You continue to rent. You save more.

You withdrawl money from a 401k if a loved one needs lifesaving surgery/medication/ransom. That's it.

 

[StallionRx]

No. You continue to rent. You save more.

You withdrawl money from a 401k if a loved one needs lifesaving surgery/medication/ransom. That's it.

This.

Do not touch it unless 100% necessary.

 

[PharmaTope]

has anyone withdrawn money from their 401k to pay for a house down payment? Is this a smart move?

not a good idea.

when you remove money from it, you get taxed on the money as you would have originally. PLUS, there is a withdrawl penalty. you basically get ****ed HARD bc of it

 

[HumbleAfrican]

I am planning to enroll in 401k with fidelity. I am contributing 6% and I don't know anything about choosing investments. I don't know which investment options to choose. Therefore, I have put my enrollment on hold for now. Any ideas?

 

[awval999]

I am planning to enroll in 401k with fidelity. I am contributing 6% and I don't know anything about choosing investments. I don't know which investment options to choose. Therefore, I have put my enrollment on hold for now. Any ideas?

Just go with Fidelity Freedom 2040 for now and start to learn about investments and go from there. In the beginning all that matters is rate of savings and not investment returns.

 

[confettiflyer]

Just go with Fidelity Freedom 2040 for now and start to learn about investments and go from there. In the beginning all that matters is rate of savings and not investment returns.

Agreed, if you don't know much about investing, just stick it into a target fund and it'll rebalance automatically. I did this to start and as I learned more I knew what to look for and started buying other funds.

As for using a 401k for a house down payment. You can take a loan against your 401k and then pay the loan back, but I don't recommend it. There's no "penalty" since a down payment on a home is allowed per 401k rules, but you miss out on potential gains, and you end up having to pay it back (with interest, i believe). So say you take out $40k and then the market suddenly takes an upswing, you'll miss out on the gains of that $40k and be kicking yourself.