Med school/finances-Building one's retirement fund

[SaintJude]

With med school going to be so expensive, it's time I get smarter about finances post- med school (or during med school).

Alright, how do some people make $1 million in retirement within 20 years?

Or, I just met a 25 year old who had $89k in retirement. (?!) I'm a few years younger and have maybe $50 in retirement.

How can I change this around?

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[Long Way to Go]

Miracle of compounding interest. Even assuming a 3% annual growth rate of your account, $37,500 a year is enough to hit a million in only 20 years. Jack that up to 7% and you only need a little above half that a year.

Most people also invest for retirement for >20 years.

 

[skiing]

$1 million in retirement isn't that much and not hard to save. Let me illustrate.

Let's say you set aside $2500/mo as a doctor. In 20 years you'll ahve saved $600K. Not bad for putting aside ~12% of your income a year. And that is assuming you don't invest ANY of it.

Let's say you buy a house, $200K down (~ 1 year salary), with a $2500/mo mortgage (the down payment is about 20%). By the end of 30 years, you have about 800K in equity.

Let's say you buy the same house, and rent it out for $2500/mo to cover your $2500/mo mortgage (ideal situation for illustration purposes). By the end of 30 years, you've gotten the entire value of the mortgage on the house for free - the renters paid for 80% of your house. As a rough rule of thumb, housing prices double about every 10 years. After 30 years, in a perfect economy, you will have multi millions in equity. Say the economy didn't do so well. After 30 years, you should in a worst case scenario have at least 1.5 million in equity (assuming growth was slow, housing prices should 'theoretically' at least match inflation. 1.5 is a ballpark number I am throwing out there without doing the calculations)

These are ideal scenarios, and in real life, looking for real estate and investing is a complicated nuanced process that involves a lot of working with people and overcoming obstacles, dealing with unexpected circumstances, and preparing for the worst. But I just wanted to highlight these examples to show you that $1 million is not a lot to save and any smart, rational, person who makes smart decisions and protects effectively against the unexpected should easily be able to save this amount for retirement.

I would suggest reading books and educating yourself about investing - it's not rocket science

 

[Renaissance Man]

Miracle of compounding interest. Even assuming a 3% annual growth rate of your account, $37,500 a year is enough to hit a million in only 20 years. Jack that up to 7% and you only need a little above half that a year.

Most people also invest for retirement for >20 years.

Which is also the miracle of student loans. 6.8% interest rate is nothing to sneeze at. To the OP, order a book or two on Amazon. Check out www.whitecoatinvestor.com, and realize much of what you learn can't be implemented until after medical school.

 

[SaintJude]

Thank you! Can anyone suggest a really good book? There are so many investment books out there, it's hard to decipher which ones are the real deal.

 

[music2doc]

Which is also the miracle of student loans. 6.8% interest rate is nothing to sneeze at. To the OP, order a book or two on Amazon. Check out www.whitecoatinvestor.com, and realize much of what you learn can't be implemented until after medical school.

*cough cough* .... Yes, and don't forget that most people cannot do 6.8% because Staford only covers an amount about equal to tuition at most places (i.e., you're going to be taking out grad plus loans at 7.9% as well). At a COA of about $70k (pretty typical nationally for OOS/private schools), my interest, if paid off as I go (i.e., avoiding compounding), is about $200/mo * (semesters completed + 1)....

 

[redpanda]

Things that you can do now (i.e. pre-medical school) assuming you have a job:
1. Invest in tax-advantaged retirement accounts (always check contribution limits with the IRS yearly)

• Roth IRA: Invest up to $5000 of post-tax income per year (subject to income limits, none of which you'll probably meet before being a doctor). Growth and earnings are tax-free(!). Tax-free growth over 40 years is pretty awesome.
• 401k: Invest up to $16500 of pre-tax income per year (subject to income limits), income taxes are deferred until withdrawal of funds. Reduces your federally taxable income (ex. $50000 gross income - $10000 contribution to 401k = $40000 of taxable income). Many large employers have a match program; if yours has this, do it if at all possible. It is free money! (ex. 1:1 match up to 3% of income; you contribute 10% of your income, employer adds in another 3% = you added 13% of your income this year).

2. Invest reasonably but conservatively. Since you're young, you should be taking more risk (i.e. stocks v. bonds) but don't mess around with investing in individual stocks. Unless you are extremely good or lucky, you won't beat an index fund or another type of fund the financial professionals arrange. If you are that good, you should consider going into finance instead of medicine. Choose funds with low expense ratios.

3. Have luck. This can't be engineered, but if you're lucky enough to invest at a local low and things go up, you're golden. Otherwise, just sit tight. Investing for retirement is a long plan, so if the market tanks in the short term, don't worry and sit tight. It will go back up and you don't want to be the person who lost a ton of money by fleeing at a low.

4. Remember, finances that are in federally-defined retirement accounts are not counted into usable assets for paying med school tuition by most medical schools. Therefore, you can have a pool of money growing over the 7+ years of training that isn't going into tuition. It may be a minor way to offset some of that massive opportunity cost.

 

[tn4596]

Okay, a little confused here. Why not just put any extra cash straight into med school expense? Isn't the interest from loans going to offset any profits made from
any kind of investment?

 

[Praefectus]

Things that you can do now (i.e. pre-medical school) assuming you have a job:
1. Invest in tax-advantaged retirement accounts (always check contribution limits with the IRS yearly)

• Roth IRA: Invest up to $5000 of post-tax income per year (subject to income limits, none of which you'll probably meet before being a doctor). Growth and earnings are tax-free(!). Tax-free growth over 40 years is pretty awesome.
• 401k: Invest up to $16500 of pre-tax income per year (subject to income limits), income taxes are deferred until withdrawal of funds. Reduces your federally taxable income (ex. $50000 gross income - $10000 contribution to 401k = $40000 of taxable income). Many large employers have a match program; if yours has this, do it if at all possible. It is free money! (ex. 1:1 match up to 3% of income; you contribute 10% of your income, employer adds in another 3% = you added 13% of your income this year).

2. Invest reasonably but conservatively. Since you're young, you should be taking more risk (i.e. stocks v. bonds) but don't mess around with investing in individual stocks. Unless you are extremely good or lucky, you won't beat an index fund or another type of fund the financial professionals arrange. If you are that good, you should consider going into finance instead of medicine. Choose funds with low expense ratios.

3. Have luck. This can't be engineered, but if you're lucky enough to invest at a local low and things go up, you're golden. Otherwise, just sit tight. Investing for retirement is a long plan, so if the market tanks in the short term, don't worry and sit tight. It will go back up and you don't want to be the person who lost a ton of money by fleeing at a low.

4. Remember, finances that are in federally-defined retirement accounts are not counted into usable assets for paying med school tuition by most medical schools. Therefore, you can have a pool of money growing over the 7+ years of training that isn't going into tuition. It may be a minor way to offset some of that massive opportunity cost.

You hit it right on the head. I'd recommend investing in a small-cap growth index fund now because you won't need that money for another 40 years. The volatility of small cap stock is very high on an annual basis, but over 30-40 years you should expect a return around 12-13% per year. However, once you get closer to retirement (~10 years) you should move that money into less risky investments (ex. a mix of large-cap stock and bonds, with a bigger weight on bonds).

Also, avoid any fees associated with index funds. Look into Vanguard because their index fund fees are generally between 5 and 25 basis points (0.05%-0.25%). Avoid active trading because you burn up your returns on transaction fees. Last but not least, start investing for retirement today in order to take advantage of compounding interest.

 

[redpanda]

Okay, a little confused here. Why not just put any extra cash straight into med school expense? Isn't the interest from loans going to offset any profits made from
any kind of investment?

Depends on how fast the market is growing. For example, if one were invested in a S&P 500 index fund from the beginning of this year, growth is 17% as of today. Also, remember that paying med school expenses comes with no tax advantages.

I'm not suggesting that anyone dump all their extra money into retirement investments without saving for med school expenses, but it is one way to start one's retirement investments early (which is what you're supposed to do with some extra income) and reduce one's tax liability during the years that you are earning money prior to school. Also, it sometimes gets lost on SDN, but people's plans change from the time they're in undergrad to the time of matriculation into medical school. It's always possible that you won't go to med school for whatever reason and then definitely you should be starting your retirement accounts as soon as financially feasible. In addition, you never know when tax-advantaged retirement accounts will go away, as is possible with any IRS tax break (federal tax policy can always change!). If you're in, chances are that your accounts get grandfathered in with tax-advantages; if you're not, you missed a nice opportunity. You should consider all the factors before making a decision on whether to start an account and how much you want to weight saving for med school versus longer term goals.

If you're already in med school, 99% of the time, you're not earning significant quantities of money, so the discussion of retirement investments is a moot point (no earned income = no eligibility to contribute to tax-advantaged retirement accounts).

 

[Praefectus]

Okay, a little confused here. Why not just put any extra cash straight into med school expense? Isn't the interest from loans going to offset any profits made from
any kind of investment?

It depends on your interest rates and the return that you generate. If I have a loan that carries a 4% interest rate, I could make a 400 basis point spread on an investment generating 8% by making interest-only payments (as well as taking an interest payment deduction on my taxes). That's why you see hedge funds utilizing leverage.

 

[TheMightySmiter]

You are probably better off making reasonably safe short-term investments now and using that money to take out the minimum amount of med school loans.

 

[skiing]

Suze Orman has good advice but it's pretty basic - your college premed counselor for grown-up stuff. But its a good primer to get an overview of how saving/investing works (or should work) and helped me round out my knowledge of my available options. I would recommend starting here.- http://www.amazon.com/Money-Book-Yo...d=1347944850&sr=1-2&keywords=suze+orman+books, http://www.amazon.com/s/ref=nb_sb_s...orman+books&sprefix=suze+orman,stripbooks,133

I learned everything I know about real estate from this book: http://www.amazon.com/Investing-Real-Estate-Gary-Eldred/dp/0470499265. It's good to plan for the future and have a savings plan, and know what you'll do with your money before you have it.

I don't do stocks because I feel I have higher and more stable returns thru real estate (solid rental properties) but my dad recommends this book: http://www.amazon.com/Random-Walk-D...&keywords=a+random+walk+down+wall+street+2012 <-- It's basically the classic on stocks

This one is older brotherly advice from one fellow physician to another - it gave me a few ideas - or at least it offers a good example of how this one smart person applies the principles in thea bove books to his life - http://www.amazon.com/The-Physicians-Guide-Investing-Practical/dp/1588295699. A very very good read.

 

[Praefectus]

I learned everything I know about real estate from this book: http://www.amazon.com/Investing-Real-Estate-Gary-Eldred/dp/0470499265. It's good to plan for the future and have a savings plan, and know what you'll do with your money before you have it.

I don't do stocks because I feel I have higher and more stable returns thru real estate (solid rental properties) but my dad recommends this book: http://www.amazon.com/Random-Walk-D...&keywords=a+random+walk+down+wall+street+2012 <-- It's basically the classic on stocks.

Unless you're a developer that builds subdivisions or you buy foreclosed/distressed short-sale properties, your ROI for real estate will be on par with the Consumer Price Index (3-4%). However, you can make a killing in renovating foreclosures right now if you have any capital.

A Random Walk Down Wall Street is essential for a new investor. I'd recommend it in a heartbeat.

 

[azide10]

Okay, a little confused here. Why not just put any extra cash straight into med school expense? Isn't the interest from loans going to offset any profits made from
any kind of investment?

I'm sure there are better ways to go about it but that's how I'm doing it. I'll hopefully have nearly 1st years tuiton saved. I'll do better things with my money when I have someone to walk me through how to best handle it.