Roth-IRA

[Ender]

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So I have read multiple posts on Roth-IRA's in the forum, but I have a question. Everyone always says you must max out your Roth-IRA every year while in residency, as opposed to paying off debt (even high interest debt?).
Honestly, I have 3 years left and even if I could put $5000 away each year for the next three years (which would be very difficult if not impossible), would $10,000-15,000 in a Roth-IRA now really make much of a difference in the long run? Thanks for the advice.

Ender

 

[sethco]

So I have read multiple posts on Roth-IRA's in the forum, but I have a question. Everyone always says you must max out your Roth-IRA every year while in residency, as opposed to paying off debt (even high interest debt?).
Honestly, I have 3 years left and even if I could put $5000 away each year for the next three years (which would be very difficult if not impossible), would $10,000-15,000 in a Roth-IRA now really make much of a difference in the long run? Thanks for the advice.

Ender

Yes, behold the miracles of compounding interest...

From Dave Ramsey's Financial Peace University...

Person A: Starts investing at age 19 and stops at age 26 (2,000/year)
Person B: Starts investing at age 27 and stops at age 65 (2,000/year)

Assumption: Each person invests only 2,000/year in a mutual fund with an average return of 12% per year, Retire at age 65

Person A: At age 65, his 8 year investment (16K) is now worth $2,288,996
Person B: At age 65, his 39 year investment (78K) is now worth $1,532,166

Some may consider these numbers an exageration, but there is no denying the ability of compounding interest.

My suggestion would be to ask if there is any matching 401K/403B at your residency program and max out the possible match.

After this, you should then max out the Roth IRA while you are still eligible (Note there are income limits to contributions)

After this, finish whatever else you want to invest with in the 401K

Hope this helps.

 

[dhb]

Some people like to gamble... in your case you are betting that the government ( which is currently inflating the money supply by more than 15%/year) will pay you back in 40y money that it doesn't even have now. And you are betting that the value of that money will be more than it is now.


ps if you're counting on 12% return you must be a central banker because only them can garrante such inflation.

 

[lord_jeebus]

Another big advantage of the Roth IRA is that it uses after-tax money, so you will never have to pay tax on the gains your money makes in the account.

Considering the degree of national debt and large future government obligations (SS, Medicare), it seems very likely that taxes will be higher in the future than they are today. By dodging this future tax, your savings will be worth quite a bit more than similar savings in a 401k/403b or Traditional IRA.

Compounding interest works on debt as well as savings, so if your loans have a high interest rate, I might want to prioritize paying them off. What that high interest rate would be is a matter of debate.

 

[Ender]

Yes, behold the miracles of compounding interest...

From Dave Ramsey's Financial Peace University...

Person A: Starts investing at age 19 and stops at age 26 (2,000/year)
Person B: Starts investing at age 27 and stops at age 65 (2,000/year)

Assumption: Each person invests only 2,000/year in a mutual fund with an average return of 12% per year, Retire at age 65

Person A: At age 65, his 8 year investment (16K) is now worth $2,288,996
Person B: At age 65, his 39 year investment (78K) is now worth $1,532,166

Some may consider these numbers an exageration, but there is no denying the ability of compounding interest.

My suggestion would be to ask if there is any matching 401K/403B at your residency program and max out the possible match.

After this, you should then max out the Roth IRA while you are still eligible (Note there are income limits to contributions)

After this, finish whatever else you want to invest with in the 401K

Hope this helps.

Thanks for the info. At my residency program there is no 401K/403B match. I personally don't know anyone that gets a 12% return, obviously some do, but I think I can safely say the average is much less. Besides, every resident I have talked to who has invested money over the last year has had a net loss (once again small sample size). So my question come back to "Will $10-15,000 invested over the next three years (residency) in a Roth-IRA make much of a defference if I retire in 30 years?"

And if so then what makes it better than paying off high interest loans (no risk whatsoever)?

 

[sethco]

Thanks for the info. At my residency program there is no 401K/403B match. I personally don't know anyone that gets a 12% return, obviously some do, but I think I can safely say the average is much less. Besides, every resident I have talked to who has invested money over the last year has had a net loss (once again small sample size). So my question come back to "Will $10-15,000 invested over the next three years (residency) in a Roth-IRA make much of a defference if I retire in 30 years?"

And if so then what makes it better than paying off high interest loans (no risk whatsoever)?

While I agree that the average is not typically 12%, it is certainly attainable. In addition, I only used this number because that is what the book used and I am too lazy to do the math.

Invested wisely, I would not consider 12% (by no means) an outlandish return on a good mutual fund.

I am staring at the Morningstar Funds 500 right now (Which I highly recommend buying) and most funds are producing >10% returns over 5-10 years.

As an example take T Rowe Price Mid Growth Fund. This is probably a low-moderate risk mutual fund. The 5, 10 and 15 year average total returns % are 18.74, 11.56, and 14.75 (as of 2007). So, if you invested 10K in this fund in 1992, it would be worth 78K in 2007. This also takes into account the large market dip that occured after 9/11 (the total return in 2002 was -21.22%), but the other years well made up for this.

Hell, even 10K invested in the S+P 500 in 1996 would be worth about 27K in 2007. This translates out to about a 10.5% return.

Now, I know a lot of people would point to a down market, but realize that Mutual Funds are long-term investments (Should be at least 10 years) and they are much safer than individual stocks because you are spreading the risk of many stocks. Likewise, Index funds are even safer because these are basically pooling several mutual funds (Although the returns won't be as high)

IMO, in taking the difference between paying off loans now versus investing, one needs to consider their earning potential and the interest rate. If you have loans that are less than 6-7% and you know you will pay off your loans within 10 years of finishing residency (perfectly reasonable for an Anesthesia Grad), it makes sense to invest in the Roth, while you are still eligible. As said above, the Roth in a post-tax investment, which is huge since you will most likely be retiring in a higher tax bracket that what you will be investing into today.

Just my opinion. Take it for what it's worth

 

[beefballs]

So I have read multiple posts on Roth-IRA's in the forum, but I have a question. Everyone always says you must max out your Roth-IRA every year while in residency, as opposed to paying off debt (even high interest debt?).
Honestly, I have 3 years left and even if I could put $5000 away each year for the next three years (which would be very difficult if not impossible), would $10,000-15,000 in a Roth-IRA now really make much of a difference in the long run? Thanks for the advice.

Ender

dude, the beauy of the Roth is you don't pay taxes on the interest accrued. Yes compounding interest is a beautiful thing but this is last chance you will get a chance to invest in a viable tax shelter due to your future income level. Everyone says stuff it during residency because of the tax protection. After you get over a certain income level you are not allowed to contribute to a Roth, you can contribute to a traditional IRA ( And deduct the amount you contributed for that tax year) but you WILL pay taxes on the interest accrued on it

even if you can't max it, make a serious attempt go contribute what you can

 

[anesonia]

Several points:

1) Just please remember not to spread yourself too thin...don't stretch to put $ into a Roth, only to have to take on more debt for day to day living expenses (ie credit card debt), or run into trouble if you have an emergency and need more funds.

2) Roth is a great investment vehicle, and you most likely will NOT be able to put $ into after you graduate residency unless the limits change between now and then. I would put it in the Roth before paying school debt as long as its at a "reasonable" rate as someone else already posted

3) Money into a Roth untouchable for a long, long, time- another option is put extra money into a regular brokerage or money market account. Then if you need $ for an emergency you can get to it.

 

[dhb]

"will $10-15,000 Invested Over The Next Three Years (residency) In A Roth-ira Make Much Of A Defference If I Retire In 30 Years?"

no

 

[deleted50478]

People losing so much money over the last year should allow you to make even more when the market recovers if you buy while it's down. You shouldn't be discouraged by people's short=term loses, you should be encouraged by the bargain prices in parts of the stock market. It's a great opportunity for long term investments like a Roth IRA.

 

[Pilot Doc]

even if you can't max it, make a serious attempt go contribute what you can

I think that's a really bad strategy.

Most of the conventional investing wisdom out there does not fit physicians. No one else has a predictable period of ~10 year of no/low income after college and subsequently will make 90-95th percentile earnings for 30 years straight.

Don't waste your money on a Roth. Yes, I know you're $2,000 today will turn into $1.6 billion by retirement. But think about what the money will do today and what it will do for you at retirement.

Presumably at retirement, if you have been responsible during your attending career, you will have a large nest egg and live a comfortable existence such that your lifestyle would not markedly change if you had 5% more assets.

Contrast that to residency where a couple hundred dollars a month could make a noticeable change in your standard of living - be it eating out, a nicer car, an extra vacation each year - whatever makes you happy.

You can either be happy now or suffer to, in all likelihood, increase the size of your children's inheritance.

Start saving after residency. (If you REALLY want to be responsible, put the money into a good disability policy that you can carry with you post residency)

 

[Arch Guillotti]

I think that's a really bad strategy.

Most of the conventional investing wisdom out there does not fit physicians. No one else has a predictable period of ~10 year of no/low income after college and subsequently will make 90-95th percentile earnings for 30 years straight.

Don't waste your money on a Roth. Yes, I know you're $2,000 today will turn into $1.6 billion by retirement. But think about what the money will do today and what it will do for you at retirement.

Presumably at retirement, if you have been responsible during your attending career, you will have a large nest egg and live a comfortable existence such that your lifestyle would not markedly change if you had 5% more assets.

Contrast that to residency where a couple hundred dollars a month could make a noticeable change in your standard of living - be it eating out, a nicer car, an extra vacation each year - whatever makes you happy.

You can either be happy now or suffer to, in all likelihood, increase the size of your children's inheritance.

Start saving after residency. (If you REALLY want to be responsible, put the money into a good disability policy that you can carry with you post residency)

I think your post is really bad advice (at least for me). Actually I know it is. My Roth is well funded and that money is going to lay around for many years and make me a few million at retirement without my having to raise a finger.

 

[Pilot Doc]

I don’t think you understand my post – or I wasn’t clear.

I’m not denying the merits of tax-free compound interest. It’s a great thing

Though to be fair, you are greatly overstating those merits in your post. $10K for 30 years at 12% annually is $300K, not “a few million.” With a more realistic real (i.e. inflation adjusted) return of 5%, that 10K turns into a little less than $50K in 30 years.

The question is whether a dollar now does you more good than 2 (or 5 or 20 or whatever) dollars at retirment.

I think for almost all residents, the clear answer is that a dollar now has a much higher marginal utility than that same dollar after a 30 year investment. The likelihood that you will be 1) alive and 2) fiscally lifestyle constrained after a lifetime practicing medicine is pretty small. Better to put the money to use now when it can clearly improve your life.

And as I mentioned, if you have a burning desire to be responsible, there are “investments” that can be made now which will benefit you long before retirement.

 

[dhb]

I think your post is really bad advice (at least for me). Actually I know it is. My Roth is well funded and that money is going to lay around for many years and make me a few million at retirement without my having to raise a finger.

HAHAHAHA i thought there was no such thing as a free lunch...

 

[dhb]

I don’t think you understand my post – or I wasn’t clear.

I’m not denying the merits of tax-free compound interest. It’s a great thing

Though to be fair, you are greatly overstating those merits in your post. $10K for 30 years at 12% annually is $300K, not “a few million.” With a more realistic real (i.e. inflation adjusted) return of 5%, that 10K turns into a little less than $50K in 30 years.

The question is whether a dollar now does you more good than 2 (or 5 or 20 or whatever) dollars at retirment.

I think for almost all residents, the clear answer is that a dollar now has a much higher marginal utility than that same dollar after a 30 year investment. The likelihood that you will be 1) alive and 2) fiscally lifestyle constrained after a lifetime practicing medicine is pretty small. Better to put the money to use now when it can clearly improve your life.

And as I mentioned, if you have a burning desire to be responsible, there are “investments” that can be made now which will benefit you long before retirement.

👍 and 5% adjusted for inflation is still a return you would have a hard time to achieve.

 

[sethco]

I don't think you understand my post – or I wasn't clear.

I'm not denying the merits of tax-free compound interest. It's a great thing

Though to be fair, you are greatly overstating those merits in your post. $10K for 30 years at 12% annually is $300K, not "a few million." With a more realistic real (i.e. inflation adjusted) return of 5%, that 10K turns into a little less than $50K in 30 years.
The question is whether a dollar now does you more good than 2 (or 5 or 20 or whatever) dollars at retirment.

I think for almost all residents, the clear answer is that a dollar now has a much higher marginal utility than that same dollar after a 30 year investment. The likelihood that you will be 1) alive and 2) fiscally lifestyle constrained after a lifetime practicing medicine is pretty small. Better to put the money to use now when it can clearly improve your life.

And as I mentioned, if you have a burning desire to be responsible, there are "investments" that can be made now which will benefit you long before retirement.

Now I know I am bad at math, but how is 10K invested over 30 years with 12% interest only come out to 300K???

Isn't 10K over 30 years with 0% interest equal to 300K?

Am I missing something?

 

[BobBarker]

10K with nothing added to the investment at later dates, only compounding the interest.

 

[Pilot Doc]

Isn't 10K over 30 years with 0% interest equal to 300K?

Sorry - that was unclear. I meant 10K (more or less what you could get into a Roth as a resident) with no further additions left to grow for 30 years.

 

[Arch Guillotti]

Who said anything about a paltry 10K? My account has another zero on the end.

 

[deleted126335]

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[sethco]

Sorry - that was unclear. I meant 10K (more or less what you could get into a Roth as a resident) with no further additions left to grow for 30 years.

...and this is a bad thing? (BTW, if you don't believe me about the above example leading to a "couple million", I can write out the math)

300K (tax free) would be equal to about an extra one year salary (if not more), for what? For a small contribution of 3-5K per year during residency or about 10-15% of your yearly salary.

If anybody wants to talk about an unsure investment that barely outpaces inflation, how about real estate? Obivously in the early part of this decade there was a sharp boom, but this has quickly level off (and declined, actually) over the past 2-3 years.

 

[dhb]

Disagree. Financially The best thing you can do early in life is to save. Later in life cutting investment expenses will be far more valuable than saving a few extra dollars in living expenses. It will never be easier to maintain low livng expenses than during these years. Agree that one should not take on debt or spread oneself too thin to fund a Roth IRA.

It depends on what you are saving: if you're saving dollars you're gonna have a problem. Inflation in the money supply is going to eat away your buying power faster than the growth you can expect from said savings.

I'm in no way against saving but people have misconceptions about saving and investing especially in the current fiat currency and inflationnary environment.

 

[deleted126335]

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[cerev]

👍 and 5% adjusted for inflation is still a return you would have a hard time to achieve.

Actually, the historical average annual real rate of return of an S&P 500 index fund is 6.7% over any 50 year period. If you are having trouble getting 5% returns, you need a new investment adviser.

http://finance.yahoo.com/funds/unde...ing_Horizons_Reduce_Average_Return_Volatility

 

[dhb]

Actually, the historical average annual real rate of return of an S&P 500 index fund is 6.7% over any 50 year period. If you are having trouble getting 5% returns, you need a new investment adviser.

adjusted for inflation

 

[Pilot Doc]

Who said anything about a paltry 10K? My account has another zero on the end.

Congratulations on your accomplishment. It's great to have substantial assets so early on.

It also has very little bearing on this conversation as to whether the typical resident should invest around 10K in a Roth IRA. No resident will be able to generate a six figure Roth starting from zero on med school graduation.

 

[Pilot Doc]

...and this is a bad thing? (BTW, if you don't believe me about the above example leading to a "couple million", I can write out the math)

300K (tax free) would be equal to about an extra one year salary (if not more), for what? For a small contribution of 3-5K per year during residency or about 10-15% of your yearly salary.

I have no argument with your math. I just tweaked the time horizon a bit and adjusted for inflation.

But let me put out an alternative set of numbers.

Resident A - invests 2K/yr starting after graduation and then stops contributing after fellowship - never invests again. When he retires 30 years later at age 61, he has $426,329 assuming 12% annual return.

Resident B - uses his salary to improve his standard of living during residency. Get's a good job after fellowship. His first year he invests $20,000 one time and doesn't add to it or touch it again. At retirement 30 years later how much does he have? $599,198.

Even if you ignore your Roth, it's really not that hard to catch up once you have an attending salary.

Going further

Resident A1 - same situation as above, but also invests 30K/yr (10% of salary) with same return. At retirement, that has grown into $8.1 million or about 8.5 million total. Put that into municipal bonds at 5% and it will pay $425K/yr in perpetuity leaving your heirs wit the same $8 million

Resident B1 - same deal - spends his money on ****** and booze during residency and ignores his roth. Gives his stockbroker a $20K graduation present/investment and also does 30K/year as well. At retirement he has around 8.5 million total. Or say he even doesn't make the catchup contribution. He only has 8 million. His muni bonds will only pay $400K/yr which he will either have to get by on ... or he can draw down his capital $25K/yr to age 111 and leave his kids an inheritance of 6 mill and change.

But this even ignores my basic point: disposable income during residency is vastly more useful to you than during retirement. Consider the thought experiment of giving $10 to warren buffett and to a Chinese factor worker. That same $10 is absolutely meaningless and makes no impact on WB's life, but will be an incredible windfall to the factory worker. The resident/retired physician situation is the same with a less stark contrast. Residents almost always have a really good use for some extra money. Retired physicians rarely are strapped for cash. Seriously ... do any of you guys plan to die broke? Unless you do, the only thing the Roth is doing is adding to your estate tax bill.

[/soapbox]

 

[deleted126335]

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[cerev]

adjusted for inflation

"Real rate of return" is financial speak for "adjusted for inflation".

 

[Ender]

Thanks to everyone for all the advice. Even if you all have widely differing opinions.😀

Ender

 

[sethco]

I have no argument with your math. I just tweaked the time horizon a bit and adjusted for inflation...

Good post, can't say I disagree with anything you wrote.

My one, and only, point though is to take the fullest advantage of compound interest, the sooner you invest the better.

 

[urge]

I'm on dhb's camp. I don't have much expectation on the future. Get a Roth ira if you have disposable income. Otherwise don't worry about it. Right now the economy is about to collapse. There is no way the market will have good returns for the next 5 yrs. Add the real inflation of about 12%, which is about to be higher, and you realize that you are only losing money. Even with a 12%(really hard to achieve) return you won't make any money. My advice is pay all your debts as quickly as possible. Get an indivudial investing account, traditional ira, 403b, 401k....possibly a house if staying in the same place forever..... when money is available.