Saving for IRA/401k during residency?

[codeblue34]

My hopital doesn't offer a 401k company match or IRA package.

I met with a fin advisor, and if I put money towards a roth ira and max it out annually, it'll cost me $335/month... i think that's kinda lot considering my take home pay is $1170 (net pay). I did defer my loans, but with mortgage payment, bills, car, etc., i can't quite afford it.

Are most people able to put money away for retirement now, or do they begin after residency (aka. physician's salary)?

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[deleted87716]

I didn't save anything during residency. I had to eat.

 

[deleted109597]

I met with a fin advisor, and if I put money towards a roth ira and max it out annually, it'll cost me $335/month... i think that's kinda lot considering my take home pay is $1170 (net pay). I did defer my loans, but with mortgage payment, bills, car, etc., i can't quite afford it.

How are you only taking home $1170? Because that should be biweekly, meaning you're taking home $2340 a month (most months), and there will be a few that you will get an extra check. It shouldn't be that hard at all, unless you are living in a very high housing area, or you drive a $60K car.

If you are netting $1170 after mortgage, bills, and car, it should be pretty easy. Unless you eat out a lot.

 

[Soapbox123]

Are most people able to put money away for retirement now, or do they begin after residency (aka. physician's salary)?

It's probably not worth it to save very much while in residency. Your income will go up by leaps and bounds after you finish training, and you'll be in a much better position to save.

Residency is tough enough without having cash flow issues.

 

[deleted109597]

It's probably not worth it to save very much while in residency. Your income will go up by leaps and bounds after you finish training, and you'll be in a much better position to save.

Residency is tough enough without having cash flow issues.

Not true. Fund a Roth is the best thing you can do in residency. Because you can't do it once you are an attending, as you earn too much. The 12-15K (only 4K per year unless you are very old) you can put in will be worth over $300K when you retire. It is a lot of return on a low investment, and it is tax free. The rest of them you can take or leave, but a Roth is pretty much golden.

 

[KidDr]

It's probably not worth it to save very much while in residency. Your income will go up by leaps and bounds after you finish training, and you'll be in a much better position to save.

Residency is tough enough without having cash flow issues.

This is really really bad advise. See Dr. Mcninja's reply below, he's not exaggerating--if anything, I think his estimate that your $12-15k Roth IRA investment during residency being worth $300k when you retire is probably low.

 

[WatchingWaiting]

This is really really bad advise. See Dr. Mcninja's reply below, he's not exaggerating--if anything, I think his estimate that your $12-15k Roth IRA investment during residency being worth $300k when you retire is probably low.

I think people are confused about retirement savings. Most of these save early articles are written to sell lots of magazines/web advertising revenue, and so are targeted at average shmoes who will have only a slight increase in annual earnings per year. If you're making $50K per year at age 27 as a low-level engineer or business person, and expect to have a slow annual increase in wages up to maybe $80K when you retire, it makes sense to save early and start compounding, because there is no pot of gold under the rainbow awaiting you.

However, if you're a doctor, it's kind of poor advice-- because your earnings and investment opportunities once you're in practice are just so superior to your earnings potential during residency. Specifically, once you are in private practice, you can fund your own SIMPLE, KEOGH, or other pension plan to the tune of $45,000 per year (as compared to the pathetic $4K per year of the IRA). That will be a pre-tax contribution, which is actually of significant value (comparable to the pay tax now, pay no tax at retirement roth structure) to you as a physician since the marginal dollars going into your retirement plan based off your $140K per year starting salary (you can double this if you're in a surgical specialty, gas, rads, derm, etc.) will be taxed at around 40+% depending on your state of residence. One year of living tightly as an attending, and you'll be able to save way more than you could during four or five years of similar living as a resident.

In short, if you want to be "set for life"-- don't screw yourself during residency when you're already screwed, but instead live tightly during your first couple of years in practice, when you could sock away several hundred grand in a tax-deferred account that actually will make you a millionaire when you retire even if you don't save anything later in life.

Or, alternately, just live reasonably when you're an attending, stick $20K, $30K per year in a retirement plan from when you start, and you'll be very happy by the time your retire.

 

[Soapbox123]

...if you're a doctor, it's kind of poor advice-- because your earnings and investment opportunities once you're in practice are just so superior to your earnings potential during residency.

An excellent and very well articulated comment! Thanks!

The only thing I would add is that all resident physicians and young attendings should have generous disability insurance. This entire scenario is dependent upon their earning abilities going up dramatically after training. Should something horrible happen, they would not only be without savings, but they would still be on hook for some, if not all, of the educational loans they took out to fund their education.

And don't pooh-pooh the odds of this occurring. I'm sure we've all seen MVC victims, but don't forget the possibility of becoming deeply depressed or of coming down with leukemia/lymphoma or MS or... You get the idea.

 

[Red Man]

I would save as much as you can (while still allowing yourself to live comfortably) in the Roth IRA.

-The money that goes in is taxed at your (presumably) low income tax rate (<15%) and comes out untaxed when you will (presumably) be in a higher tax bracket. (Whereas a 401k would go in tax-free while you were at 15% but come out when you were banking as an attending.)

-You can withdraw from a Roth IRA without paying a penalty to pay for a child's college and other special exemptions.

-You get in the habit of savings (which cannot be emphasized enough).

-Compound interest over 30 years will do a lot for a little bit of money.

 

[madtowngirl]

I heard the max investment into a Roth will increase to 5K/year starting next year.

 

[dc2md]

did anyone find an online calculator that shows the end result of investing in a Roth IRA for 4 years and then letting it ride for another 30 years?

 

[wipedown]

Disclaimer: I am not a financial expert. Please feel free to critique the analysis below.

I crunched some numbers using conservative estimates (7.5% average return till age 65, 3% inflation, 35% federal/9% state marginal tax rates). I am comparing 6 years of investing during residency vs. 1 year of investing as a 1st year attending.

RESIDENCY (over 6 years)
- Total money invested including taxes = $41,000
(note: $4000 in a Roth IRA = $5700 pre-tax)
- Income at age 65 = $138,000
(adjusted for inflation, tax-free for Roth)

ATTENDING (1st year)
- Total money invested = $60,000
(note: various tax-free vehicles like 401k)
(at 44% marginal tax (35% federal, 9% state), this only "feels" like $34,000 as it is pre-tax)
- Income at age 65 = $137,000
(adjusted for inflation, taxed at standard income rates)

Assuming this analysis is relatively accurate, I think several points jump out.

1. Investment figures that are not adjusted for inflation are misleading (eg, purchasing power of $378k = $138k at age 65).

2. The real investment rewards are not that dramatic ($41k --> $138k).
- If you use a more aggressive average rate of return (eg, 10%), they become much more dramatic ($41k --> $320).
- However, there is a large risk involved in order to obtain 10% a year over 3 decades.

This analysis appears to favor deferring investment during residency if:
a. $6000/year increases standard of living more as a resident than $34,000 would as a 1st year attending.
b. Comfortable retirement will still be achievable by deferring investment.

What do you think?

 

[deleted109597]

$34K is a lot more standard of living than $6K, regardless of when you do it. Most people aren't going to earn 6 times their resident salary during their first year.

Besides, your data used $60K, not $34K, so I'm not sure where you're getting that number.

 

[KidDr]

2. The real investment rewards are not that dramatic ($41k --> $138k).
- If you use a more aggressive average rate of return (eg, 10%), they become much more dramatic ($41k --> $320).
- However, there is a large risk involved in order to obtain 10% a year over 3 decades.

This is not a large risk involved in order to obtain an average 10% return per year--as long as you're talking averages over 3 decades. Find a good financial planner who can help you put your money into a diversified fund that has a history performing well over the past several decades. You're not going to find a fund that's had 10% returns every year for the past 30 years (were there ANY funds that made people $$ in 2002?? probably not very many). But you should be able to find funds that have performed well (i.e., about 10% average gains per year), when you average their yearly gains/losses over a long period of time. And that's all that really matters in the long run, as long as you're not planning on withdrawing from the account until you retire. My personal bias is that it's a good thing to get in the habit of saving and to start putting $$ away as early as possible, especially when you can take advantage of the tax benefits from a Roth IRA. By the time you're an attending, you'll be used to saving $$, and you'll be able to start saving more. I realize that some people's personal circumstances (especially those who are trying to support families on a resident's salary alone) probably make it impossible to do this, but I'd think that almost every single (or married/partnered with no kids) resident should be able to start investing during residency.

 

[guitarguy]

I agree that for those residents who are able to, a Roth IRA is a great place to start saving for retirement. Young attendings often are not in a great position to put substantial amounts of money into retirement accounts -- many are purchasing their first homes, upgrading cars, trying to pay off student loans, etc. The earlier you start saving the better.

Remember that the IRA is:
-not a pretax contribution. You will pay taxes on your contribution while you are at the lowest tax bracket. When you withdraw money at retirement, your entire account can be withdrawn without paying any tax at all. This is significant because by the time we retire, we will likely be at the highest tax bracket; and in 30 or so years its extremely likely that tax rates in all tax brackets are going to be significantly higher than they are now.
-you can withdraw any money from your IRA (except for interest that has accumulated) at any time with zero penalty.

The only other retirement option that may be better than the Roth is if your hospital matches your contribution to a 401K/403b. Definitely something to inquire to your benefits officer about.

Unless you need your hand held by a financial planner, good places to start a Roth IRA account are low-cost internet brokerages like vanguard, fidelity, etc. You are always safe going with a broad index-fund, which in the long run historically outperform most other funds anyway.

If you've made any salary in 2006 in a part-time job even as a medical student, you can start contributing to your IRA now.

 

[Arch Guillotti]

I fund my 403b to the max limit and contribute the full amount to my roth IRA. I am able to make up the difference in lost income by moonlighting a moderate amount. In fact I come out ahead somewhat for the most part. In 2010 or so the law changes so that you can roll a 403b/401k/IRA into a roth regardless of income, though you obviously still have to pay tax on the distribution. So when I do that - all the money that I have saved (including 401K savings from previous employment) will accumulate TAX FREE for 30 or so years.

 

[wipedown]

Great discussion. Keep it going.

Dr.McNinja: I think it is arguable that $34k on a $250k salary "is a lot more standard of living" than 6k on a $50k salary. $34k is the amount of money you would have in your pocket if you did not invest the $60k in a 401k (i.e., $26k was taxes).

KidDr: Most people do not keep their funds in a "historically 10% fund" over 30-years. If they did, then they risk losing a substantial portion of their total funds near retirement (think year 2000). Instead, most people rebalance their portfolio as they get closer to retirement age. In practice, this means during the third decade (age 55-65), capital is put into much safer investments, which of course yield much lower returns.

I agree with everyone's analysis that Roth IRA's are an incredible investment tool. But I think WatchingWaiting's original point -- that saving during a frugal time is not necessarily the right answer, given the coming increase in salary -- is valid.

 

[wook]

This is not a large risk involved in order to obtain an average 10% return per year--as long as you're talking averages over 3 decades. ...But you should be able to find funds that have performed well (i.e., about 10% average gains per year), when you average their yearly gains/losses over a long period of time. ... My personal bias is that it's a good thing to get in the habit of saving and to start putting $$ away as early as possible, especially when you can take advantage of the tax benefits from a Roth IRA. By the time you're an attending, you'll be used to saving $$, and you'll be able to start saving more. I realize that some people's personal circumstances (especially those who are trying to support families on a resident's salary alone) probably make it impossible to do this, but I'd think that almost every single (or married/partnered with no kids) resident should be able to start investing during residency.

I agree. Contribute to a Roth while you still can (attending salary means you can't contribute). Make every effort to put what you can into the Roth, as in the long run, it will be potentially very beneficial.


Wook


Wook

 

[Mumpu]

This is not a rhetorical question, I'm really curious...

Why should I put money into a Roth account if long-term moneymarket funds and even some of the online savings accounts (ING, etc.) offer basically the same APY but with a guaranteed return and no risk of losing money if the market crashes?

 

[SexPanther]

This is not a rhetorical question, I'm really curious...

Why should I put money into a Roth account if long-term moneymarket funds and even some of the online savings accounts (ING, etc.) offer basically the same APY but with a guaranteed return and no risk of losing money if the market crashes?

I have an ING and emigrantdirect savings account, and they are giving about 4.5 - 5% interest which is great for savings. However, a Roth IRA is a retirement account that should contain fund/funds (at least while you are still not close to retirement) that will hopefully give you a greater return on investment. No-load index funds such as ones that follow the S&P 500 have outperformed ~90% of actively managed funds over the long run and have traditionally given a ~10% return yearly.

Yes, mutual funds are more risky than savings accounts....but they also offer more rewards, especially over the long haul.

I really like Suze Orman and her latest book called "The Money Book for the Young Fabulous & Broke." She lays out investment principles as well as tips for purchasing insurance (i.e. disability, life, etc.), paying off credit cards, etc.