By James M Dahle, MD, Emergency Physician, WCI Founder
A lot of the personal finance blogosphere and social media is focused on supersavers, getting started early, and the benefits of compound interest. I don't deny that starting to save at 18, saving the majority of your income, and investing it wisely so decades of compound interest can work on it is an incredibly great way to build wealth.
But it isn't what most people do.
Most people don't earn all that much in their 20s, don't save much of it, and don't invest what they do save particularly effectively. In fact, I suspect that most people don't spend a lot of time thinking about retirement at all until their 40s, 50s, and 60s. However, once these people (the majority) do start thinking about it and start reading books and Googling terms, they get a little depressed at what they missed out on by not starting early. I find it hilarious to get emails from people in their late 30s and early 40s who feel like they're getting a late start. Well sure, compared to a FIRE blogger maybe. But not compared to most of your peers.
Remember that only 50% of physicians are millionaires according to the 2020 Medscape Physician Debt and Net Worth Report:
Remember net worth is EVERYTHING. Everything you own, minus everything you owe. It's your house, your cars, your boat, your savings account, and your investments. It's even more interesting if you break the data down by age, gender, specialty, race, and where you went to school. Unfortunately, Medscape hasn't done that since 2017. But that report is still accessible.
If you're under 50, 2/3rds of your peers are not yet millionaires. Interestingly enough, despite the fact that women physicians are far more likely than male physicians to marry another high earner, women are less likely to be millionaires.
Now I doubt this graph has been adjusted for age or specialty (especially since the numbers for the men are basically average but the numbers for the women are below average), but it shows that 2/3rds of women physicians are not millionaires.
I hope none of that is terribly surprising to you. Clearly, income is not wealth, but income is the greatest wealth-building tool a physician has. It's simply easier to get rich making $400K a year than $200K a year, despite the additional tax burden.
Like most other professions in America, white people seem to be wealthier.
Getting your degree in the US also seems to correlate with more wealth. I kind of wish they'd asked about marriage/divorce status too.
Now, none of this is the most statistically rigorous data that has ever been compiled, but my point with sharing it all is that you're probably not as far behind your peers as you think you are. If you think it's normal to be able to retire from medicine at 43, you're probably a white, male anesthesiologist supersaver living in the Midwest who loves to read FIRE blogs. It's not normal. Is it possible to do that? Absolutely. Is it normal? Absolutely not.
Catching Up Your Retirement Accounts
The fact is that most doctors reach 50 and are still at least 5-10 years away from financial independence. Yes, they've lost out on a decade or two of compound interest compared to someone who lived like a resident for 5 years when they came out of residency at 32. But they've still got most of their decades ahead of them. Most of us are going to live into our upper 80s or even 90s. At 50, there are still 4-5 decades of your investing career ahead of you and only 2 behind you.
Most people enjoy their peak earnings in their 50s. That may not be true for doctors, at least not all doctors. I suspect most emergency docs, hospitalists, anesthesiologists, and radiologists peak before then and are actually cutting back on hours and working more pleasant hours in their 50s, and thus making less money. But if you've been building a practice, your 50s probably are your highest earning years. Plus, thanks to the wonders of inflation, at least on a nominal basis most of us do make more in our 50s than in our 30s and 40s.
The more you make, the more you can put away. Hopefully, by your 50s your student loans are either paid off or forgiven. You've also already purchased your cars, boats, furniture, and fancy doctor house. You've probably even paid down your mortgage somewhat and your home has appreciated quite a bit. Even if you haven't been saving like maybe you should have, you should still be in a better financial position than you were back in your 30s. Putting kids through college is a financial cost of your 50s, but that's about the only thing that is a bigger expense for you in your 50s than in your 30s.
If you're behind, you are likely now in a position where you can put more money away than you could just a few years ago.
What Is a Catch-Up Contribution?
FIRE folks often find that most of their retirement savings end up going into taxable accounts. They are simply saving more than they can put into retirement accounts. That's unfortunate because, despite increased flexibility, a taxable account provides much less tax and asset protection than tax-protected accounts.
If you're 50 years or older, however, you will find that the government wants to help you save for your retirement. In order to do so, they have skewed the rules to your benefit on five important types of accounts. These rules allow you to put more money than younger people can into these awesome accounts in the form of a “catch-up contribution”.
IRA Catch-up Contributions
For 2021, anyone can put $6,000 into your Individual Retirement Arrangement (IRA), and even if your spouse isn't working, you can put $6,000 into your spouse's IRA. Most White Coat Investors make this contribution into a Roth IRA via the Backdoor Roth IRA process. However, if you are 50+, you can put $7,000 into your account (and if your spouse is 50+, $7,000 into your spouse's account). That's an extra $2,000 a year that can benefit from the additional tax, estate planning, and asset protection benefits of an IRA.
401(k)/403(b) Catch-up Contributions
For 2021, your employee contribution to a 401(k) or 403(b) is $19,500 if you are under 50. But once you turn 50, that goes up to $26,000! That's an extra $6,500. If your spouse is 50+ and has a 401(k)/403(b), that's an extra $13K per year that can go into a tax and asset-protected account. Even the $58,000 limit (the total per plan/independent employer of employee and employer contributions) goes up by $6,500 to $64,500.
Special 403(b) Catch-up Contribution
In addition to the above contribution, if you have been at a qualifying employer for at least 15 years, you may put in an additional $3,000 per year into your 403(b) as a catch-up contribution.
Catch-up 457(b) Contributions
457(b)s get catch-up contributions too, but they work a little bit differently. Read your plan document carefully to understand if your plan allows catch-up contributions and how they work. The IRS allows a governmental 457(b) plan to do the same 50+ extra $6,500 catch-up contributions that 401(k)s and 403(b)s allow. However, they also allow both governmental and non-governmental 457(b) plans to have “special catch-up contributions” in the last three years before retirement age where you can either double your contributions (now $39,000 per year) or make up for any years that you didn't put in the maximum $19,500. Unfortunately, it's whichever of those two is less. So total catch-up contributions is never going to be more than $19,500 x 3 = $58,500. If your plan offers both the 50+ catch-up and a type of special catch-up, you can only do the one that allows the larger contribution, not both. So if your plan's retirement age is 65, you can do $6,500 extra from 50 to 62 and then possibly $19,500 extra from 63 to 65. I know, it's complicated. I don't write the rules, I just tell you what they are.
HSA Catch-up Contributions
You can put an extra $1,000 into your HSA too, but you can't do it until you are age 55. It's $1,000 whether you're an individual or a family, though. You don't get to double dip this one (unless your spouse has a totally separate HSA).
If you add this all up, it's possible that a couple that is over 55 could contribute as much as $62,000 more into retirement accounts than a younger couple with the exact same retirement accounts.
- IRA: $1,000 ($2,000 if married)
- 401(k)/403(b): $6,500 ($13,000 if married)
- Special 403(b): $3,000 ($6,000 if married)
- 457(b): $19,500 ($39,000 if married)
- HSA: $1,000 ($2,000 if married with separate HSAs)
- Total: $31,000 ($62,000 if married)
You still have to do the hard work of earning, saving, and investing the money, but at least the government is trying to help you to reach financial independence.
What do you think? What catch-up contributions do you take advantage of? Comment below!