I recently had an advisor tell me that “You write too much about your situation, and it makes docs in less fortunate situations, particularly with regard to retirement accounts, feel like they can’t relate to you. All they may have access to is a 401(k) with an $18K contribution limit.” The curse of The White Coat Investor- the more docs I reach and the more success I have the less my situation is like that of the average doc. I don’t know. I feel like I’ve been the doc with the below average income, the doc with the average income, the doc with the above average income, and now the doc with a great income. But let’s address this situation that more and more docs find themselves in.
What Should I Do If I’m an Employee With Nothing But a 401(k) With a $18K Limit?
Invest the Rest In taxable. Next Question.
Just kidding. Kind of. I mean, that really is the short version.
Let’s take a doc with fairly typical doctor income. We’ll round it up to $250K (including match) to make the numbers easy, but you can adjust if you’re only making $200K, $150K, or $100K. She’s an employee with a 401(k) with a $18K employee contribution limit and a $5K/year match. Where should she save her money?
The first question is what is she saving her money for? Probably retirement, but maybe also a house down payment, college for her two kids, and she also has some student loans to pay off.
The second question is whether or not she’s married, and whether her spouse has access to retirement plans.
Let’s assume, just for simplicity’s sake, that she wants to save 20% of her gross income for retirement and put $5K a year per child toward college. Her student loans were already paid off by living like a resident for a couple of years and she already purchased a home after saving up a $100K down payment while trying to figure out if the job seemed stable in the long run. Her husband is being a stay at home dad.
Where should she save for college? Well, she happens to live in a state with no state tax break for using their own 529, so she chose the New York plan over Utah and Nevada’s plan because she valued having the lowest ERs more than having access to some DFA funds (UT) or having her account at Vanguard (NV). So she opens a 529 for kid # 1 and one for kid # 2 and puts $5K a year in it and invests it all in the aggressive age-based option.
What about retirement? Well, she is in her peak earnings years and $250K * 20% = $50K so….
- First $18K employee contribution + $5K match goes into the 401(k).
- Next $11K goes into hers and his Backdoor Roth IRAs.
- That leaves $16K to invest in taxable for retirement. Maybe you invest that in a muni bond fund, a stock index fund, or real estate. Whatever your Investing Personal Statement directs.
If they have more money left over after their expenses, it can be used to pay down the mortgage, invest in taxable for retirement, saved up for their next car, given away, or spent on something fun. It really is that simple.
What If Her Husband is Working?
Let’s change the situation a bit. Let’s say her husband is working, makes $50K and has access to a 403(b) and a 457 plan, but a match on neither. Now, what does their situation look like? Well, their income is now $300K, so 20% is now $60K
- First $18K + $5K match goes into her 401(k)
- Next $18K goes into his 403(b)
- Next $11K goes into Backdoor Roth IRAs
- Last $8K goes into his 457 Plan (while the 457 provides tax-deferment which is good in peak earnings years, the fact that it is technically still your employer’s money until withdrawn would lead me to probably do the Roth IRAs first if I couldn’t do both but reasonable people could disagree.)
If they have money left over and they want to save it for retirement, they can put another $10K into the 457. Alternatively, they can use it to pay down debt, give to charity, or buy something fun.
What If She Makes Gobs of Money?
Let’s say she actually makes $500K (and her husband is being a stay at home dad again) but she still only has access to that little old 401(k). Now what?
Well, she still wants to put $100K toward retirement. So it looks like this:
- First $18K + $5K match into the 401(k)
- Next $11K into Backdoor Roth IRAs
- Next $66K gets invested in taxable.
See how this works? It’s not rocket science. It’s not even Nephrology.
But When Do You Buy Whole Life Insurance?
Well here’s the thing- you don’t have to ever buy it. Or an annuity. Or real estate. Or whatever. You can just put the money into your taxable investing account and buy some index funds. Lots of docs retire with 7 figures in their taxable investing account that they will use to fund their retirement. It’s hardly the end of the world. It’s entirely possible to invest very tax-efficiently with a taxable investing account. It doesn’t even have to be complicated.
Now, if you want to invest some of that taxable money in real estate, that’s fine. If you get some self-employed income, then open an individual 401(k). If you get the opportunity to buy into a surgical center or imaging center or dialysis center and your due diligence suggests it is a good idea, then do some of that. But as a general rule, don’t mix insurance and investing. Don’t believe me? Fine, if you’re going to buy some cash value life insurance, at least ask yourself these questions first.
Once more, if you have more money and don’t know what to do with it, then pay off debt, give it away, spend it, save it in taxable to accelerate your retirement, burn it, or even buy some whole life insurance with it. (You’ll come out ahead of burning it most of the time.)
What do you think? Are you forced to invest in taxable for retirement due to limited tax protected space? How has that affected you? Comment below!