By Dr. Cory Fawcett, Guest Writer
As The White Coat Investor has stressed many times, saving for retirement needs to start early to take the greatest advantage of compound interest. Many residents don’t believe they can save anything until after they start their practice. I encountered that roadblock during my residency when I tried, without success, to convince my fellow residents to contribute to the retirement plan offered by our hospital. Only one other resident joined me. All the rest of them felt they needed to spend their entire paycheck each month on current needs.
I started contributing to the hospital retirement plan, my IRA, and my wife’s IRA during the first year of my residency, when we earned a combined annual income of $45,000. The small amount of money I was able to save during my residency, when an IRA deposit was capped at $2,000, grew to $225,000 during the first 20 years of my practice. If I leave it alone for another 20 years and it grows at an average of 7.5%, it will exceed one million dollars. If I had waited to start until after my residency, a five year delay, I would have one million dollars less in my retirement accounts at age 70. That’s what starting early can do.
That extra million dollars will produce an additional $40,000 a year for the rest of my retired life, if withdrawn at the recommended 4% per year. I traded a few thousand dollars a year during my five years of residency to have $40,000 a year during my possibly 30 years of retirement. That’s an extra $1,200,000 of retirement income. In addition, I will pass the remaining unused balance on to my children when I’m gone. Compound interest is a beautiful thing.
Just get started, even if it’s only $50 a month. Make saving a priority and get it into your budget before you start spending all your new income. The first time you start earning, as an intern, is the best time to start saving. When on a small income, if you develop a habit of spending all of your money and saving none, that habit will continue when you have a larger income. Spending tends to climb with earning. Don’t let that happen to you. Develop a habit of saving and begin with your first paycheck.
I have seen many doctors get caught up with spending their new wealth and telling themselves they will begin investing later, only to never quite get around to investing. They feel they don’t have enough money to put into their retirement account, but they did have the money to buy a $60,000 car, and a very expensive house. They will reach retirement age with a nice house and car but not enough money.
A doctor friend of mine who augmented his lifestyle to a very high position once told me, “Some of the best advice I got was from a neurosurgeon. He told me to open a Schwab account and begin contributing to the Schwab 1000 Index Fund. I wish I could still afford to do this.” His lifestyle became so expensive that he had nothing left to invest. Don’t let your attitude become one of saving only leftover money, there is never left over money. Start early and stay consistent, so you will reach your retirement years with financial security.
[Founder's Note: This post was a little on the short side so I thought it would be a good chance to add a little personal experience. I wasn't quite as smart as Dr. Fawcett. As you'll recall, I hired a commissioned salesman as a financial advisor in the second half of my intern year. But we did contribute to a Roth IRA for that year. I don't think we maxed them out, and I think we may have used the last of some mutual funds my wife was given by her grandparents to do so rather than real savings. That summer (2004) I read my first real financial book (Tyson's Mutual Funds for Dummies) and a fire was lit. My wife had just stopped working (teacher) when our first child was born that summer, so we had a little bit of extra cash and we maxed out our 2004 Roth IRAs for the first time. Given that we were living that year on less than $40K, we felt pretty good about that and we started working on our 2005 contributions. I think we were initially contributing about $150 a month, then eventually $333 a month. By the time the deadline for a 2005 contribution rolled around, we still hadn't hit the maximum. Cash was little harder to come by but light could be seen at the end of the tunnel. I think I had a 0% credit card deal I took advantage of for a few months to make the deadline. Maxing out our Roth IRAs on that income was the equivalent of about a 20% savings rate. It was hard to do. Since completion of residency, we gradually moved up when we do that Roth IRA contribution each year and now we generally do it early in January of the current year. It is easy to do now (through the backdoor of course) mostly since it is a much smaller percentage of our income, but also because it is a habit.
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Given how hard it was for us to just do Roth IRAs, I'm amazed when I see residents not only doing that, but also maxing out their Roth 403(b)s and maybe even paying off their student loans during residency. There are some real super savers out there. I'm not sure that you have to do any of that to be financially successful. The real key to financial success is that first year as an attending (and making sure you don't grow into your attending income all at once). But Dr. Fawcett is right that the habit matters more than the amount. So start saving residents, but also make a written plan for your first year as an attending.]
What do you think? How much did you save for retirement as a resident? Was that too much or too little? Comment below!
[Editor's Note: Dr. Cory S. Fawcett is a semi-retired general surgeon, financial coach, and blogger. He is the author of The Doctor's Guide to Starting Your Practice Right. This article was submitted and approved according to our Guest Post Policy. We have no financial relationship.]
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I made about $40K/year in the mid-1990s in NY, pretty much the highest salaries in the country. I left residency (3 years) with over $40k in the bank plus $6000 more in my IRA (no 401k). I wish Roth IRAs had been available then.
I watched people with > $100K in school debt (1990s $$) run out and lease an SUV with their 1st paycheck. I tried to talk about these things, but it’s easy to tell when no one is interested in listening. Still, I tell my scribes on the way to medical school this stuff and give them this website, and hope that at least one or two of them will pay attention.
After paying off school with military service, my family and I are living in a relatively inexpensive East Coast city and maxing out all tax advantaged retirement accounts available: Roth IRA x 2, 403(b), HSA, and still wonder what to do with some left over money. Deliberating between saving to open my own practice in a few years v. funding 529 accounts.
It’s been stated a few times already how resistant other residents can be to the idea of saving early. That seems to be a hard nut to crack. As opposed to other behavioral change, where showing how it can be done can be quite effective, i.e. exercise, financial demonstration seems to be tacky and met with excuse after excuse. I don’t know the solution
Mary I’m glad you are trying to pass on this wisdom to your residents. Those in their final year are the group I wanted to reach when I wrote the book “The Doctors Guide to Starting Your Practice Right.” It is hard to convince someone who has been living on a shoestring not to buy that new car when they start getting paid. I had the same problem in my residency.
Dr. Cory S. Fawcett
Dr_JB,
Saving is a habit that needs forming early. If you can’t save on a $25,000 a year income, you also will not be able to save on a $250,000 a year income.
Dr. Cory S. Fawcett
It’s true that you can save and invest during and perhaps before residency, and it will give you a head start, but it’s also true that you can make up for lost ground much more quickly after you finish. Depending on your specialty, you can probably set aside more in your first month as an attending as you could in a year as a resident.
I think the goals in residency should be to minimize further debt, and maximize fun & happiness in the little free time you have. If you’re doing that, and have a little money left over, great! Invest it. But don’t sweat it if you’re pretty much living paycheck to paycheck like I was. You can be a super saver later on.
Best,
-PoF
I did not save a penny as a resident. I had some great vacations and great experiences with people (colleagues in training) who turned out to be lifelong friends. I courted my wife in residency and married her near the end of fellowship. We bought a house together six months before we were married. I look back at my residency as the best of times, and I would not do anything differently (except maybe travel more!).
Other financial chores probably matter more than saving for retirement- getting disability and life insurance, getting a good attending job, making sure you’ve chosen the right pathway for your student loans etc. But I think the habit of saving matters more than the actual amount. It’s good for a resident to save something, if for no other reason than to understand how his patients will be living.
PoF,
One thing I run into, if you are living pay-check to pay-check as a resident, and spending all the money you earn and never saving anything, you are likely to continue the pattern as an attending. I see many attendings that are going to be super savers, just not this year. They intend to catch up later, but later never seems to come.
Dr. Cory S. Fawcett
I agree with POF. I saw lots of my fellow residents run up credit card debt to finance things they could not afford. Student loans were not as big a factor when I was a resident (29K total for me) but retirement plans were limited to $2000/year in an IRA. I was too ignorant of retirement planning to do an IRA as a resident but at least I kept my lifestyle reasonable. I think you will do fine if you get serious about saving when you get finished with training.
My wife and I are guilty of running up credit card debt in residentcy, my wife is a new attending and it’s going to be interesting to see how long before we eliminate the credit card debt. I am hopeing by xmas.
JN,
You can do it. Stick on that credit card debt until it is gone and never let it creep back into your life again.
Dr. Cory S. Fawcett
What I like the most about this post is that it touches on the why and not just the how of savings. We didn’t save in residency but started soon afterwards because we had a vision of the future we wanted. Life had to smack us around a little to get it though. We were pretty stubborn. It is easy to stay so busy in medicine, especially in residency, that thinking about now is all you can do. Hope and a vision of the future can seem distant. My fifty year old self thanks my thirty year old self immensely for getting started!
Dr. Mom.
Glad to hear you caught the vision. Yes your 50 year old self will thank you.
Dr. Cory S. Fawcett
I’m still unclear about whether I should do traditional tax deferred 401k or Roth 401k (Iras will remain traditional), I have wont max these out in fy2016 but I hope to in fy2017. I am thinking about doing Roth for me and traditional for my wife (or vice versa), that will provide flexibity with the rmd on the traditional (ie if there’s a year in retirement where I need an extra 100k then I can take it from Roth with no extra tax burden) but (flexibity aside) it’s very hard for me to figure out which one is actually financially better and by how much,
Why not do Roth until you are both attendings? That start, plus compounding, plus annual backdoor Roth IRAs should at least give you some significant Roth money in retirement.
I second WCI’s suggestion. You are in a tax bracket now that you won’t see (hopefully!) for decades to come. Make lemonade.
I was a bit sparing in the details of my last post… My wife is the high earning doctor who just started being an attending and I am a decent earning non-dr spouse. I have had a traditional 401k for years but she will start one shortly . I am afraid that our low earning years are behind us (sad face goes here), so If I do Roth 401k (not ira that’s another discussion), then I am doing it at the wrong time in my life… It’s a toss up on getting screwed with high taxes now… Or high taxes later… Just trying to figure out the right balance (or if I should balance at all)…(I’m not sure if any of that would change your advice?)
JN
I think you are worried about a win-win situation. Either choice will get you to a nice place by the time you are ready to retire. Neither choice is bad. There are worse things to worry about. Keep saving.
Dr. Cory S. Fawcett
Lol good point Dr Cory, I do tend to over think things a bit … Thanks
The Roth or Traditional decision is a comparison between your current tax rate and your anticipated tax rate when you have to pull the money out (this assumes that with a Traditional IRA or 401(k), you invest the tax savings). While we do not know what will happen in the future with tax rates, it is reasonable to expect them to increase over the next 30 years based on a comparison of US tax rates with other developed countries and the tendency of governments to expand their services (and therefore raise taxes to pay for those services). If you are in a low tax bracket right now, then a Roth contribution is even more likely to be the correct move for the long run. Also, now may be a good time to convert Traditional IRAs to Roths and bite the bullet on taxes so that you can more easily take advantage of backdoor Roth IRAs in the future. If I recall correctly, we did that just before my wife got out of fellowship, and then paid the taxes in her first year of practice, when it was easier to stomach the tax bill.
Don’t forget about filling up the lower brackets with withdrawals. Even if tax brackets climb, tax-deferred during peak earnings years is still the right move for most, by far.
Saving is taught by your parents
My dad a,ways told me to sock it away
40yrs later compounded profits pays my total living expenses in ret
Compounding, the 8th wonder of the world
Learn the rule of 72
Ken,
I’m glad you picked the right parents. I also was fortunate enough to have parents, and grandparents, teach me the value of saving early. We now need to spread the word to those who didn’t have saving parents.
Dr. Cory S. Fawcett
Ha. That same book is what sparked my love of personal finance. Mutual funds ftw. 🙂
I wasn’t smart enough to save for retirement for myself i resident, but my wife was smart enough to realize she had a 401k match so she saved at least as much as the match every year in residency. That was free money, if you have a match you should be at least contributing that much.
SJ,
Great advice. Never leave free money on the table.
Dr. Cory S. Fawcett
My residency allowed us to contribute up to 6% of salary and after 6 months they matched 50% of your contributions, so it was a no brainer. Unfortunately, they did not offer a Roth option in the 401K. Also, at the time I did not know about the Roth IRA option. So, kind of lost out, but I look at it as a victory with contributing during residency, regardless.
Seth,
If you put anything in during your residency you are at the top of the pile. Great job.
Dr. Cory S. Fawcett
The notion of conditioning yourself to be a saver, even if you’re only saving a small amount, is a good one. Aside from that, this post strikes me as very “Old Economy Steve.” The idea that you should be making any meaningful contribution to retirement during residency is (IMO) out of touch at best. The only residents for whom this is feasible are either 1) married to a spouse with substantial income, 2) still living off of their parents or 3) some combination thereof. The $45k that the author had in income during his residency is the equivalent of about $100,000 today, and a student loan was something you walked down to your bank to collect in cash at the beginning of fall and spring.
These days a resident’s “stipend” is somewhere in the high $40s to low $50s if you’re lucky, and it incrementally goes up each year. And tax comes out of that. Even if you choose an inexpensive medical school and live frugally, you’re facing six figures of student debt, so you’re paying at least a grand a month toward that. Worse if you had to pay your own undergrad too. Decent housing in most areas is typically at least $1,000/mo. So after tax, rent, and student loans you might be looking at $1,500-$1,600 a month to live on, enjoy yourself, start a family, the occasional emergency, etc. Sure it’s still possible to put away a few grand a year on that, but it’ll be a pretty miserable experience.
I’m kind of surprised by your comments. There are many docs here who managed to save to Roth IRAs during residency. Don’t forget that many residents/fellows are not married and living a fairly frugal lifestyle. You should check out Wise Money Doctor’s blog and read some of the stories on our forum – you’ll find very inspiring posts. It can be done.
Plus, the income taxes for dual docs in residency with children will be close to zero – a superb opportunity for contributing to Roth IRAs on $90k – $100k gross.
As always, financial planning with a fee-only CFP can be key to success if you are not sure how to DIY.
As a resident I lived in an apartment that was way too big for my needs (3br, 2ba, 1200 sq ft for my and my new wife and our cat, no kids), ate at restaurants all the time, bought a new car (Honda Accord, partially financed but paid off in 2 years) and traveled several times. We still managed to both max our Roth IRA every year and have some left over. My loan burden was small but in repayment already.
It’s certainly feasible to max a Roth IRA as a resident, but even with a non-working spouse and more loans almost anyone should be able to put SOMETHING into an IRA during training. If you have kids and other issues then sure the number may be smaller, but I think it’s rare that someone making $50k can’t save $3-5k in a year — as WCI points out all the time, $50k is the median household income in this country.
Admittedly you had a small loan burden and were married to a working spouse.
Yes, 50k is the median household income in this country, but the median household doesn’t have one, two or three hundred thousand of student loans.
Craig, maxing out two Roth IRAs in residency may not be feasible for everyone, but putting in something should be feasible for all but those in the worst financial circumstances.
If my wife didn’t work then we wouldn’t have saved in her Roth IRA — she wouldn’t have been eligible and we may not have had the extra money if she somehow was eligible.
If my wife didn’t work we wouldn’t have bought a new car costing $28k (which was not something I consider a great financial decision), I would’ve bought a used car costing $5-10k. But we still had it paid off in 2 years (shortly after I started fellowship).
If my wife didn’t work we wouldn’t have been in an apartment with a $1500/month rent, we would have been in one much cheaper.
We had a lot of places we could have cut large chunks of money from our budget that would have easily been the amount of a Roth IRA for myself alone. We weren’t in an attending life style, but we clearly spent a lot of money that could have gone into savings. However we still had room to save in the Roth IRA even if we didn’t save a lot beyond that.
A married person with a stay at home spouse and a large loan burden will have a much lower disposable income, but they will also have a very low income tax, so most of that money is going to go into the bank account. Maybe you can’t put $450/month into a Roth, but $200/month pays off long-term.
In residency the loan repayment figure is going to be relatively small for a one-income household with multiple members in the household. I just used an online calculator and for a $200,000 loan in a 2-person household (you +spouse) and $55k yearly income the IBR repayment starts at $387. That’s not too far over my unnecessarily high car payment as a resident.
It still requires a saving mindset — $400/month can buy a really nice car, and many people will rather get a new car than save in a Roth IRA. Maybe I still would’ve bought a new car if my wife didn’t work, but that would be a decision I made of my own accord, not a requirement of circumstances.
When I was in fellowship my wife was working part-time for part of it in a lower paying job, was in a Masters program, we were paying for childcare, and her take home pay was literally ~ $250/paycheck every 2 weeks. My income was only marginally increased and we still both maxed out a Roth IRA that time period. We are NOT super savers — we’re fortunate we did not have $200k in loans, but we still found money here and there for the Roth.
+1
Excuses can always be found. If you were to make 10-20% less than you currently do, you would find a way to survive. This applies to essentially everyone that has an income and is alive. See X-Factor post.
I’m sure there are. It absolutely can be done. Just for many these days (to me it would appear most) it’s not really feasible IMO. Not being financially supported through med school by your parents, not marrying an income producer, having children, etc. are all normal things that residents do.
That dual doc situation would fit my #1 category. A single person living in a cheap area can probably do it, but is facing being single well into his or her 30s or even early 40s (which is fine, but just not typical).
You make a decent point, but I would argue $2500-2700 should be the income after taxes, loans, and health insurance. Very doable if you don’t try to keep up with your attendings/residents/fellows.
Most residents aren’t paying a grand toward their student loans thanks to IBR/REPAYE etc.
I was paid under $40K and we saved $6-8K a year, but it was tough. I agree with the general sentiment that the key is what you do with your first few years of attending income.
I would love to know that statistic. You have to go out of your way to select IBR, REPAYE, PSLF, though anyone with six figures of debt should be exploring all of his or her options. I would argue that extending your loans at 6.8% likely could wipe out any savings and compound interest you get on early retirement contributions unless you’re going to qualify for forgiveness.
Agreed, what you do with the first years of attending income really dictates your mentality for the rest of the career.
The average resident is paid about 52,000 gross nowadays.
The median loan debt is about 180 or 190,000 last time I checked. This does include people that have had substantial outside financial help.
IBR requires roughly 4,000 in yearly payments with 200,000 of debt growing at about 6% a year. (If you had lived frugally in med school and went to even an above average cost med school you wouldn’t need to take out Grad Plus loans)
ROTH IRA max contributions are only 5,500 a year.
In our average cost state the cush apartments in a metropolitan area with 5 million people are about 1,000 a month. I live in a place that is literally less than half that and in a safe area, though not “posh.”
#frugalperson skillz.
In my town (New Orleans), $1,000 a month will get you a decent little apartment where the old people live. Anything in a safe area that’s much nicer is $1,500-$2,000/mo. $500/mo would be doable with a roommate. Probably that’s what’s skewing my feelings here 🙂
CRAIG,
This replay makes a good example. In your town you have options of $500, $1,000, $1,500, and $2,000 a month for rent depending on the choices you make. If you first look at your budget and pick the option you can afford, you usually come out well financially. If instead you pick the option you would like to live in or think you deserve, you can get into trouble financially. I see this with a lot of attendings when it comes time to buy a house. They don’t pick the house they can afford on their income and current debt, the pick the house they want or think they deserve. Often this leaves them house poor for decades and then they reach retirement and say “I never had enough money left over to save for retirement.” They could have had enough if they made different choices along the way.
In your town, a resident with a roommate in the $1,000 a month apartment would be fine. Especially if you are single and both residents. Neither of you will ever be home to bother the other. We often have more choices available than we see at first glance.
Dr. Cory S. Fawcett
Thanks Dr. Fawcett for the reply.
All good points, and definitely words to live by for the physician, especially as his or her income picks up.
Craig
I’m on track to max out my 403(b) and Roth for all 4 financial years of my 3-year residency. The hardest part was maxing it out in the first financial year (ie saving the entire $19K in first 6 months of intern year); had to live with my parents at the start to do that. Now I’m living on my own on ~$20K/year, paying ~$500/mo rent in a nice house w/ roommates, dating, no kids, full disability insurance. My only other “advantage” is that I have no loans (sellout MSTP), but of course that also means I’m starting the saving game 4 years late, so not necessarily an advantage in the grand scheme of things.
So, very possible depending on life circumstances.
HDO,
You are a super saver! I thought my example in this post was a good one but your numbers will blow mine out of the water. You keep saving like that and you can have anything you want in life.
Dr. Cory S. Fawcett
CRAIG,
There is a great variability in the financial status of residents. We tend to think everyone is in a similar boat to ourselves, but they are all different. Some are not drowning in debt and some are. Some have spouses that work and some don’t. Some have children and some don’t. Some had the military pay for it all.
Dr. Cory S. Fawcett
I didn’t put away any money for retirement during my residency; finished in ’97 making ~$25k/yr. I did manage to save ~$8,000 in a mutual fund; I don’t remember the name, but it definitely wasn’t Vanguard. I don’t remember why I didn’t invest in an IRA. I think it was just ignorance. I don’t think I knew what an IRA was back then.
One of my attendings did advise me to ‘live like a resident’ for the first 5 years out in practice and start educating myself on financial matters. That started me on the right road. So many of my colleagues are living paycheck to paycheck; it’s so sad. They may never get to retire, or at least retire well.
Roth IRA didn’t exist until 1997. 😉
Did someone imply otherwise?
“finished in ’97 making ~$25k/yr….I don’t remember why I didn’t invest in an IRA. I think it was just ignorance. I don’t think I knew what an IRA was back then.”
I don’t think the guy was ignorant like he said, putting away money in a mutual fund was probably a good move. Regular IRA probably didn’t offer a big benefit at $25k/yr (I’d have to look at those 1990s tax brackets) over a taxable account mutual fund. And the ideal choice of a Roth IRA was not an option for him.
Ivy,
I’m glad you got on the right road. But saving $8,000 during your residency is great. Not many residents do that. Good job.
Dr. Cory S. Fawcett
FIRST PRIORITY when working-fund ret. plan-find the money somewhere or have a parent lend you the dough
I disagree. I have a SAH spouse and a child, make an average training salary (FYI average is $56k now), don’t moonlight, am not getting any stipend from future employers, have modest loans (worked 2 jobs in medical school to minimize them), give away 10%, and my wife and I have still been able to save 6 figures (~90% Roth) in 5 years of training. I say “my wife and I” because while the offense has all been mine, that woman plays some killer financial defense. A $650 rent, 2 paid-for small cars serviced by Mechanic Youtube, dining out on coupons only, bathroom sink haircuts for all 3 of us, an abiding love of thrift stores, and living in proximity to Aldi can go a long way. This may be extreme to some. I am merely contending that one can do it, not that all should.
I figure I will be 4 years closer to financial independence on day #1 of attendinghood than I would have been if we hadn’t saved during residency. I am not sure how most would define “meaningful contribution,” but >1000 days of additional freedom is meaningful enough to me to be worth it.
Ticker — that’s really impressive. To save > $100k out of ~ $250k in salary is eons ahead of every resident and in terms of overall saving ahead of most people reading this blog.
One question about the math — is the 90% of your savings in the Roth including the growth and something else? Otherwise I don’t see how a Roth IRA x 5 years (even x 2 people if you figured out a way for your SAH spouse to save) could come anywhere close to $90k during residency. Max contribution is $5500, so 5 years x 2 people is only $55,000 in Roth contributions.
Regardless, you’re on your way to FI at a young age.
It does include growth. But, more importantly, we have a Roth option in our 403b, so my maximum potential Roth space is $29k per year (18+5.5+5.5). The non-Roth component is mostly my employer’s match.
Also, though my pay is almost exactly average for my year of training, it is above the overall average for trainees by this point since it increases with every increase in PGY standing. I started at <50k and am just over 60k now, so I suspect my total earnings have been more like 280-285k than 250k.
I make 45 gross as a resident and live on 13. 32/45 go to loans, roth ira, and roth 401k for six months in med school I lived in a two bedroom, one bathroom apartment with two other guys.
260/month in rent. Rest of med school was about 400 rent. Used bike first six months of med school. No car for that time period.
No hair cuts for 10 yrs. Used buzzed military cuts. Last two yrs I’ve gotten haircuts at 8-10 dollar places.
Boom.
#poor immigrants
Incredible. Just on the spending side alone you might already be financially independent for all intents and purposes.
Ticker,
Great job on the defense. You are off to a great start. You will be able to retire early if you want to.
Dr. Cory S. Fawcett
Great and timely post! I gave a finance lecture to my residents yesterday- gave away a few of your books during the talk. They loved it and I hope some of them will start saving. One of my residents already maxes out a roth ira every year.
Conniebird,
Glad to hear you are teaching finances to the residents. We need more people doing that. They need to be on the right track before they get their attending salary or they will end up spending it all. That is why I wrote my book “The Doctors Guide to Starting Your Practice Right.” Keep on teaching them and some of them will even listen.
Dr. Cory S. Fawcett
My 457b contributions – fully funded – in Residency and Fellowship, made a difference in monthly take home pay of less than 100 dollars because of the tax savings that came with contributing. And we did Roth IRA, contributions were in the 2000 range. This is from 1999-2004. Straight forward S&P 500 index funds in 457b. I fooled around with stocks earlier on in Roth, learned my lesson and then moved to 457b. They have all grown. All together, they are about 150k now, adding to FI. All this without any particular sacrifice or penny pinching, mostly passive.
DrS,
Great job. Keep on saving.
Dr. Cory S. Fawcett
My residency had what I still think is the most generous retirement deal. You contribute 3% of your salary and they contribute 8%!
My only regret is not having a roth in addition to that in each of my 3 years of residency and ploughing 10 k into my etrade account :(. I sold and bought seemingly always at the wrong time :(. At least I was making the mistakes with residency money and not attending money.
I wonder how many of your peers never got any of that match.
WCI this post reminded me to ask a question I’ve been wondering about. Have been very lucky due to having a Med school scholarship etc, working side gig and being frugal and as a second-year resident have been able to max out my Roth IRA for the second year in a row with plenty to spare. I’m wondering with my extea savings, does it make sense to put it into a 401(k) (or maybe it’s a 403b) on a resident salary? I’m deferring the tax burden to my retirement when I hope to be making more in passive income in retirement than I make as a resident currently. Obviously capital gains are taxed at a lower rate than income at least for now. But I just wanted to know overall what is a better option. Thanks!
Yes, it can make sense. But first put it in a Roth 401(k) or 403(b) if a Roth option is available. If not, convert it the month you leave residency to a Roth IRA.
I am sorry for re hashing this (I tried to read up to no avail as I still have questions). I will be maxing my post tax space with a Roth at $5,500/year. On top of that I have started maxing out my (non Roth) 403b so $18k/yr x 3 more years of residency. So at the end of residency that $54,000 will be in a 403B in Fidelity. Can I somehow roll all that over using a backdoor Roth? After reading your tutorial I thought it had to be in a tIRA or similar? And the max was another $5,500 for a total of 12k of Roth per year? Again, I want to max out tax advantaged space but I am at a lower tax bracket in residency than I will be in retirement so if I can’t roll it over to back door Roth than maybe I should do post tax investing? Thanks so much for all your incredible advice.
You can’t do a “backdoor Roth” with it, but you can do a regular old Roth conversion the year you leave residency. You will have to pay the taxes due on that $54K + growth that year. You can now go directly from a traditional 403(b) to a Roth IRA without stopping in a traditional IRA.
I’d probably do that instead of taxable investing. You may also want to use your money to pay off debt or save up a down payment. And of course lobby your hospital to provide a Roth 403(b) option.
My Hospital doesn’t have a Roth 403b option either and I am planning to lobby for one, but wanted to make sure I’m clear on the benefits of it. Why is a hospital provided Roth 403b option better than contributing to a 403b during residency and converting to Roth IRA at the end of residency? Either way you are being taxed on the contributions right? Is it partly because with a Roth 403b you wouldn’t also have to incur taxes on the growth?
Thanks!
With a Roth 403b, you are gradually building up your Roth while you are in a low tax bracket during residency. By converting in the year you graduate residency, you will be taxed on all of your contributions in a year when your income tax bracket is going to be higher because you’ll have 1/2 year of attending income.
Because you pay the tax at a lower rate during your resident years than you are at the year you have 1/2 a year of resident income and 1/2 a year of attending income. The growth helps a little too.
Right, but could you avoid that by converting the 403b to a Roth IRA say the year before you graduate residency (still at Resident salary for full year)? Then just contribute to that Roth for the last year until your income increases as an attending? My residency will be 5 years so 4 years of avoiding management fees (by using my hospital’s 403b plan instead of Roth) seems like it may be a decent move even though I would get taxed on the gains after 4 years which wouldn’t have been the case if go straight into a Roth IRA through something like Vanguard right now (I’m an intern). I’m just trying to decide if there is any utility for me in this 403b (without Roth option) or if I should just open and start funding a private Roth, and avoid my institution’s 403b?
Thanks
You cannot convert a 403b to a Roth IRA while you are still working at the employer that is providing the 403b. You do not have access to it – it has to stay with the employer as long as you work there. That’s the purpose of the Roth 403b option – to allow you to add to your Roth account through your employer plan.
Should you continue with that employer after residency, you will likely still not get to roll it out unless you have a qualifying break in service, which is usually not a good idea because you would have to start all over again to qualify for other benefits.
Ok yes that is a good point. And I am sorry to keep chasing this idea even though it is not a common path but I just realized it may be a decent idea (in my situation) to transfer it when I graduate residency as I am nearly 100% sure I will be doing a fellowship and that it will be with a different employer (my residency doesn’t have fellowships in my specialty). So I theoretically could fund the 403b until I leave the employer and transfer it to a Roth IRA with 1/2 year of 5th year resident salary and 1/2 year fellow salary (still pretty low). Is that something I should consider vs. just opening a private Roth now?
Thanks
No problem – never hurts to ask.
To answer your question, you’re going to end up with a Roth either way. The decision will be based upon cash flow – theoretically, you can contribute $24k to a Roth ($18,500 403b and $5,500 Roth IRA). I doubt you can do that much as it is probably approaching 1/2 of your salary so just do what you can wherever you choose.
Okay yes I will not have enough to do both a Roth and a 403b, I’ll likely just choose one with the goal of putting around $5500/yr into whichever I choose. So I guess I am still a little unclear on this question: if my choices were to put $5500/yr into a Vanguard Roth IRA starting now -OR- to put $5500/yr into my institution’s 403b and convert/rollover into a Roth when I leave and start fellowship in 5 years which would you recommend? Or are you saying its basically a toss up?
Thanks again! sorry for dragging this on a bit, just want to clarify.
Just do the Roth IRA IF there is no employer match.
ML,
If you are only going to put in $5,500 a year, just put it into your Roth and forget about it. Don’t add in complicating factors. Keep it simple.
Dr. Cory S. Fawcett
Prescription for Financial Success
Agree with Dr. Cory – just use the Roth IRA. You’ll have more control over choice of investments and you won’t have to roll out from the 403b later.
You often CAN’T rollover or convert a 403b until you separate from the employer. If you can, sure, go for it.
You know you don’t have to pay management fees to invest in a Roth IRA, right? Usually fees are higher in 403bs than in Roth IRAs.
If there’s no match, I wouldn’t touch that 403b until I’d maxed out a personal, and if eligible, a spousal Roth IRA.
Along with WCI’s suggestions, check to see if your plan has an after-tax option available. If so, you’ll be able to convert to a Roth when you leave (or annually if your plan allows in-service rollovers).
HG
I love it when someone’s problem is they are saving so much they aren’t sure where to put it all.
Keep saving.
Dr. Cory S. Fawcett
I am currently in my second year of a family medicine residency, thus far I have been fortunate enough to be able to max out my Roth IRA during my intern year and have it budgeted out to max it out both this year and next. This year the company my residency is part of allowed us to contribute to an ICMA-RC 457b account which I have been contributing $100 a month to in addition to the Roth IRA.
I have been reading this blog and doing quite a bit of light reading on investing. It has become important to me to put away as much as I can early enough for retirement. I have also been trying to whittle away at my student loans which are quite the burden. But, it will all come with time.
Thanks everyone for all of the information that you have given on here it has been fun to learn and I look forward to learning more!
Be sure to read up on 457(b)s.
https://www.whitecoatinvestor.com/should-you-use-your-457b/
If you think it’s impossible to start saving with so little incomes, try start very small, like $100 a month. Make it automatic and commit to save all future wage increases. This is painless enough. Starting doing something that will benefit the future requires tons of mental energy, but a good start is half a journey to success.
Michael Zhuang,
Well said. Starting is half done.
Dr. Cory S. Fawcett
I still need clarification… I’m an intern, married no kids combined income is (52k + 30k) and I have 190k in loan debt at 6.8% I’m motivated to get the debt monkey off my back and have been paying ~1k/mo towards my debt. I have been saving this year and have the 5500 (+emergency fund) to put towards a roth IRA, but I am actually leaning towards just putting that into my loans… my (simple) thinking is paying off the debt is like a guaranteed investment of 6.8% return vs getting a vanguard index fund which is about 6 or 8 or 10%(?) but no gaurentee at all. What should I do?
Mark,
If as an intern you have money to max out your IRA, then you are already ahead of most of your peers. I suspect you have good money habits and what ever you choose will turn out well. You are winning the money game. I will assume your only debt is student loans, if not, then pay the others off first. If so, do the one that makes you sleep better. 6.8% guaranteed is a good return and hard to beat. Don’t agonize too long over win-win decisions. If you can’t make up your mind, split the money and do both. I don’t think there is a wrong answer in your situation so you can feel good about either one. Are you doing anything to seek loan forgiveness? If so, it might swith the decision towards the IRA.
Assuming you’re not going for PSLF, then it’s okay to pay extra on your debt. You’re right- 6.8% guaranteed. Bear in mind your effective interest rate under REPAYE may be lower.
Tax-free, asset protected space in a Roth IRA (which you can never get back) is also of huge benefit to you. Either is fine. Do one, the other, or split the difference. You can only know the right move in retrospect.
Reading your book now, and loving it! Such great information. Can WCI add this to his “WCI Bookstore”/Recommended books? I didn’t see it there.
Doc,
I’m glad you found my book helpful enough to recomendation it to your friends. The more residents who read it and start off on the right foot, the better off we doctors will be as a group. The right start makes all the difference.
The booklist is getting revamped, and there will be a section where readers can add their favorites to it.
Hello there!
I am a new resident and curious where to really start on this process. When I spoke with a financial planner, they mentioned doing both a Roth and traditional IRA for “backdoor” use.
However, I have no clue where to start. Do I need to just pick a company (Vanguard, Fidelity) and set up a Roth IRA and/or both?
Thank you!
Erika,
If you are a resident, you should be able to do a Roth IRA. The backdoor Roth is for people who make too much money to qualify for a Roth. You shouldn’t need both right now. Also your residency may have some sort of retirement plan you can participate in. Go ask about it. If you could fill those up during residency, you will have a great head start. You can set up your IRA with either of the companies you mentioned. I did mine a Schwab. Just start out buying a no load S&P 500 index fund or total stock market Index fund and just do that one fund for your entire residency to keep it simple.
Good Luck,
Dr. Cory S. Fawcett
Prescription for Financial Success
Dr. Fawcett,
Thank you for taking the time out to reply!
Okay excellent! I know that I will have the option of contributing to a 403(b) but it would not be matched by the hospital.
So I was planning to contribute to the Roth before the 403(b)?
Hello again!
When I am setting up the Roth IRA on Fidelity it is inquiring whether to select the following “core positions”
A. FDIC – insured direct deposit sweep program
B. Fidelity Government Money Market Fund (SPAXX)
Is there a selection that is preferred out of these two?
Thank you!
I would go with option A, FDIC protected. You can always make a change later.
Erika,
I use option B because the money market fund usually pays more interest. Both of these options are for what interest bearing option you want for the money that is just sitting around in the account and not yet invested. Either option is fine though.
Dr. Cory S. Fawcett
Prescription for Financial Success
Resident here, going PSLF route. How do I calculate whether I should be utilizing traditional or Roth IRA accounts and does it matter if I live in a state with or without income tax? My partner and i would really really really appreciate any insight into this. Have about 380K in loans, hopefully 350K as a new attending.
I have a post coming out on it soon, but bottom line is use a tax-deferred account if going for PSLF.