[Editor's Note: This is a guest post from Dr. Cory S. Fawcett, a semi-retired general surgeon, financial coach, and blogger. He is the author of The Doctor's Guide to Starting Your Practice Right. We have no financial relationship, but I do have one with Amazon. If you buy books after going through links on the site, I get a small percentage and you don't pay any more.]
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.
One resident told me he would begin to contribute to his retirement plan after he was an attending and making big bucks. He felt his contribution as a resident would be so small compared to the massive amount of money he would save as an attending that it would not be worth the sacrifice. The problem with that type of thinking, the I’ll start tomorrow mentality, is that tomorrow never seems to come. As an attending the story changes to “I’ll start saving as soon as I get settled.” Then it’s “as soon as my student loans are paid off.” Then, “when I get this car/motorhome/boat paid off.” It seems there is never a good time to begin diverting money from the present to the future.
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 twenty years of my practice. If I leave it alone for another twenty 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That extra million dollars will produce an additional $40,000 a year for the rest of my retired life, if withdrawn at the recommended 4% per year.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 fifty dollars 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.
[Editor'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.
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!