You did it. You survived medical school, excelled during your residency, and passed your exams– you are a physician. The skills you have acquired will help so many people every day. In the hustle and bustle of caring for others, it is still important that you take care of yourself. One of the best ways to do that is by thinking about how you will save for retirement.
There are many different vehicles to saving for retirement, and not all of them will be applicable to your needs. I have outlined the most common retirement options: pensions, individual retirement accounts, and self-employed retirement accounts. Take a look at these options and think about how your retirement savings strategy could benefit.
If you are employed by a hospital or group practice and enrolled in their retirement plan
Many physicians do not start earning money until their early to mid 30s which makes saving for retirement a different experience. In addition, student loan debt looms and many new physicians will work for a majority of their careers paying that debt off.
With all of these factors, how can you make saving for retirement a priority? Add retirement savings to your long-term financial goals. Assign a greater meaning to it, and by adding that value it will be easier to save. Let’s look at some of the ways your workplace could help you reach that goal.
A pension plan is a defined benefit plan and designed in a way that the employer adds money to a fund to support the employees retirement income. This plan acts as guaranteed income in retirement. With the growing expense and upkeep of pensions, many companies are not offering such options as readily as they used to.
Many people regret the decline of the pension plan, but the reality is that these plans (while attractive) did not guarantee full income support for the rest of your retired life. These plans are also more rigid in terms of how the money is invested and how you are able to receive it. With the sharp decline in the private sector for defined benefit plans like the pension, a new form of retirement plan has taken its place: a defined contribution plan, or 401(k).
401(k) & 403(b)
401(k) and 403(b) are retirement accounts dependent on both an employee and employer contribution. In its parameters, the employee selects a percentage of their paycheck to be funneled into their 401(k)/403(b) accounts. Many companies and non-profits offer a contribution match, where the employer also adds to the retirement account up to a certain percentage. Often times an employer will contribute a 100% match up to 3% of the employee’s income with an additional 50% match up to 6% of the income. With a 401(k) or 403(b), you are also able to have more flexibility with how your money is invested. You become in control of your financial investment profile which leaves you with many creative and strategic decisions.
I urge you to contribute the maximum income deferral which is $18,500 in 2018. By doing this, you are making sure that not only you save for retirement but that you hold the employer responsible for contributing as well. Not contributing to your retirement account is leaving hard earned money on the table. As physicians, you will likely have access to a 401(k) if you work for a private employer or a 403(b) if you work for a non-profit. Contributing to any of these accounts will help you get closer to your savings goals.
If you aren’t enrolled in a retirement plan already
Your options for retirement saving strategies are not limited to what your employer offers. There are other methods for retirement investing that rely on your contributions.
Individual Retirement Account
An individual retirement account or (IRA) is a specific account that the owner adds to as they see fit. An IRA will come with many tax benefits and help contribute to your long-term savings goals. There are two types of IRAs that you should be aware of: Traditional IRA and Roth IRA. How do you choose which one is right for you? Below, you will find a list of the qualities and differences of each to help you decide which is right for you.
If you are earning income and are younger than 70 ½ you are eligible to contribute.
After age 70 ½, you are required to withdraw the required minimum distribution (RMD) which is taxable. Failing to take out the RMD will leave you with severe tax penalties.
- The money grows on a tax-free basis.
- All withdrawals are taxable income.
- All contributions are tax deductible.
There are no age restrictions on this account.
Income eligibility and restrictions are in place. For example, in 2018 a person who filed single could not have a modified adjusted gross income of $135,000 or less to contribute to a directly to a Roth IRA. As doctors, your base income may be higher than this, which would not make the Roth IRA the most lucrative option.
- The money grows on a tax-free basis.
- Withdrawals are not taxable.
- Contributions are not tax deductible.
Let’s say that you have your own practice and you want to optimize your taxes. One sure way is opening up a Solo 401k. Solo 401ks allow you to contribute a huge amount of your retirement account which means big tax savings! Solo 401k plan contributions are comprised of two components:
- On the employee side – an employee salary elective deferral
- On the employer or business owner side – an employer profit-sharing component
- The maximum contribution limit for 2018 is $56,000. Those who are over 50 years of age are able to take advantage of an extra $6,000 catch-up contribution, which increases their maximum to $62,000 (this includes salary deferral and employer profit-sharing). If you are self-employed, this is likely the way to go. Just make sure you satisfy all the conditions to set this up.
Looking to The Future
As you can see, there are so many options for savings channels. Physicians can have a difficult time saving for retirement due to the myriad of financial responsibilities on their plates. I hope that by reading this you feel more empowered to save your money to live the life you deserve when you retire.
If you would like more personalized advice, I would love to talk with you.