I cannot count the number of times I came home during residency to play with my kids. And then promptly fell asleep in the middle of reading a book to one of them. Your job in training is to learn how to be good at your job. It’s busy and we rarely have time to focus on things outside of the craft we are learning. It is tiring. Along the way, though, I hope you learn a little bit about financial decisions. The topic I want to discuss today is continued from our discussion on minimizing debt during residency. It really isn’t just a drop in the bucket. I want to show you the math behind why it is so important to save what you can during residency. In fact, I want to make an argument as to why you should invest in residency.
I should probably mention that I think its entirely reasonable if you have a high amount of debt to put any extra money you can towards minimizing that and/or paying it off during training. That said, I think it’s also reasonable to do the following:
What’s a good goal?
We all need goals to strive for and I think that a reasonable goal in residency is to fill up your Roth contributions each year. The total there is $5,500. First, I am going to outline why I think this is an achievable goal. Then I am going to show you why it is worth putting the effort in during residency to save this money.
An Achievable Goal
The average resident salary in 2017 was $57,200. The median household income in the United States in 2016 was $59,039. I say this to point out a few things:
- Maxing out your Roth IRA contribution ($5,500) is less than 10% of your resident income. You can spend the other 90% on whatever you want. [Hopefully, part of that is spent on PSLF or Refinanced Loan Payments].
- If you feel that you cannot save during residency, then how should we expect any “normal” person who has an average household income to save anything? The fact is, many many of these people do save quite a bit. There is an entire Financial Independence and Retire Early (FIRE) community that exists for average income earners. They are a great at it!
- I am not saying it is easy to save this much during residency. What I am saying is that it is an acceptable and achievable goal.
Therefore, I encourage you to set this as your goal. Make a budget/track your spending.
Five reasons why you should try
Number 1: It will matter in the end
I anticipate many students and residents saying, “I will be able to save so much more money as an attending that it probably isn’t even worth saving money as a resident.” I want to put this to bed right away.
Let’s make some assumptions and look at the math: You have a four year residency and save $5500 via a Roth IRA each year. Assuming 6% interest growth over those four years you will have saved/earned $24,952. Remember, when you take money out at retirement there are a lot of reasons why you want to save your Roth money for last.
Therefore, how much money will that turn into at the end of retirement 50 years later? The answer… over $300,000. That all comes from just the four years of saving $5,500 during residency.
Also, it must be said that each year that you don’t fill that retirement space (IRA), it goes away. You can’t contribute to it four years later when you are in a better spot with your income.
Number 2. You may be able to get a tax credit
You may be able to get a Retirement Savings Contributions Credit (see chart below) up to 50% off $4,000 of of your contribution if married ($2000 if single). This, of course, depends on whether you are married or not and on what your Adjusted Gross Income is for the year. Check the chart out below, which comes from the IRS link above. Could be a sweet deal for some.
Given the massive standard deductions ($12,000 single; $24,000 married) that are now in place for the forseeable future, many residents may be able to get a credit for as much as 50% of their Roth IRA contribution up to $4,000, if married ($2,000 if single).
For example, the married resident with a household with a gross income of $62,000 (AGI of $28,000 following standard married deduction) could deduct 50% of their Roth IRA contributions. If they are smart, and both make $5500 contributions…they are saving $11,000 and while getting $4,000 back as a credit!
Number 3. Behavioral finance Part 1.
This may be the biggest reason. If you teach yourself to save a percentage of your take home pay as a resident now, then saving as an attending will be easy. It will not be some huge transition where you now no longer spend 100% of what you bring home.
I cannot understate the importance of this. Most people take that huge pay bump and spend it. Because you have learned how to save during residency, you’ll keep saving as an attending. It’s part of life.
Number 4. Behavioral Finance Part 2.
This will also teach you to pay yourself first. Put the money away each month and then make the contribution at the end of the year in December. For those of you bad at math, this comes out to $458.33 each month.
Number 5. Roth contributions are not as valuable as an attending physician
You will not be able to contribute to a Roth IRA when you are an attending in a standard fashion. You will have to perform a Backdoor Roth IRA. While this is perfectly acceptable, it has some added steps. This will be straight forward for you, because you will already have a Roth IRA by this point. Just open a traditional account, put money in, and then convert it to your Roth. Done.
Also, Roth contributions are more valuable in lower-income earning years. The reason is that you put this money into the Roth account likely at a lower tax bracket than when you take it out in retirement. This makes Roth the vehicle of choice during non-peak earning years.
The how to is much simpler than convincing you to do it. Pick a good investment company (Vanguard, Fidelity, Schwab) and open up a Roth IRA. Pick a diversified low-cost index fund such as the Vanguard Total Stock Market Fund. Put all of your money into it. Forget about it until the next year when you put another $5,500 into it.
Of course, the giant elephant in the room I am not talking about is your debt. The reason that I encourage residents to make Roth contributions while they are in training is that every year that passes you miss the deadline on that $5,500 you can contribute.
So, unlike your debt that is going to be destroyed a couple of years after residency, this money will continue to grow. If you are participating in PSLF, you will have debt forgiven. If you have refinanced to a lower rate (3-4%) the odds are that you are going to make more money (6-8%) in the market. And, shoot, I save money as an attending while I pay down debt. We should be actively both destroying debt and aggressively investing. Why not encourage residents do the same?
Also, the government is willing to give you a tax credit to do it. You are potentially leaving money on the table.
If you were, like me, completely oblivious to this stuff as a resident and you are now an attending, don’t sweat it. Yes, we are behind the eight-ball, but we can still make it to our financial goals despite our mistakes. It’s just going to take a little longer.
What would you tell yourself if you were a resident again on this topic? For the residents out there, who is saving during training? I would love to hear your thoughts. Leave a comment or two below.