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Articles

The Importance of Investing Money in Residency

By Jimmy Turner, MD
The Physician Philosopher

 

I can’t count the number of times I came home during residency to see my kids before bed time, 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. 

Despite that, I hope you learn a little bit about personal finance decisions, including how you should be minimizing debt during residency.  It really isn’t just a drop in the bucket.  Today, I want to show you the math behind why it is so important to save what you can during 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 your debt 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 $6,000 (in 2021). This assumed of course that you don’t have access to matching through a 403B or 401K at your employer.  Don’t leave part of your salary on the table!

Today, 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

According to Medscape, the 2020  average resident salary was $68,500.  The median household income in the United States in 2020 was $78,500. I say this to point out a few things:

First, maxing out your Roth IRA contribution ($6,000) is about 11% of your resident income.  You can spend the other 89% on whatever you want.  

Second, 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!

Finally, 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.

Should I Invest in Residency: 6 Reasons 

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.”  Let’s put this to bed right away.

Let’s make some assumptions and look at the math:  You have a four year residency and save $6,000 via a Roth IRA each year.  Assuming 6% interest growth over those four years you will have saved/earned ~$26,000. 

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)assuming you gain 8% in interest?  The answer… over $500,000.  That all comes from just the four years of saving $6,000 each year during residency.

Also, it must be said that every 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 deduction

Contributing to a Traditional IRA (TIRA) comes with a great benefit.  You get a deduction.  In addition to this, you should know that any decrease in your AGI produces a lower monthly payment for anyone enrolled in an Income Driven Repayment program.

In 2020, if you have the option of investing in a retirement plan through your employer, your opportunity to take part in the TIRA deduction is limited. Despite this, you can still deduct the full TIRA contribution as long as your income is less than $65,000 as shown in the chart below. 

This is according to the IRS.

If Your Filing Status Is…

And Your Modified AGI Is… Then You Can Take…
single or
head of household

$65,000 or less

a full deduction up to the amount of your contribution limit.

more than $65,000 but less than $75,000

a partial deduction.

$75,000 or more

no deduction.

married filing jointly or qualifying widow(er)

$104,000 or less

a full deduction up to the amount of your contribution limit.

 more than $104,000 but less than $124,000

  a partial deduction.

 $124,000 or more

 no deduction.

married filing separately

 less than $10,000

  a partial deduction.

 $10,000 or more

 no deduction.

If you file separately and did not live with your spouse at any time during the year, your IRA deduction is determined under the “single” filing status.

 

Number 3: Roth IRA investors may get a tax credit

For example, the married resident with a household with a gross income less than of $65,000 could deduct 10% of their Roth IRA contributions. 

In other words, if they invest $6,000, the government will give them a dollar for dollar tax credit of $600. They could so the same for their spouse, too.

2021 Saver’s Credit

Credit Rate Married Filing Jointly Head of Household All Other Filers*
50% of your contribution AGI not more than $39,500 AGI not more than $29,625

 

AGI not more than $19,750

 

 

 

 

20% of your contribution $39,501 – $43,000 $29,626 – $32,250 $19,751 – $21,500

 

 

10% of your contribution

$43,001 – $66,000 $32,251 – $49,500 $21,501 – $33,000

 

 

0% of your contribution

more than $66,000 more than $49,500 more than $33,000

 

*Single, married filing separately, or qualifying widow(er)

Number 4: 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 overstate 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 5: Behavioral Finance Part 2

This will also teach you to pay yourself first. 

Trust me when I say that if you spend all that you earn now, you are likely to do the same when you start earning “the big bucks”.  It’s the same phenomenon that happens in sports.  People spend what they see in their checking account.

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 6.  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.

Take Home: Should I Invest in Residency?

Investing in residency is really important.  It can also be cost effective. 

Whether you are taking advantage of the tax break from a TIRA or the credit earned by performing a Roth IRA contribution, the chance to start early is so important.

Pick a good investment company (Vanguard, Fidelity, Schwab) and open up a Roth IRA.  Pick a diversified low-cost index fund and get back to your training.  Don’t think twice about it.

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 $6,000 you can contribute.

Of course, the elephant in the room we didn’t really talk about is your student loan debt. If you are pursuing PSLF (attempting minimum payments), then investing is the next step with your money.  

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 do you think?

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.

TPP

 

 

 

 

 

 

 

12 Comments

  1. Xrayvsn

    I really wish I came across this advice when I was a resident. I truly regret not taking advantage of all that ROTH space I had available to me. The contributed money would have been taxed at likely the lowest rate I would ever see until I retire and then allowed to grow tax free for as long as I wanted.

    You are right that there is a mentality that you can just do it later when you make more money but skipping ROTH during residency is a hard one to make up for as, like you mentioned, even backdoor Roths come with a higher price tag, mainly a higher tax bracket bite.

    Reply
    • ThePhysicianPhilosopher

      Yeah, I didn’t take advantage either. A lot of my writing is a “do what I say, not what I did”… Because no one taught me differently.

      I want that to be different for our future physicians and medical professionals.

      Reply
  2. IM-PCP

    I was very lucky to get second hand advice (a father advised his son, who was my co-intern) to save for retirement in residency. It’s hard to look back now, because of several years of Backdoor IRA contributions, but it looks like those residency contributions are now worth 5x what I put in.

    Reply
    • ThePhysicianPhilosopher

      Good advice is good advice. Regardless of where it comes from. Glad that you were fortunate enough to be in that situation!

      Reply
  3. Psy-FI MD

    If I wrote the blog post…I would have to title this,”things I wish I did in residency and (if you are in residency) you should do them too”. Nice post!

    Reply
  4. mobilehomegurl

    I remember the resident salary being pretty low. Think the hardest part was having the discipline to invest. Being young, there are a lot of wants (instead of needs) that we see. Especially when you don’t have kids yet. We spent a lot of money on food and entertainment at the time. Good reminder post!

    Reply
    • ThePhysicianPhilosopher

      Thanks!

      We were the same way. We spent money on a lot of unnecessary stuff. At the time, we didn’t know any better. Trying to fix that problem for others going forward.

      Reply
  5. Chris

    Can you expand a bit on what you comment in regards for those pursuing PSLF? If we are considering PSLF should we not put our money in an IRA?

    Reply
    • ThePhysicianPhilosopher

      If pursuing PSLF, your goal is to maximize your forgiveness and to minimize the money you pay back (because it will be forgiven).

      So, you should absolutely consider putting extra money into a Roth IRA if you plan on pursuing PSLF.

      TPP

      Reply
  6. Rads_Res

    Great advice. I agree that perhaps the behavioral aspect is the most important. I am midway through my PGY2 year and am currently saving pretty aggressively by maxing out a HSA and contributing to a Roth 457(b). One thing that really aggravates me is that residents are often exempt from employer matching into retirement accounts (at least at the two hospitals I have been a resident and many others I have looked at). Matching might help convince more residents to save. Anyhow, I currently have around $30k in retirement savings and hope to have around $75k by the end of my residency assuming decent market returns for the next few years (certainly no guarantee of that!). Perhaps not a huge chunk compared to what an attending will/can save, but I’m certain that my future self will benefit a lot from a little sacrificing here and there now.

    Reply
    • ThePhysicianPhilosopher

      Don’t diminish your amazing accomplishment! That’s truly impressive as a resident. You should be proud.

      As for resident matching, we have the same issue where I work. It seems that it has something to do with staff status and “forcing” residents to contribute when they don’t “make much”. I think it is lost on many that the resident income is the median income for our country. This may be something I attack in the future as my personal finance curriculum gets bigger, which may provide more of an opportunity to make this change for my residents. Time will tell.

      Keep setting a great example!

      TPP

      Reply

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