Money Meets Medicine Podcast
5 Things About Retirement Accounts Every Doctor Should Know
“I don’t understand the different retirement funds… I don’t even really know what a fund is. I know I need to be investing, but I could use some guidance doing it.”
Sound like you? Trust us, we get it. When you’re a busy doctor, retirement fund lingo-translating feels like taking on another job. And nobody has time for that.
Retirement funds are one of the biggest points of financial confusion for doctors. We want to provide some clarity and understanding so you can learn what you need to know to start making your money grow.
We’re going over five things about retirement accounts every doctor should know.
There are a variety of investment types within doctor retirement accounts
Typically you’ll be offered either an active mutual fund or an index fund. How do you know which you’re in? Usually the index fund will have ‘index’ in the name, but you can also look at the expense ratio. If it’s 0.1% or lower, that typically indicates an index fund. Since index funds are passively managed, the cost to run the fund (which is what an expense ratio is) tends to be very low.
Actively managed funds are essentially when someone deliberately selects which stocks are going into the fund, whereas index funds follow an index – like the S&P 500 or NASDAQ.
Historically, studies show that index funds beat actively managed funds to the tune of something like greater than 90% over a 15 year period.
Our advice: save yourself a lot of money and heartache and invest in index funds.
Target date funds
Some clinical employers automatically put their employees into what’s called a target date fund. This is where you’ll land by default if you don’t make a different selection.
Target date funds invest your money in a way for you to retire by a target date. It assumes a 30-year career, and it’s going to be more aggressive when you’re younger (presumably with a long career ahead of you) and becomes more conservative as you approach retirement age.
As with many of our topics on Money Meets Medicine, we have differing opinions on target date funds. On one hand, the expense ratio is higher and many of them have a much higher exposure to international equities and bonds, including exposure to risk.
On the other hand, you don’t have to handpick the stocks and bonds you choose to invest in OR rebalance your account every year, because both of these things are done for you automatically.
It’s really up to you and your preference if you choose to go with a target date fund.
There is often a choice between a post-tax (Roth) investment and a pre-tax investment
This topic alone probably deserves a show by itself.
Common education here is that you should favor Roth during your non-peak earning years and pre-tax during peak earning years.
But there’s one big potential caveat here to be aware of: student loan forgiveness.
If you have student loans and you’re planning on public service loan forgiveness (PSLF), where you can get your loans forgiven in 10 years, a lot of times your years in residency count. So when you’re a resident, you may not be at your peak earning years, but this time can still potentially count towards PSLF.
Why does this factor in? Because one of the requirements of PSLF is that you’re enrolled in an income driven repayment plan where you’re making monthly payments based on adjusted gross income – AKA the amount of income you’re paying taxes on.
So if you’re able to lower your taxable income, then not only do you pay less money in taxes when you’re a resident and money’s already pretty tight, but you also lower your monthly student loan payment.
In this instance, you may want to choose a pre-tax investment account.
One retirement account will probably not be enough
Yep – you’ll likely need to invest in more than just your retirement account.
Depending on your preferences and what works for your individual situation, you may want to add money to a 403B, explore a 457, choose to start a Roth IRA – or a backdoor Roth IRA if you can’t contribute directly. Some money could go into a taxable account, some into an HSA.
Many retirement accounts have rules about how and when you can withdraw your money (more details in #5), which underscores even more the need for a separate account where you can reliably take out money without having to qualify for certain rules or take out a defined amount of money.
Just like you want to avoid putting all your eggs in one basket, you also want to disperse your retirement money into different accounts.
Some accounts have rules to prevent early access
If you’re following the path of FIRE (Financial Independence, Retire Early), keep in mind that you can’t touch retirement account money until age 59 ½.
For a lot of doctors who plan on working past the age of 59 ½ , that’s fine, but if you’re someone who wants to retire early at age 50 or 45, you can’t access your work retirement account until you get to age 59 without a penalty of 10%.
There are some ways around the penalty – for example, if you’re making a withdrawal for healthcare expenses. Certain amounts may be allowed for a down payment on a home. But generally speaking, if you decide to withdraw $1k, you get to keep $900.
A: The IRS allows penalty-free withdrawals from retirement accounts after age 59 ½ and requires withdrawals after age 72.
B: You generally have to start taking withdrawals from your IRA, SEP IRA, SIMPLE IRA, or retirement plan account when you reach age 72 (70 ½ if you reach 70 ½ before January 1, 2020).
Send us your questions
We covered lots of topics today and we realize that some of this gets into the weeds, especially if most of this is all new to you. If you have a question, just email me at [email protected], and we’ll be happy to help.
You might also be interested in…
Despite our best intentions, certain emotions can keep us from building wealth. After many years arming physicians with the information they need to achieve financial wellness, I had a significant realization.
Information is one thing – behavior is another.
As the saying goes, money is 80% behavior and only 20% math.
Not only do I want to share important information about personal finance, I also want to help you recognize how certain behaviors can (and do) affect your finances.
Drawing from one of the classic books about investing, let’s go over five common behaviors that could be keeping you from achieving your financial goals.
Many doctors and high-income professionals hire financial advisors for any number of reasons. Either they’re too busy to handle their finances themselves, they don’t really know how to invest, or they want an expert on their side to make sure they’re on the right track.
So allow me to say from the start: I’m not against financial advisors, but I am against doctors (or anyone, really) being overcharged for bad advice.
There’s no shame in asking for help – you just want to get the help you need at a fair price.
You should be equipped enough to vet and evaluate your financial advisor so you’ll know whether they’re working well on your behalf. How can you be as confident as possible they’re acting in your best interest? This episode will help you find out.
Have you ever thought about using real estate to reach financial independence, but you didn’t want to be a landlord?
Recently I sat down with one of my good friends and one of the OG partners of The Physician Philosopher. He’s an anesthesiologist, husband, father, entrepreneur, as well as a real estate and physician side gig guru – of course, I’m talking about Dr. Peter Kim.
One of the interesting things about Peter’s story is his transition from full-time practice as an OB anesthesiologist to stepping away from medicine and going part-time, to now his being on sabbatical. He’s not sure if that’s a permanent sabbatical or not, so we got to explore his thought process on that and his story.
So let’s dive into this discussion with Dr. Peter Kim and the intersection of all things entrepreneurship, side gigs, medicine, money, and real estate.
Need help getting disability insurance or student loan help from a company built by doctors, for doctors? Make sure to check out HelloAttend.com