This is the first post in a two-part series which will cover retirement investing in medical school and residency. The first post will deal with early retirement investing for medical professionals and some of the issues that are peculiar to our trade.
We begin with the problem:
I don't know what kind of golden parachutes or gold watches have been handed out to physicians in private or academic practice in the past, since I'm new to this game. What I do know is that there has been a nationwide push to place more of the working man's responsibility for retirement income on the individual's shoulders as opposed to the corporation's. Hence, the creation in the 1970's of the IRA and in the 90's of its sibling, the Roth IRA. (And 401(k)'s and 403(b)'s and on and on).
The great benefit of traditional and Roth IRAs is that they are tax-advantaged in one regard or another. Meaning, since Uncle Sam is encouraging the individual investor to sock away his own retirement income, he has agreed to let you keep more of the money that is going in or coming out.
So here's the issue: dollars socked away for retirement purposes in vehicles like IRAs are most effective when they are put away early, well before you retire. This is due to the wonderful, wonderful power of compounding interest. However, in order to be eligible to contribute to your traditional or Roth IRA, you must have earned income.
The need for earned income means you need a W2. (Or self-employment income). This creates a problem for the average medical student, who - chances are - has not held a job since high school, if ever. That means that you have lost perhaps eight years or more of potential retirement investing opportunity. Not to mention the fact that, without an employer, you wont' be contributing to any 401(k)'s or 403(b)'s.
But wait - it gets worse. I would imagine that many retirement professionals would agree that in our situation, the Roth IRA is a superior investment vehicle than a traditional IRA. Visit Motley Fool if you would like to read in depth about the difference. In brief, if you think that you are in a lower tax bracket right now than you will be when you retire - a safe bet given we'll be employed as physicians - the Roth is the right pick for you.
And here's the rub: there are income limits which cap the point at which you can contribute to a Roth. Once you start making over $101,000 per year, your ability to contribute is phased out. Once your yearly income reaches $116,000, you are completely ineligible to contribute. If you happen to be married and file your taxes jointly, the limits per household are $159,000 for phasing out and $169,000 for total ineligibility.
Here is the blessing and the curse of being a physician. When you finish your residency and get a job, chances are you will be making six figures. You won't find me shedding too many tears about my paycheck, although the fact remains that many of our colleagues - especially those in primary care - are relatively under-compensated for their labors.
However, our high earning potential belies the fact that we will spend anywhere from four to eight years of postgraduate life without a paycheck and the following three to eight years in residency training with what more or less amounts to a stipend. This is, of course, not to mention the vast sums of student loans which we will accrue and the fact that we will now likely have to pay them off during residency. (See my post on economic hardship deferment if you have federal student loans.)
To put some numbers on this story, we're going to look at Jane and Jack, who are both 29. Jane went to an Ivy League college and graduated in four years with a degree in business and $23,000 in student debt. (That's the figure if she took four years of Stafford loans as a dependent).
Jane got a job right out of college working for an investment bank, making $80,000 per year, with annual 5% raises. Every year while working, she contributes the maximum to her Roth IRA as well as to her 401(k), which her employer matches at 50 cents on the dollar.
Jack went to the exact same Ivy League college and graduated with a degree in biology and $23,000 in undergraduate student debt. He then went to his home state's public medical school and graduated in four years with an MD and $138,500 in additional student debt. (That's the figure if he took four years of subsidized and un-subsidized Stafford loans).
Jack then went into an internal medicine residency program where he made $50,000 per year, with annual 5% raises. Every year during residency, he contributes the maximum to his Roth IRA as well as to his 403(b). Unfortunately, his residency program doesn't provide matching contributions (you show me the one that does). Note, however, that by doing this - and paying off student loans at the same time - Jack is left with $750 at the end of each month to pay rent, bills, buy food, etc. Chances are, there's no way on earth he's able to contribute the max to his 403(b), so let's trim his contributions and give him $1,500 to spend each month after retirement expenses.
We'll find out what happens to Jane and Jack when they retire in the next installment...