Doctor Retirement Plan, Your Guide to Retiring Successfully

Retirement: the stage of your life that you spend so many hardworking years in preparation for. It’s more common than you might think for people to have a very solid vision for what they’d like their retirement to look like, but a very foggy vision of the steps that they’re going to take to properly get there. Specific issues present themselves to doctors, who often after many years in school have sizable incomes, however additionally have large amounts of debt on account for the many years spent in school. The American Medical Association reports that 27% of Physicians retire after the age of 71, and report less satisfaction when they do.

So what are some ideas for individuals in the medical field looking to gain more insight and control of their retirement savings?

Starting Early

The first and most important aspect to consider for any individual hoping to gain more literacy as to their retirement savings plan, is to start early. If you’ve begun your career, you ultimately should have some kind of retirement savings plan in place. After so many years of schooling and debt, any money in your accounts feels like ‘a lot’ of money. Yet the importance of starting as early as you can comes down to both the sheer amount of money you’ll need for a comfortable retirement, as well as the potential for higher yielding investments in the long term, the earlier you begin.

Compounding Interest

The secret to starting early can be explained by a concept called compounding interest. Compounding interest takes into consideration not only the interest gains on your initial investment from year to year, but additionally how much is gained from reinventing your interest gains. The money grows at a much faster rate when it’s reinvested, and so the difference of starting a few years earlier can make an individual’s investment grow to a much higher level than an individual who starts even just 5-10 years later.

For example, if ‘Person A’ invests $1,000 a year into the S&P 500 beginning at age 20, their investment will have grown to over $400,000 by the time they’ve reached age 60. If ‘Person B’ starts investing $1,000 a year starting at age 40, their investments will have only grown to just over $57,000 by the age of 60. In order to reach the same amount of money in their investment savings account by the age of 60 as Person A, Person B would have to invest nearly $8,000 a year from the age of 40.

Investment Considerations For Physicians

The reality is that education in health services can come with a pretty hefty price tag. With so many years of education involved, it’s understandable that nearly 75% of new doctors graduated college with some form of college debt in 2017. In the same year, a doctor entering a practice came into the position with an average of $160,000 in student loan debt. With the length of time and large expense that medical school establishes for those in the healthcare industry, working out the logistics of debt in terms of their student loans is an added challenge that may occur at higher rates than other occupations as a result of the extensive and expensive extra education. The amount of debt that can be incurred, as well as the high rate of interest you may be paying on these loans make this a very important part of your financial plan that needs to be considered in your long term plan for retirement on time. 

Not to mention, after so many years of working toward your goal of graduating and beginning your practice, there are plenty of purchases and investments you’ll be making along the way: your car, your home, and your family. Since the average working wage of those working in the medical field tends to be on the higher end of the spectrum, individuals in the healthcare industry must be equally careful with their spending. Poorly managed money and spending adds up quickly if not monitored, and a late start on saving could put you several years behind the age you’ve set out for yourself to retire. Saving takes discipline and planning.

Investment Planning

Investing your money is only as useful as your plan to achieve your goals however. In order to reach your retirement goals, it’s important to envision the age at which you’d like to retire, as well as how much you think your lifestyle will require once you reach the age of retirement. This will give you a better idea of how much you should be saving/investing for retirement in comparison to your income level. 

A common rule of thumb for the amount an individual should be saving for retirement, is to accumulate enough to annually withdraw 70-80% of your pre-retirement annual income. For example, depending on the number of years you’re aiming to be in retirement, for an individual making $100,000 a year, they should have enough accumulated to take out $70,000-80,000 a year. For a 25 year retirement at this rate, an individual would have to accumulate $1.75-2 Million in total assets. After determining the amount of money you’re saving up toward for retirement, the question is begged: at what rate should I be saving my income?

How Much Should I Save?

While it may seem rather obvious, the amount of money that you save today could greatly increase or decrease the amount of money that you have for retirement savings. An early start, in addition to large contributions will certainly bring an earlier achievement of your retirement goals. However retirement savings isn’t the only thing that your money is going toward, you have costs associated with your life every month and year, as well as things you want to enjoy and spend your hard earned money on occasionally.

Depending on your monthly expenses, the amount an individual can save will vary, however a broad rule of thumb normally dictates an individual should be saving around 15% of their income in order to reach their retirement goals. This could also vary depending on the benefits your place of employment offers. If your employer offers to match your contributions made toward savings, then you may be able to contribute less toward annual savings. Due to the relatively high working wages doctors often have in comparison to the general population, it is sometimes advice that physicians save a higher percentage in order to account for the lifestyle that they’ve grown accustomed to through their working career that they’d most likely continue to enjoy into retirement.

What Savings Options Are Available To Me?

Depending on the options your employers give you, there are retirement saving options that you will want to, and most likely already are taking advantage of. Outside of those options offered through your employer however, there are stand alone retirement saving account options. Knowing what account options you have available to you, as well as which investments options to choose from can help you to determine the best retirement savings option for you.

401(k)s

As one of the most common forms of retirement savings accounts, these accounts come with many aspects that make them an attractive vehicle for individuals. These accounts are set up with your employer, and include a chosen upon rate that you would like to make automatic contributions from your annual income. In most cases, employers will also agree upon a certain percentage that they will ‘match’ in contribution to the account. 

Accompanying 401(k)s are a variety of tax advantages that additionally make them attractive savings vehicles. Contributions to this account are made on a pre-tax basis, which means that they draw away from your amount of taxable income. The account and contributions you make also grow on a tax-deferred basis. 

There are limits on the amount you can withdraw from the account however: tax penalties are issued on amounts that are withdrawn from the account before the age of 59.5. Beginning at the age of 70.5, you are required to begin taking minimum withdrawals from the account. For an individual under the age of 50, you are only able to annually contribute $19,000 ($25,000 for an individual over the age of 50). If your company offers matching contributions, the annual limit for combined contributions is $56,000.

Often, 401(k) contributions by employers are subject to a vesting schedule. This would mean that if you left your employer within a certain time frame after being hired, some of the employer’s matched contributions would be forfeited. It’s not uncommon for employers to offer a vesting schedule of around 20% per year, which means each year you work (up to 5 years), an additional 20% of the employer’s contributions to the account is guaranteed if you were to walk away from your position. For example, walking away from a position after 2 years of employment would only guarantee 40% of the contributions that your employer made. After 3 years, 60% would be guaranteed.

More frequently, 401(k) plans have more investment options for employers than something such as 403(b) plans that we will discuss shortly. 401(k)s are more likely to be run by mutual funds, with a variety of investing options reflecting different investment strategies for the place you are at in your retirement journey. Plans may be bifurcated on the basis of risk tolerance. Risk tolerance is the level of risk you’re hoping to take on, in order to recognize a respective level of reward: the more risk you’re willing to take on, the higher reward your investments have the potential of delivering.

Your risk tolerance when it comes to your investments should take into account a variety of life factors. Most importantly, it should account for your personal level of comfort with the risk you associate with your investments. Since young people have a longer time before they need to make use of their retirement accounts, it’s more common for younger individuals to have a higher risk tolerance because they have a longer time to make up for any bumps along the way. Individuals who are closer to retirement on the other hand, may take on less risk with their investments to ensure that there aren’t any dramatic changes to the balance of their retirement savings, which they are much closer to needing and using.

Depending on the amount of risk you’re willing to take on in exchange for a certain amount of reward, your account makes purchases of different assets that are more or less certain to realize differing amounts of returns. Bonds holders for example, are often the first investor in line to be paid by public companies, and constitute investments with much lower return, but higher certainty. The purchase of stocks on the other hand is less likely to receive payment in general, but the return on the investment provides much higher potential returns. It’s important to take the time to consider what your risk tolerance might be in order to make a selection of investments with your retirement savings that best aligns you to enter retirement with as much as you had planned. Feel free to ask your advisor about what your risk tolerance could mean for your savings accounts.

403(b)s

Similar to 401(k) retirement savings plans, 403(b)s are the ‘equivalent’ offered to individuals who are working in non-profit organization, and government positions. Depending on your exact place of occupation, knowing about this account could be relevant to you. They are ultimately treated in a very similar fashion to 401(k)s, with some minor differences. One of those differences is that it’s not as common for employers to offer contribution matches with these types of accounts. Another difference is the sort of investments offered within the plans, which are less often comprised of mutual funds and more often vehicles such as annuities. 

IRAs

An Individual Retirement Account (IRA) is an account that you would set up for yourself, rather than having it set up on your behalf by your employer. As a form of retirement savings account set up independently, you do not get the benefit of an employer match, however you may have much more freedom as it comes to the types of investments you make on the account. There are two main types of IRA accounts individuals will use: Traditional IRAs and Roth IRAs.

Traditional IRAs allow contributions of up to $6,000 a year if you are under the age of 50 (those over the age of 50 you make contribute up to $7,000 a year. In the short term, you are also allowed to take tax deductions on Traditional IRA contributions. Growth in the account is also tax deferred, however withdrawals on the account are taxed at the ordinary income-tax rate when you take them out during retirement. With Roth IRAs on the other hand, contributions are made after-taxes, and therefore you don’t have to worry about taxing withdrawals during retirement. In order to make contributions toward Roth IRAs however, your income must be less than $137,000 a year.

No matter the retirement savings account that you utilize, maxing out contributions can get you to where you’d like to with your retirement savings, the quickest. It can be tempting to set and contribute a decided upon rate below the maximum, however maxing out contributions will utilize the benefits of compounding interest and get you the highest return on your investments, as soon as possible.

Thoughts To Consider

The answer to this question is multifaceted, and includes many of the ideas previously discussed. The younger and more you begin saving, the sooner you will be able to enjoy the fruits of your labor. This is on account of the exacerbating effects of compound interest working to your favor. However simply saving a lot doesn’t necessarily translate to an on-time retirement. Doing so requires adequate planning well in advance to the start of your retirement. Once you have a financial plan in place to achieve your retirement goals, dedication to the success of your plan is just as important. Individuals have a tendency to let saving fall to the wayside when there are other, ‘more attractive’ opportunities to spend money on in the present. Making contributions to savings accounts should be viewed as the default, rather than opt-in option.

While establishing a plan is incredibly important, monitoring the plan to update and make any needed changes is just as important. Your life and career are not static, and therefore your strategy to achieving your retirement goals must be updated every time a major life event takes place. Increases in income, family plans to have children, making plans for that child’s education, as well as endless other factors need to continually be taken into consideration to ensure that your financial plan accurately reflects all the personal and professional goals that you have set out for yourself.

Be sure to contact your advisor if you have any questions about your personal financial plan. With the world’s continuous integration into the realm of technology, it’s not uncommon for young people as well as those who are short on time, to rely on resources such as apps (Robinhood etc.) to manage their financial plans. Some plan is better than no plan, however, it can be hugely advantageous to leave financial dealings to professionals. It is these individual’s jobs to manage your money in the best way they possibly can. Plans that are created with the help of finance professionals can help you to consider points you may not have previously thought about, as well as specific considerations to the retirement savings journey of a medical professional.