Start by maxing out your 401(k)/403(b) by contributing $18,500 per year. If you do this, you’ll join the 59% of physicians in their 30s who are able to max out these accounts. Pay yourself first and have it automatically deducted from your paycheck into a passive, not active, index fund with a low expense ratio.
Do you think it matters if you pay $0.11 or $0.84 for every $100 you invest? Over 25 years, those pennies get compounded in a special way. Hard to believe, but over time, less than 1% difference ends up being a difference of 18%. So, if you picked a passive index fund, you would have $106,000 more versus an active fund.
You could then build a portfolio with the adage of holding your age in bonds, for example. A 35-year-old would hold 35% in bonds, for example. Or look for “Retirement Fund 20XX” which is a plan where one picks a rough retirement year and then the plan automatically decreases risky investments and increases more stable investments over time. Remember, the enemy of a good plan is a perfect plan.
IN CASE YOU MISSED IT: Navigating the rocky financial road ahead
The next two ways to save for retirement are based on even more recent innovations. First is the Mega Backdoor Roth. Usually, physicians do not have access to a Roth IRA because income is too high. However, there is a legal way for high income earners to get around this and save $5,500 per year. The Roth IRA has unique advantages and additional flexibility compared to a traditional IRA. For example, in retirement you are never forced to remove the money nor pay taxes. And if you need to use it before you retire, there are no penalties to remove the contributions. To start the Mega Backdoor Roth process, contact any large brokerage firm, such as Vanguard or Fidelity.
Finally, the most advanced way to supercharge retirement savings is with a Health Savings Account (HSA). It offers something truly unique—a triple tax benefit. That means no taxes going in, no taxes as it grows and no taxes if you remove it (there are some exceptions in Alabama, California and New Jersey.) However, you must have a high deductible insurance plan to qualify. When you reach age 65, you’ll have two choices: withdraw and pay for medical expenses tax free, or two, withdraw as a general retirement fund and have it taxed as a very favorable traditional IRA. To take advantage of an HSA visit Saturan Capital, HSA Bank, Alliant Credit Union or Benefit Wallet where you can invest $3,400 (or $6,750 for a family) to start.
Daniel Orlovich, MD, PharmD, is a resident physician in the Stanford University Department of Anesthesiology, Perioperative and Pain Medicine. Follow him @DrOrlovich.