Should I start saving for retirement during residency?

If your employer offers matching contributions to a tax-advantaged retirement account, then yes. You should be contributing to the match limit. That’s free money. Obviously, if you’re training in a high cost of living area and surviving on ramen you steal from a roommate you found on Craigslist, then nevermind.

From there, if you have more money, what to do next depends on the status of your loans.

If you have loans:

There are few investments that are going to consistently outperform the interest rate on your student loans, so in the event you plan on paying them off yourself (i.e. not going to stay in academics/public service and achieve PSLF), then the extra income you’d want to put away for retirement should probably instead go toward paying down your debt. Unless you’re a daredevil who wants to invest on margin (i.e. gamble). It’ll depend on your debt amount, but you should also reevaluate your repayment plan (REPAYE?) or consider refinancing them to a lower interest rate as soon as possible.

The exceptions to using that income to pay down your loans is if you’ve already saved up a 2-3 month emergency fund and are making supplemental income you don’t need but are attempting to qualify for PSLF or are getting a nice interest subsidy from the REPAYE program. In this situation, you don’t want to pay down your loans directly. Any dollar you spend toward your loans is another that won’t be forgiven for PSLF or at the least could get in the way of your REPAYE subsidy. Thus, skip to pretending you don’t have loans.

If you’re in REPAYE but know you don’t want PSLF, then you could put that money you wanted to use toward your loans temporarily in an interest-bearing savings account (e.g. Ally bank) until you either have enough money saved up to pay them down or your income rises enough to wipe out at your subsidy (at which point pay down as much as you can and then refinance privately to a lower rate).

If you don’t have loans:

First, max out your employer match. If you still have more money, then keep reading:

The Roth IRA:
Try to max out your Roth IRA up to the annual limit of $5500 (and the same amount for your spouse for a total of $11,000, if the situation applies/allows). That’s as much (and probably more) than you’re likely to have sitting around as a resident. In this situation, you are putting after-tax money away while in a relatively low tax bracket that can then grow and be dispersed tax-free.

If your Roth IRA is full or if your combined household income is above the Roth limit ($132,000 single; $193,000 married in 2016):
Then you’d likely want to sock away the money in the Roth option for either your employer 401k/403b (if they provide one) or a Roth-enabled solo 401k (that you can set up if you moonlight and receive income as an independent contractor on a 1099). Roth (after-tax) contributions are advantaged in several ways over traditional pretax contributions for low-income residents, so they’re probably the best choice overall for your employer account when available. After all, Roth accounts are taxed prior to investment growth and are thus immune to any future tax increases.

If you’re set on PSLF or you don’t have a Roth option:
Alternatively, you can put money toward a pretax retirement account (either your employer’s 401k/403b if they don’t have a Roth option or a non-Roth solo 401k if you have a side business/1099 moonlighting income. This can be of some benefit in the minimize payments prior to PSLF game to get more of your loans forgiven. Money you put away pretax reduces your adjustable gross income, which is what is used to calculate your IBR/PAYE payments. Since 10-15% of the money you make this year is then earmarked for what you pay per month next year, putting away $1000 in a pretax retirement account reduces your student loan payments by $100-150 next year depending on your plan ( $8-13 a month). As you can see, this is a return of 10-15% (which is really solid), but the absolute differences here are small unless you’re able to save substantially. If you do have big side income (or your spouse is a high earner and you submit your taxes married filed jointly), then shielding this income from the IBR/PAYE calculation can yield significant savings.

If you need more than that:
In order to need even more tax-efficient saving options, you’d somehow have managed to max out a Roth IRA for yourself (and your spouse) and max out the personal contribution limit of your 401k/403b ($18,000) (and your spouse too if they have enough income to do the same). That’s almost certainly more than you could put away as a resident unless you live at home with your parents or have a really high earning spouse with a lifestyle/income mismatch (in which case, good for you). In this rare situation, possibly if you’re a prodigious but very thrifty moonlighter, your next options are a 457b account (another retirement vehicle commonly offered at academic institutions with another $18k per year limit) or a solo/individual 401k (as mentioned above), which is an individual account you can start as the sole proprietor of your one-(wo)man 1099-earning business.1 While the $18k personal limit is summed across all accounts, your “business” can put up to 20% of its profits to your 401k on your behalf (25% if you structure your business as a corporation).

So, for example, if you had maxed out your $18k contribution to your hospital 403b and then you made another $10k moonlighting as a sole proprietor, you could put another $2000 into the individual 401k. Note: the calculation of acceptable contributions for a solo 401k is a bit more complicated than multiplying by 0.2, but online calculators exist and TurboTax can also do this for you. Jim over at WCI has a great discussion of the rules for having multiple 401(k)s.

There are a bunch of options for opening up a Solo 401k account, including companies that allow for both Roth and traditional pre-tax options, so you can choose how much tax you feel like paying now versus later (general rule being that as a young person with relatively low income, you want to pay the tax now). If you have kids, and everything else is maxed, you could start a 529 account for their college. But if I met a resident who made enough money to do all that, their talents are probably wasted in medicine.

What about my mortgage?

If you own a house or condo and thus have a mortgage, paying it down faster makes much less sense financially than contributing to tax-advantaged retirement accounts given current interest rates, with the main practical exceptions that, psychologically, having no mortgage makes people happy, and you can also get the money back out by selling the house or refinancing. Still, it’s not exactly the most liquid solution to having cash on hand. This can be helpful if you have extra money now but think you’ll need to tap into it in the nearish future (compared to most retirement savings). Even so, this is generally a better option once retirement accounts are maxed and thus generally a problem reserved for attendings.

Closing thoughts

Ultimately, even as a resident, you’re already starting the retirement game late compared to those that entered the job market directly without a 4-year graduate degree. The more years your money is sitting in an account, the more years it has a chance to accumulate. But even more then that, even putting away small amounts of money (that which is unlikely to make a significant difference in your overall savings) starts the behavior pattern early and keeps you honest so that you can “pay yourself first” later when you begin to make money that is more tempting to spend/lose to lifestyle inflation.

Do yourself a favor and at least contribute to the company match. Make contributing to your retirement something automatic: a payroll deduction you never really see, so that you’re doing right by yourself from the start of your career.


Billy 05.01.20 Reply

Hey Ben, quick question about retirement accounts. I’m going to try to stay in academia and do PSLF. As a resident, how can I calculate whether I should be utilizing traditional or Roth accounts (400K loans, guessing 300-350K salary as new attending)? Does it matter if I live in a state with income tax vs one without? Asking for me and my partner.

Ben 05.01.20 Reply

You will always get a 10% “match” in the form of lower IDR payments the following year when using pretax and thus a greater PSLF benefit. As to whether or not that is the absolute optimal choice, that, unfortunately, requires some big assumptions based on what your current marginal tax rate (federal AND state) and what you expect your tax rate to be in retirement (federal + state).

It’s easy to be quite wrong here, which is why people tend to say if you’re a high earner to use pretax (because you’ll probably want to retire on less money than you earn in your peak years) whereas if you are a low-earner Roth because you’ll want to retire on more. But moving to a different state or simply changes to the tax code over the next several decades can throw a wrench in all that.

Honestly either way is fine, and it’s quite possible it’ll be a wash in the end. Roth is clearly the most future proof in the sense that you are protected if US tax rates rise in the future. I will admit that I personally like the idea of using pretax while doing PSLF and getting some bonus money up front.

There is also some recent discussion in the comments of this post as well:

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