By Jeffrey J. Brown, MD, MBA, CFA®, CFP®
After the uniquely stressful and challenging year you’ve just experienced as a healthcare professional, a peaceful and relaxing retirement has likely never sounded better. But how confident are you that you will be able to retire comfortably? In the 2018 Retirement Confidence Survey conducted by the Employee Benefit Research Institute, only 17% of people said that they were very confident they would be able to live comfortably in retirement, which means about 83% of Americans have concerns about their ability to afford a dignified and comfortable retirement. (1) Unfortunately, many doctors find themselves in that 83%. According to a 2014 Fidelity Investments report, physicians are on track to replace only 56% of their income in retirement, far below the 71% that Fidelity recommends. (2)
Despite their relatively high incomes, physicians can face daunting challenges when it comes to saving for retirement. While other professionals enter the workforce in their early to mid-20s and begin saving for retirement, physicians typically finish their training in their late 20s or early 30s, which limits their ability to harness the power of compound interest and truncates their window of opportunity for retirement saving.
Furthermore, many doctors are burdened with significant educational debt that can take years to pay off. Because of their higher incomes, physicians are not eligible for some tax-advantaged savings programs and tax benefits. They may also receive lower Social Security benefits in retirement if they have not worked for at least 35 years. Despite these disadvantages, it is never too late to bulk up your savings and catch up for retirement in a hurry. Let’s take a look at 5 steps you can take today.
1. Maximize Tax-Advantaged Accounts
Many employers offer a 401(k) or 403(b) plan, which allows employees to save up to $19,500 per year pre-tax ($26,000 for those over age 50). According to the Fidelity Investments report, 60% of physicians younger than 50 years old and 30% of those over age 50 do not save up to these limits. For a physician in a 32% or higher tax bracket, being able to save for retirement with pre-tax dollars is a great advantage. Furthermore, many 401(k) and 403(b) plans offer matching employer contributions, making it essential to participate at least to the level of maximizing the employer match.
2. Open an IRA
Another tax-advantaged retirement savings vehicle that anyone with an income or an income-earning spouse can use is an individual retirement account (IRA). If maximizing your 401(k) or 403(b) contributions is not enough to ensure a comfortable retirement, opening an IRA allows you to save an additional $6,000 annually ($7,000 for those over 50). In addition, your spouse can do the same even if he or she is not working. One caveat is that if you or your spouse has access to a retirement plan at work, your ability to deduct IRA contributions on your tax return is limited by your adjusted gross income and most physicians earn too much to qualify.
3. Convert Your IRA
In a traditional IRA, contributions can be tax deductible, but usually not for high-earning physicians. With a Roth IRA, there are no tax deductions, but the account grows tax-free and the withdrawals are tax-free once the account holder reaches age 59½. Also, there are no required minimum distributions at age 72 for Roth IRAs. Most physicians are ineligible for direct Roth IRA contributions due to adjusted gross income limits; however, a backdoor Roth conversion can be used to move money from a traditional IRA to a Roth IRA regardless of income level.
The first step in a backdoor Roth conversion is contributing to your traditional IRA. That contribution can then be converted to a Roth IRA. If you are converting pre-tax dollars, you will owe income tax on the amount of the conversion. If you are converting after-tax dollars, the assets can be converted tax-free. If you have pre-existing IRA assets, you are required to factor in those assets in determining the percentage of your conversion that is taxable (referred to as the pro rata rule).
4. Invest for Growth
Your goal retirement date doesn’t have to dictate your investing time horizon. For example, if you plan to retire in 10 years, you’ll only need a small portion of your nest egg in the early years while the remaining balance can stay invested. This longer time horizon may allow you to invest more aggressively with a higher expected long-term return. However, it is important to keep in mind that a more aggressive asset allocation may also result in greater portfolio volatility.
5. Maximize Your Health Savings Account Contributions
Another tax-advantaged way to save for retirement is to maximize your health savings account (HSA). HSAs are offered in conjunction with high-deductible health plans and are a way to save pre-tax dollars for qualified future medical expenses. The great thing about HSAs is that they are triple tax-advantaged. In addition to investing with pre-tax dollars, the assets grow tax-free and are tax-free upon withdrawal as long as they are used for qualified expenses.
We Can Help
As a physician, you are in a great position to make the most of your income to obtain an ideal retirement. But with so much on your plate, we understand that navigating this journey alone can be overwhelming. If you would like to partner with us, our Shearwater Capital team is here to discuss the retirement and investment options specific to your situation. To get started, please schedule an introductory phone call online or contact us at (314) 434-4750 or contact@shearwatercapital.com.
About Jeff
Jeffrey Brown is principal and chief investment officer at Shearwater Capital, LLC, a fee-only fiduciary financial advisory firm helping physicians and their families attain financial security using a scientific, evidence-based approach. Jeff has been a practicing radiologist for over 30 years and is currently chair of the Department of Radiology at Saint Louis University School of Medicine. He earned his bachelor’s degree from the University of California, Irvine and his medical degree from the University of California, San Diego. He has been named one of St. Louis’s Top Doctors every year since 2011 in St. Louis Magazine. Jeff saw a need for physician-tailored financial services and earned an MBA from Washington University in St. Louis, going on to found Shearwater Capital, LLC with fellow MBA classmate and radiologist, Eric Malden. Jeff is a Chartered Financial Analyst (CFA®) and CERTIFIED FINANCIAL PLANNER® (CFP®) practitioner. Learn more about Jeff by connecting with him on LinkedIn.
_____________