Residency and Retirement #illumedati 2


Hey everyone, it’s Finance Fridays, and medical students in the NRMP match will all be finding out where they will be spending their next few years in residency… So let’s talk about “Residency and Retirement“.

Stock Photo from: Pexels

Residency and Retirement?

Yea. I know, not usually something people think about in the same sentence.

However, the picture of the watch above is to highlight a point. Time is of the essence.

The best way I can describe this is that just by being a medical student, you are behind in regards to saving toward your retirement. Your friends that went to trade school or graduated with a college degree have already been working for 4+ years. Most likely they have been contributing to their 403b or 401k or whatever plan is available to them. If you wait until afte residency to “figure out all this retirement stuff” then you’ll be even more behind…. like me for example:

Do as I say, not as I do.

I’ve talked about the importance of trying to save money during residency a bunch before. If you haven’t read them, please take some time to read them now:

Roth 401k/403b in Residency


Ok, let’s move on now.

I received a comment from Dmarigs a few days ago which I will copy/paste here: (emphasis mine)

Original comment link here

Hello Dr. Nguyen,
I am a graduating Medical Student who recently matched into ortho and a dedicated follower of your site. Thanks for all the good work you do, it is a very informative and easy to learn collection of valuable information. I am beginning to brainstorm my portfolio for my time in residency and was wondering if you had any thoughts.

The TL;DR version: What funds do i pick between my Roth 401k from employer vs Roth IRA

Quick Bio

– 25 year old 4th year medical student with no undergraduate or medical school debt
– I plan to dedicate around $11-12k annually / $1k monthly on investing.
– Will definitely max out my Roth IRA which I will open at vanguard @ $5,500 annual / $458.33 monthly.
– My employer does not match for residents, but offers a 401k or 403b with a Roth option under fidelity.
– My presumptive plan is to open a Roth 401k which I am planning to contribute $6k annually / $500
– This is the link of limited funds available https://nb.fidelity.com/public/nb/mayo/planoptions/plandetails?planId=71234

Asset Allocation

– 85/15 (stocks and bonds) for my 5 years of training + 1 in fellowship, then plan to reassess goals and likely reallocate as an attending. I occasionally think if I should go 90/10 as I am relatively young and typically don’t think of myself as risk averse, however this is my first time investing.

I have narrowed down the options to what I think is reasonable from my readings but still have questions.

For my US equities do I simply go with the total stock market index fund vs S&P500 with the lowest ER?

– R401k (Fidelity) – Vanguard Institutional Index Fund Institutional Plus Shares (VIIIX) – ER 0.02%
vs
– R401k (Fidelity) – Vanguard Institutional Total Stock Market Index Fund Institutional Plus Shares (VITPX) – ER 0.02%
vs
– RIRA (Vanguard) – Vanguard Total Stock Market Index Fund
Investor Shares – 0.15%
Admiral Shares (VTSAX) – 0.04%

What about International stocks, once again lowest ER?

– R401k (Fidelity) – Fidelity International Index Fund – Institutional Premium Class (FSPSX) – ER 0.045%
vs
– RIRA (Vanguard) – Vanguard Total International Stock Index Fund Investor Shares (VGTSX) / Admiral (VTIAX) –
Investor Shares – 0.17%
Admiral Shares (VTSAX) – 0.11%

Finally Bonds?

– R401k (Fidelity) – Fidelity U.S. Bond Index Fund – Institutional Premium Class (FXNAX) – 0.025%
vs
– RIRA (Vanguard) – Vanguard Total Bond Market Index Fund Investor Shares (VBMFX) / Admiral (VBTLX)
Investor Shares – 0.15%
Admiral Shares (VTSAX) – 0.05%


Commentary

First of all, congrats on matching into ortho. I knew a few ortho guys in medical school and residency, and for them matching into ortho was the happiest day of their lives. Second of all, I want to congratulate you on wanting to take charge of your future retirement so early. I looked at your original comment before and like I said, I think your plan is sound. However, since you have individual questions, I will try my best to answer them here with my own commentary.

Debt

Having no debt is probably the single best thing for your financial future. I would imagine the majority of medical students at this stage in their careers have debt of $200k+. If your parents/family helped you with college/medical school, then you should do your best to thank them. They have given you a big head start. Call them and tell them thank you, or take them out for a nice dinner.

General Plan

I think your plan to save $1k monthly is a reasonable one. Of course this is different based on how much your residency pays you, cost of living, and other factors. However, $1k is a good round number to shoot for in general. You are correct in putting money into both the Roth IRA and Roth 401k.

Asset Allocation

Honestly, at this point in your life it doesn’t matter if you went 100/0, 90/10, or 85/15. You’re so young that it doesn’t really matter. Personally, I go with the age minus 10 in bonds, which is 80/20 for me at this stage in my life. For you, using that same metric, you’d be doing 85/15 — which looks like your current plan.

However, like I said, it doesn’t really matter. It’s all about your risk tolerance. I consider myself to be relatively conservative overall and will probably go to a 75/25 split in the near future. As for you, 100/0, 90/10, 85/15 doesn’t really matter much in the short term. You’ll rebalance when you become an attending anyways. If 100/0 makes you a little worried and 85/15 seems a little conservative to you, then 90/10 is probably fine for your risk tolerance.


Domestic Stocks

I would caution people to not just look at the lowest expense ratio (ER). Obviously, lower is better, but the whole point of using and index fund is try to get broad exposure.

For the 401k (Fidelity)

  • VIIIX is basically the S&P500, with ~ 511 stocks
  • VITPX is much larger spread, with ~ 3429 stocks

Either fund is fine overall, with ER of 0.02%… however, if you believe in The Philosophy, then you’d like more market exposure — and VITPX would be my pick.

For the Roth IRA

Bottom line: I’d go with VITPX for your 401k and VTSMX/VTSAX for your Roth IRA.


International Stocks

Unfortunately, your 401k plan doesn’t give you an option of the  Vanguard Total International Stock Index Fund… so you have two choices. You either don’t use International Stocks, or you use their alternative. There is no wrong answer here. Some people don’t like to put too much money into International Stocks… or just don’t put any money into it at all. However, I tend to like a little bit in International Stocks for the exposure since I like Taylor Larimore’s Three Fund Lazy Portfolio the best.

So let’s look at their alternative:

So Vanguard has more stocks, but a higher expense ratio — overall, neither is a bad option.

So, if you plan to utilize International Stocks then I would do exactly what you said.

Bottom Line: I’d use FSPSX for your 401k and VGTSX/VTIAX for your Roth IRA.


Bonds

It’s important to note that there is a Vanguard Bond Option in the list:

Vanguard Long-Term Bond Index Fund Institutional Plus Shares VBLIX — They only show it under “Expanded Investment Options”.

However, this is not a total bond index, this is only long term bonds, which is a more narrow exposure. (average maturity of 24.2 years)

Your choice of Fidelity® U.S. Bond Index Fund – Institutional Premium Class FXNAX is probably the better choice, since it’s intermediate term bonds. (average maturity of 8.1 years)

Bottom line: I’d go with with FXNAX for 401k and VBMFX/VBTLX for your Roth IRA.


Any other options?

Sure, there are always other options:

Blended Funds

In the Expanded Investment Options, you can consider going 100% with a very conservative blend, like Vanguard Wellington which is a 70/30 split. However, that is probably too conservative for you since you’re looking at 85/15 or 90/10 as a split.

Target Funds

For example, the Fidelity Freedom® Index 2060 Fund – Institutional Premium Class FFLEX. These are good options for people who don’t want to mess around with rebalancing. However, for people who have done their own research and understand The Philosophy, I think it’s better to just Approximate a Portfolio.

However, it’s interesting that both the 2050 and 2060 Retirement target funds utilize a 90/10 split.


The Verdict

Overall, you’re lucky because the options available to you are actually pretty good. Additionally, to me it looks like you’ve chosen the best options available to you. Your plan is great for starting internship this July, and then you can decide in December how you want to approach the 2019 tax year.

For example:

  • Was it too difficult to save that much every month?
  • Or… was it easy, and you can save some more?
  • Are you getting a raise come July 2019 as a PGY2? Will that let you save more?
  • Will there be some new expenses coming up in the future which may require you to dial back your savings?

Overall, you’re pretty set. Now you can just concentrate on being a good intern and being a good resident.

Now it’s time for you to pay it forward. Pass your knowledge on to the other residents in your program so they can learn from you. If they have trouble, you can direct them to this post.

My hope is that someday all graduating 4th year medical students and new interns will know how to save for retirement from the get-go.


TL;DR

Time is of the essence.

Roth 401k and Roth IRA in Residency. Save early. Save often.

You’re behind… but you can catch up if you’re smart about it.

My hope is that someday all graduating 4th year medical students and new interns will know how to save for retirement from the get-go.

Finance Fridays Sensei

-Sensei

Agree? Disagree? Questions, Comments and Suggestions are welcome.

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2 thoughts on “Residency and Retirement #illumedati

  • Dmarigs

    Sensei!!!
    Thanks again for looking at my situation and helping with my investment plan! I understand that at the beginning stages the main focus is saving money rather than the fine details of fund placement.

    My initial fund placement thoughts are as you commented:
    Roth 401k – VITPX, FSPSX, FXNAX
    Roth IRA – VTSMX/VTSAX, VGTSX/VTIAX, VBMFX/VBTLX

    As I continue to read another consideration I have ran into is treating your multiple retirement accounts as one portfolio. This would mean creating my ideal 90/10 3 fund portfolio across my Roth 401k and Roth IRA. If I was to consider that It would seem that I would distribute the funds as so at least for the 5 years of residency:
    Roth 401k – VITPX
    Roth IRA – VGTSX/VTIAX, VBMFX/VBTLX
    vs
    Roth 401k – VITPX, FXNAX
    Roth IRA – VGTSX/VTIAX

    A final consideration I am having is whether it makes a significant difference to use ETFs in my Vanguard funds until I get to 10k then switch to admiral funds. Or do I go with the higher ER investor shares until I achieve 10k for the admiral funds?

    What are your thoughts on this?

    • Sensei Post author

      Hey dude,

      How you look at your accounts as either one portfolio or each account as a separate one is up to you. I don’t get to crazy with my allocations, I just try my best to stick to what I think is reasonable for my age and risk tolerance. For me, whichever way leads to me looking at the accounts less is the best way to do it — since I tend to tinker.

      I would go with whichever has the lower expense ratios, since you can’t get admiral shares yet. ETF versus regular mutual funds has been debated a lot, but the reality is it doesn’t really matter for most people. For this reason, I would just go with whichever expense ratio is lower — assuming the funds are identical.

      I think for the most part you’re pretty much set. The most important part is saving early and prioritizing your retirement – which you’ve done. In general things like the funds you choose and your allocation matter significantly less in the grand scheme of things. For this reason, I would just go with whichever option you are comfortable with.

      Sensei