Hi guys, it’s Finance Fridays. I apologize for the late post, but this will be a short post. It’s just a follow up to a prior post, a Roth 401/403b in Residency How To.
Stock Photo from: Pixabay
So that Match has come and gone and you will start receiving these packets from your residency programs. Most of this paperwork isn’t too difficult and just relates to identifying information and other things that should be in “The File”. However, I realized that for some of you, you may not have read through all of my prior Finance Fridays Posts. While I do recommend that you go through the Finance Fridays Roadmap at some point, I also realize that you need to be efficient with your time.
For this reason, if you have decided to contribute to your Roth 401k/403b in Residency, then that’s great and I want to make it as easy as possible for you.
What do I need to know?
First of all, as a resident, make sure you choose the Roth version of the 401k or 403b. Don’t be like me and choose the non-Roth version in residency. The tax implications are pretty significant as I’ve talked about before.
For these years as a resident/fellow, you will probably be in the lowest tax bracket of your life, unless you worked prior to medical school. Pre-paying the taxes during these years is very important.
How much should I contribute?
As much as you think you will be comfortable with.
This depends on many factors, the most important of which are cost-of-living, amount of student loans, and (relative) salary. Unless you live in a very high cost of living area (San Francisco, New York, etc) with a lot of student loans, then I think you can put at least $100 toward your 401k/403b. Honestly, even if you think it’ll be too hard I would still try my best to at least put away $100 into your Roth 401k/403b per paycheck. In the event that you just can’t get by, then you can always go back and change it to zero.
However, I think it is more difficult to go into internship putting $0 toward your Roth 401k/403b and then finding your way back to Human Resources to fill out the sheet to make it $100. It took me 3 years in residency, even though I could have done it without much problem even during my first year. I think this has to do with priorities. In residency you’re just trying to get through every day and learn as much as you can. You can’t dedicate any of your mental capacity to “dealing with this stuff”. Don’t make my mistake. Try to put away the $100 or $200 a paycheck to start with it.
For those of you who have a lower cost of living, less student loans, and a (relatively) high salary, you can put away more. $200 per paycheck will be manageable for some, and even up to $500 may be a possibility for those who have a roommate. For those of you who have “free rent”, try your best to maximize your Roth 401k/403b ($18000/#paychecks). This is ~$693 a paycheck if you are in a full 26 week year. It is doubtful you could maximize your Roth 401k/403b in your first half year as intern, but you can definitely try!
Where should I put it?
Well, this goes back to my Finance Friday posts of Portfolio Types and Approximating a Portfolio. However, if you want to “just get it done”, then I’ll try to make it easier.
You have two options:
1. Throw it all into a Target Retirement Fund.
For example, Vanguard Retirement Fund 2060 (VTTSX). This fund is a “set it and forget it” fund which assumes your retirement date will be 2060 and essentially auto rebalances for you.
2. Choose an allocation of stocks/bonds.
For example, if you want to be aggressive, 80/20 is reasonable for a late 20s/early 30s intern. 70/30 would be more conservative for the same age range. However, if you want to, you can be “ultra-aggressive” and just put 100% into stocks and rebalance later.
Wait… which stocks and which bonds?
Unfortunately, I can’t tell you specifically because all institutions are different.
When looking at funds, try to find one that best emulates:
Vanguard Total Stock Market Index Fund (VTSMX)
United States, Large Blend, 0.16% Expense Ratio, 3578 stocks
Vanguard Total International Stock Index Fund (VGTSX)
International, Foreign Large Blend, 0.18%, 6060 stocks
You then divide whatever you want between these two.
- For example, if you decide on 80/20 split, then put 40% in VTSMX and 40% in VGTSX.
- Or if you want a slight US tilt, then put 50% in VTSMX and 30% in VGTSX.
When looking at bonds, try to find one that best emulates:
Vanguard Total Bond Market Fund (VBMFX)
Intermediate Term Bond, 0.16% Expense Ratio, 8800 bonds
For example, if you decide on 80/20 split, then put 20% in VBMFX.
Ugh… my program doesn’t seem to offer anything close to what you describe.
It probably has something similar, but it’s kind of lost in between all these different types of funds.
If you can’t come up with something you like, refer to my Approximating a Portfolio post.
Or, if you want, you can send me an email with the list of funds available to you and I try to do a post on it.
The most important part of saving, whether it’s Roth 401k/403b, etc. isn’t the asset allocation or the portfolio types. The single most important thing is saving as much as possible as early as possible.
Maxing out all the avenues available to you for saving for retirement as early as possible is essential. Don’t be Dr. Yoloswag, always remember that compound interest never sleeps.
Try to put away at least $100/paycheck into a Roth 401k/403b in Residency… and more if you can swing it.
Either use a Target Fund or choose your stock/bond split.
80/20 or 70/30 are reasonable. You can go 100% stocks if you want to be ultra-aggressive and rebalance later.
Use VTSMX and VGTSX as the “standards” by which to judge stock funds.
Use VBMFX as the standard by which to judge bond funds.
Remember that allocation type isn’t nearly as important as saving as much as possible, as early as possible.
Don’t be Dr. Yoloswag, always remember that compound interest never sleeps.
I’ll look at the funds of the 403bs in residency available to my wife and I and try to create templates for them next week.
For those interested, you can send me an email with the list of funds available to you and I try to do a post on it.
Agree? Disagree? Questions, Comments and Suggestions are welcome.
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Can’t agree more. It’s about getting into a good habit of investing regularly in a tax advantaged account. Agree with the choice of a target retirement fund for those who are financially less inclined. I actually park 100% in the S&P 500 fund. I trust in the long term record of the American economy.
If I had it to do over, knowing what I know now… I’d probably be aggressive as well and just go 100% stocks into S&P500 (or equivalent). However, I would still probably rebalance it to an 80/20 as an early stage attending.
Thanks for your comment Future Proof!
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