Hey everyone, it’s Finance Fridays and this is going to be one of those “right now” posts. I received a comment on my post about Roth 401k/403b in Residency. I was going to write a relatively long comment, but instead I’ve decided to turn it into a complete post: Roth 401k/403b in Residency Case Report.

Stock Photo from: Pixabay

Here’s the comment: (from Queue)

My wife and I are making retirement a priority. We’re just about to finish up her internship year and we’ve got about 7.5k in Roth accounts between the two of us. I’m our stay at home parent (7mo old daughter) while she goes about her resident business, so we have only the one income, but are still able to save 11k/yr to fund both our Roth IRAs. We do have a little higher income right now due to being in the military, so that helps us save more than normal. I’d like to run our numbers as you did to see where we might come out.

She will work for 4 years for the Air Force, then finish her residency afterward. I anticipate 3 or 4 years of residency (still not 100% sure what specialty)

So: 4 years of saving 23.5k/yr (5.5k for my spousal Roth IRA + the full 18k for Roth 401k (due to increase in pay as a flight doc) = 94k
Add to that what we have already saved: 7.5k + 94k = 101.5k
3 years of residency (back to resident pay so just 11k/yr): 33k or 4 year residency: 44k
Total saved: 3yrs residency: 101.5k + 33K = 134.5 4yrs residency: 145.5k

We will be ~ 35 by the time my wife is an attending. So I’ll assume 25 years of compounding to hit age 60.

Compounding total for 3 yrs residency @ 6%: ~600k
Compounding total for 4 yrs residency @ 6%: ~650k

Not too shabby. My favorite part of the exercise is that this amount does not include me going back to work once the little one goes to school, or our savings once we hit attending land, which, if things go according to plan will dwarf our contributions we can currently make. Could we be in a better spot than we are now? Sure. I worked for a couple of years while my wife was in med school and only saved a couple thousand dollars. But I’m sure as heck glad we discovered the concept of financial independence now, rather than 10 years post residency. The best time to start is always now! Thanks for the great post Sensei!

Commentary:

Hey dude!

That’s great! Around ~600k in post tax dollars to use in retirement will be nice.

However, the best benefit will be that you’ve already shown you’re able to save this early in your lives. Having a plan to save during residency is great. Demonstrating the desire to save while still in residency will serve you guys well. Additionally, since your wife is Air Force, I assume she doesn’t have any student loans. This will help significantly to enable a high savings rate as she hits attendinghood.

Let’s look a little bit deeper:

From my understanding, she is doing her internship, so I assume it’s a prelim medicine or prelim surgery year,  and is near the end. So, starting in July, she has to pay back her time to the Air Force and will be a flight doc for 4 years. Then, depending on residency choice, another 3 or 4 years or residency.

Flight Doc

Planning to save $23.5k/year during her time as a flight doc is a good one. I’m glad you’re making use of the Spousal IRA. I honestly think that this limit should be higher for the stay-at-home parent, but unfortunately, it is what it is.

Your current calculation includes a full $18k for the Roth 401k. However, I would check into whether there is some sort of match. I believe most, if not all of the government agencies (military included) receive some kind of match. So the $18k you’re putting toward the Roth 401k may be end up being significantly more than that. 

It’s also probably good to know that her first half a year as a flight doc (July to January) may be difficult (or impossible even) to maximize her Roth 401k. So just do what you can until January, with plans to maximize the first full tax year of 2018.

Residency

During her residency, I would continue doing your Spousal IRA. However, you may want to try to put whatever you can toward the Roth 401k/403b at your wife’s residency program. Whether that is $5.5k or more. My reasoning for this is:

• Her residency may have some degree of employer match. (free money)
• In the the event that she does a specialty that allows some internal moonlighting, you may even be able to increase the amount you save toward a Roth 401k/403b above the $5.5k limit that a normal IRA provides. In the “dream” scenario where she was somehow able to contribute $18k to her Roth 401k/403b and still have money saved, she could put any excess to a Roth IRA or Backdoor Roth IRA if necessary. This is unlikely, but hey, you never know.

First Year Attending

I cover this in my post “The Biggest Mistake of Your Life“. However, for the first half year as an attending, make sure you maximize your 401k/403b limits to $18k. For example, if during the first half year as her last year as a resident, she put away $3k, then make sure at the new job she puts away an additional $15k.

I haven’t really covered this, but should the first half year as an attending be a Roth 401k/403b or a regular 401k/403b? This is kind of difficult, because you have to make assumptions on how much money you would want in retire distributions.

However, I think that if you can swing it, trying to maximize the first half year as an attending using a Roth 401k/403b would be optimal.

For example:

Let’s say you made $50k as a resident and $200k as a first year attending. So for the first half year you made $25k and the second half year you made $100k. So for that tax year, your income is ~$125k. If you believe your retirement distributions will be more than that (and they probably will be, considering 30 years inflation), then doing the Roth 401k/403b is better, if you can swing it.

However, with moving costs and a whole host of other things, maximizing a 401k/403b in a half year is already difficult by itself. Your wife not having any student loans to pay back will help out here though. So, if you guys really wanted to be as efficient as possible, opting for the Roth 401k/403b during the first half year as an attending is the most optimal.

What If (Employer Match)

If your wife does get a match during her time as a flight doc (and I think she does), then your estimate might end up being a little low. I’m just using round numbers, but if she receives ~ $10k match during her time as a flight surgeon, then the $93k figure above becomes $134k ($18k+$10k match+$5.5k x 4 years).

Then her time during residency is still an additional $33k or $44k, assuming $11k/year.

Add the $7.5k you already have and:

The new estimate is $174.5k for 3 years and $185.5k for 4 years.

Compounded x 25 years @ 6% = $749k and $796k respectively

Always take advantage of an employer match (for Residency too).

Thanks for your comment Queue!

I think having real world examples allows people to understand just how powerful saving early is.

TL;DR

Just some commentary on an already great plan from Queue.

-Sensei

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

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