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!
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.
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.
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.
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.
Just some commentary on an already great plan from Queue.
Agree? Disagree? Questions, Comments and Suggestions are welcome.
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Thanks very much for the detailed commentary Sensei! I agree that real world examples provides for much more impactful learning, and it wouldn’t surprise me if there were lots of other military physician families out there with a similar-ish situation to ours that this could apply to.
To clear up the employer match question, military members do not receive any match for contributions to their Thrift Savings Plan accounts as of today. However, a new retirement system called the Blended Retirement System (BRS) is being implemented across all of the services and is effective on January 1st, 2018. Since my wife has been serving for a few years already, we are grandfathered in to the current retirement system, which will be called the Legacy retirement system. We have all of 2018 to decide if we want to switch or not. The relevant part to this discussion is that under the new BRS, military members will be eligible for up to a 5% match of your base salary. For us, that translates into roughly a $2900 average match for each of the 4 years that she will be serving as a flight doc. It’s certainly better than the $0 match we receive right now, and we will most likely switch over to the BRS to take advantage of it, as staying in the Legacy retirement system doesn’t pay any benefits until you hit year 20, and I’m not willing to bet the $11,600 of free money + compounding that we could make it the full two decades, even if we desired to.
As far as moonlighting goes, it will depend on if we separate from the Air Force after her 4 years are up. Those residents who are in a military residency or in a deferred civilian residency are strictly not allowed to moonlight. Being caught can result in you being dismissed from the program. Yikes! However, if we do separate, and my wife wants to try and stomach the extra hours, then our retirement accounts shall reap the rewards!
Overall, I have to whole-heartedly agree with your sentiment that a comfortable retirement is an inevitable by-product of making retirement a priority at this early stage in our lives. There are a billion and a half ways to save for retirement, and while some are certainly more optimal than others, the biggest factor in determining whether or not a comfortable retirement is within your grasp is to just save as much as you possibly can as early as you possibly can.
Thanks again for all the great commentary and advice given in your post!
Hopefully other military families will find this “plan” helpful.
Hmm, it’s too bad there is no match. From the sound of it, it sounds as if your wife needs to have a general idea about whether she wants to do the 20 years of service or not. Like you alluded to, if it’s a no, then changing over to the new BRS system is probably better. However, if she does plan to do the 20 years, then the Legacy system is better. I assume the Legacy system is some form of a pension that you are only eligible for if you commit yourself to the 20 years of service. It also kind of depends on when they start counting too. Air Force Academy? Medical school? Internship? Or does it only start counting once she starts as a flight doc. Depending on these variables, it may be worth it to “bet” on doing the 20 years.
I did not know that military residents could not moonlight. That certainly makes putting away extra money difficult.
Thanks for your comment! Let me know how things go.