By Michael Donahoe, CFP®
After the uniquely stressful and challenging couple of years 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 2021 Retirement Confidence Survey conducted by the Employee Benefit Research Institute, only 29% of people said that they were very confident they would be able to live comfortably in retirement, which means about 71% of Americans have concerns about their ability to afford a dignified and comfortable retirement. (1)
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 $20,500 per year pre-tax ($27,000 for those over age 50). According to a Fidelity Investments report, many physicians do not save up to the limit. (2) Tax-advantaged accounts are one of the most effective ways to save for retirement, and many doctors are not taking advantage of the opportunity. For a doctor who finds themselves in the 32% or higher tax brackets, being able to save for retirement prior to paying their high tax rate puts them in an incredible position to build wealth for a comfortable retirement. One of the first things anyone looking to bolster their retirement savings should do is take advantage of every benefit offered by the IRS and maximize their tax-advantaged accounts.
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 Harvest Asset Group team is here to discuss the retirement and investment options specific to your situation. To get started, call us at (207) 775-1151 or email us at email@example.com.
Michael Donahoe is the founder and principal of Harvest Asset Group, LLC, an independent, fee-only financial planning and investment management advisory firm in Portland, Maine. Michael enjoyed a successful corporate career in marketing and sales before transitioning to the financial planning profession, founding his firm in 2012, where he now leads the client services team and serves as the firm’s chief compliance officer. Michael earned his MBA degree from George Washington University and completed his educational requirements to earn the CFP® mark of distinction at the University of California, Berkeley. He is a Fee-Only and NAPFA registered financial advisor, a designation which followed the completion of rigorous continuing education requirements. Michael has lived in the Portland area since relocating from San Francisco in 1995 to be closer to family. He is active in community affairs and spends his non-working time enjoying the natural beauty of Maine.