By Nicholas Efthemis, CFP®, CRPS®
After decades of stressful work and saving lives, healthcare professionals deserve a relaxing and rewarding retirement. But how confident are you that you will be able to retire comfortably?
Physicians face a unique challenge compared to most people in other professions. While most professionals enter the workforce in their early to mid 20s, physicians don’t typically fully finish their training until late into their 20s or 30s. On top of that, many physicians are stuck paying enormous amounts of money in student loans. Because of student debt and almost an extra decade of education, it can be very difficult for physicians to catch up for retirement since they are not able to fully harness the power of compound interest.
Furthermore, many physicians are not eligible for some tax-advantaged savings programs and tax benefits because they have high incomes. They may also receive lower Social Security benefits in retirement if they have not worked for at least 35 years. Despite some disadvantages physicians have when preparing for retirement, it is never too late to catch up for retirement and bulk up your savings. Here are 5 steps you can take to catch up for retirement.
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). 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 discuss the retirement and investment options specific to your situation, schedule an appointment online, or reach out to me at (716) 828-8390 or email nick@emergentwa.com to schedule a no-obligation conversation.
About Nick
Nick Efthemis is wealth advisor and chief compliance officer at Emergent Wealth Advisors, a fiduciary financial advisory firm serving retirees and pre-retirees with customized financial planning solutions. Having worked in the financial industry since 1997, Nick has deep knowledge and experience in retirement, investment, and comprehensive planning strategies, coupled with an understanding of the hopes, needs, and goals his clients have for their future. He is dedicated to helping his clients find confidence in their financial situation through personalized advice and support that empowers them to make the best decisions for their lives.
Nick is a CERTIFIED FINANCIAL PLANNER™ and a Chartered Retirement Plans SpecialistSM professional. Outside of the office, Nick is an active member of his community, working with the SPCA and the Humane Society. In his free time, you can find him hiking or fishing with his family. If you want to learn more about Nick, connect with him on LinkedIn.