Q. I know I should get started investing, but I just haven’t gotten around to it. What is the easiest way for me to get started?
A. You might think that every emergency physician in the land is attuned to the importance of proper financial management in reducing burnout, facilitating career options, and providing for a dignified retirement. Unfortunately, you would be wrong. I recently had the opportunity to speak to a large group of physician leaders of a well-known national contract management group. In preparation for the talk, data from the company revealed that one-third of the physician employees had never contributed a dime to the company 401(k), despite the company offering a generous match for doing so. The average balance in the 401(k) was a very low six-figure amount, enough to provide a monthly income of just over $500. To describe these savings habits as “inadequate” would be a gross understatement.
Surveys of physicians in their sixties show that 25 percent have a net worth of less than $1 million and 12 percent have a net worth of less than $500,000. Net worth, the most important number to track in personal finance, includes all of their assets (checking and savings accounts, home equity, investments, retirement accounts, and “stuff”). Presumably, most of these doctors enjoyed 20 to 30 years of physician-level paychecks, but they have little left to show for it. While divorces, illnesses, and disabilities affected some, the vast majority of these doctors simply made poor choices—they spent too much, saved too little, invested in an unreasonable way, refused to learn basic financial principles, and did not insure against financial catastrophes.
The most important aspect of achieving a dignified retirement is to save some money—and more than you might think. A good rule of thumb is to save 20 percent of your gross income for retirement. I often tell medical students, “If you cannot live, and live well, on 80 percent of a physician income, you have a spending problem, not an earning problem.” They all laugh because it is so obviously true. When I use that line with midcareer doctors, they don’t think it is funny at all. It is amazing how good we are at growing into our income, no matter what our income may be.
Get Started with a 401(k)
The easiest way to get started saving for retirement is to use the 401(k) or similar retirement plan provided by your employer. In our “401(k) world,” you have a second job as your own pension fund manager, whether you are prepared to do so or not. Ask your employer for the “summary plan description”—they are required by law to provide it if you ask for it. Read it and then figure out how to log in to your online account. Learn what your money is invested in (or what it can be invested in) and how to change your contribution rate and investments.
Many employers provide a “match” to plan participants. That is, if you put in some of your money, the employer will put in some money, too. If you do not contribute enough to get the full match, you are essentially leaving part of your salary on the table. Don’t be satisfied with merely obtaining the entire match amount. Figure out a way to contribute the maximum amount possible to the 401(k). In 2020, an employee can contribute up to $19,500 ($26,000 if you’re older than 50) to a 401(k), and when combined with the employer match, the total annual contribution can be as high as $57,000 ($63,500 if older than 50). Since the average emergency physician income these days is in the upper $300,000 range, and 20 percent of that is about $75,000 per year, maxing out your 401(k) should represent the bare minimum in retirement saving. Yet a third of doctors are not contributing at all.
Inside the 401(k), you can invest your money in a variety of mutual funds, where your money is pooled with that of other investors and managed by a professional. As employers have realized they have a fiduciary duty to their employees, they are generally providing at least a few of the low-cost, broadly diversified index funds you should be using for the bulk of your investments. In some 401(k)s, you will be able to use a simple “life cycle” or “target retirement” fund, where all you have to do is pick the fund with the date closest to when you think you will retire. It may be called “Target Retirement 2035 Fund” or similar. These “fund of funds” are the one-stop shop of investments and will provide you a diversified mix of investments that rebalances automatically and gradually becomes less aggressive as you approach retirement.
Financial Benefits of Maximizing Savings
Aside from providing a place for you to invest for retirement, 401(k) plans, like their cousin the 403(b), provide significant tax, estate planning, and asset protection benefits. Money you contribute to a 401(k) is not taxed in that year. If your marginal tax rate (the rate at which the next dollar you earn is taxed) is 35 percent, contributing $10,000 to the 401(k) will reduce your tax bill by $3,500. The money inside that account will then grow in a tax-protected way, without the growth-retarding “tax drag” normally applied to investments as they distribute dividends and capital gains each year. While you will have to pay taxes on the money when you distribute it from the account in a few decades, most physicians will be able to pull out the money at a far lower tax rate than they saved when they put it in. Without much other taxable income in retirement, many doctors end up paying rates of 0 to 12 percent on a large percentage of their withdrawals. Saving at 35 percent and paying at 12 percent is a winning strategy.
Your 401(k) will also allow you to designate beneficiaries, so that money will pass directly and rapidly to your heirs without going through the expensive and public process of probate. 401(k)s and similar retirement plans also receive exceptional asset protection in every state. In the unlikely event of an above-policy-limits judgment forcing you to declare bankruptcy, you would be able to keep everything in your 401(k).
Your 401(k) is one of your most important benefits of employment and is a great place to start investing for retirement. Take advantage and get started today. If you are already using your 401(k), discover what you are invested in and make plans to maximize this benefit.