A Physician Investor Tells: Smartest Financial Steps for Young Doctors

Karen Riccio

Disclosures

March 27, 2019

A No-Brainer: Invest in Your Company 401(k)

The first thing to do when you finish residency is (if you choose employment) to max out your employer's 401(k). That's because most employers offer some percentage of match. For example, if you contribute 5% of your salary each paycheck, so might your company, up to an established amount. The maximum allowable contribution in 2019 is $19,000.

Let's say you're making $190,000 salary; you can invest 10% in your 401(k). Even if your company only matches up to 4% or 5%, the full $19,000 you contributed is tax-deferred. That means, you put money in pre-tax (which lowers your adjusted gross income and tax burden) and it grows tax-free. You pay taxes on it only when you take it out upon retirement age. A word of warning, though: don't withdraw or borrow from your retirement account early because you will be subject to penalties and fees and lose some of the power of compound interest.

According to Gary Gordon, CFP, and president of Pacific Park Financial, Ladera Ranch, California, the best strategy in a 401(k) is to invest in index funds because they will carry the lowest expenses. Most active funds cannot beat the index. There are many funds that are broadly diversified and hold 500 of the largest US companies across many different industries. Three popular such funds are: Vanguard 500 Index Fund (VFINX), Fidelity 500 Index Fund (FUSEX), and Schwab S&P 500 Index Fund (SWPPX). While not all 401(k) plans will offer these specific funds, most 401(k) plans offer an index option.

If you don't have a 401(k) plan at work, you can get the same tax benefits by saving for retirement in an individual retirement account (IRA). Although the contribution limits are lower, saving up to $5500 per year in a traditional IRA will qualify you for a tax deduction on the amount contributed and tax-deferred investment growth until you withdraw the money from the account.

In a Roth IRA, on the other hand, you put after-tax dollars into it (money you've already paid taxes on). The money also grows in the account without being taxed each year. And if you need the assets before retirement, you can also withdraw your contributions—but not the earnings—without incurring the early withdrawal penalty.

Short-term Savings Goals

Saving for short-term goals, which typically means needing the money in less than 1 to 2 years, requires two fundamental principles. First, you should put the money into a liquid investment that can be easily accessed, Turner said, although not be so easy to access that you're tempted to withdraw money too readily. Second, short-term savings should try to keep up with inflation, but must also be stable and, therefore, should not be placed into volatile investments like stocks or mutual funds, even though they often provide the highest returns and risk, he suggested.

"For short-term savings goals, I usually recommend a high-yield savings account (about 1-2% annual yield), short-term municipal or tax-exempt index bond funds in a taxable account, or a plain-old-vanilla savings account. If there is a firm time-line on a goal, a [certificate of deposit] may also be considered," he said.

Gordon agreed. "Yields are better than they've been in a decade...near 2.5%." However, he cautioned that in the next economic downturn they are likely to stay low for a prolonged period just as they did 2009-2016. "That's because many believe that the [US Federal Reserve] will eventually revert back to a zero percent rate policy."

Weighing Financial Advisor vs Robo-Advisors

Many young physicians wonder if they'd do better by having professional help with their investments.

Since most young doctors fall into the millennial generation, one might expect that robo-advisors would be a popular choice. These no-frills automated services develop investment plans for small- and mid-sized investors at a fraction of the cost of full-service management. There is little or no human interaction.

A person simply answers a few fill-in-the-blank or multiple-choice questions that convey risk tolerance, time horizon, and goals. Then a program analyzes the responses and creates a unique portfolio—many of which are designed for the long term.

Some young physicians have used these services, but others prefer to get advice that is more personally tailored for their situation.

According to Turner, physicians fall into three categories when it comes to getting or using professional investing advice. First, he says, there's the DIY (do-it-yourself) investment group; they want to learn and take control of their own destiny rather than trust a stranger. They read and study and keep up with what the stock market is doing and are already familiar with many basic concepts and investment tools.

Next is the "dot the i's and cross the t's" group that knows quite a bit about personal finance but wants a professional to look things over, he says.

Finally, the "outsource group" intends to outsource their financial decisions like they would lawn care, car maintenance, or dry cleaning. The second and third group could most benefit from a professional financial advisor, he says.

By devising a plan that caters to your short- and long-term goals—whether you do it alone or with the help of a professional—you'll be well on the way to achieving financial independence. It will give you peace of mind throughout each stage of your life and allow you to focus on your career.

Just don't procrastinate. Time really is money when it comes to saving and investing.

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