Fortunate MD with no debt out of residency, what is the best avenue to take?

[DrHyde]

So due some very good luck, which I won't get into here, we have been able to pay off 100% of my medical school debt during residency. I am now having a significant pay bump in salary after completing residency. I have found that most of the guides and discussion around physician investments revolve around managing debt repayment alongside other investments.

We are quite inexperienced in finances, so what would everyone suggest as an optimal, yet simple, investment strategy for someone in this situation? I have maxed out our Roth IRA contribution for the last two years of residency. Options include paying off mortgage on our house.

Thanks for the help!

 

[FIREshrink]

Welcome to the forums!

 

You haven't provided enough information to help you. At a minimum we should know your approximate household income, your approximate annual expenses, your mortgage/home info (value, size of loan, rate/length of loan), your family situation, your ages, and what your goals are. Also what retirement accounts you have available through work?

When I finished residency we also had negligible loans. We immediately maxed out two 403bs (one for me, one for her) and two IRAs (non-deductible, converted via backdoor Roth IRA later), and then saved as much as possible in taxable accounts. We "lived like a resident" for about 5-7 years.

[hightower]

You gave a somewhat vague picture of your finances, so the standard answer to a question such as yours is to do the following...

Contribute the maximum amount each year to any and all tax advantaged accounts you have access to (401k's, Backdoor Roth's, HSA, 529's if you have kids, etc).

In addition, contribute to a taxable brokerage account with any funds you still have left over.

How much to save?  A very general rule is at least 20%.  But, if I were in your shoes I'd contribute even more...Try living off only 1/2 of your take home pay and save the rest.  With no debt except the mortgage, it won't take you long to reach financial independence doing that.

 

If you're looking for advice on how to invest, I would recommend directing you towards the bogleheads wiki for a easy place to start reading or check out WCI's book.  You basically need to pick an asset allocation and plan on sticking with it for life.  Buy and hold your investments. Invest in low cost, highly diversified index funds such as the total stock market funds, etc.  Ignore what's going on in the stock market and just stick to your plan.

[DrHyde]

FIREshrink wrote:

Welcome to the forums!

 

You haven’t provided enough information to help you. At a minimum we should know your approximate household income, your approximate annual expenses, your mortgage/home info (value, size of loan, rate/length of loan), your family situation, your ages, and what your goals are. Also what retirement accounts you have available through work?

When I finished residency we also had negligible loans. We immediately maxed out two 403bs (one for me, one for her) and two IRAs (non-deductible, converted via backdoor Roth IRA later), and then saved as much as possible in taxable accounts. We “lived like a resident” for about 5-7 years.

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Thank you! Sorry for minimal info, again, relatively new to all this.

 

Combined salary (wife and myself) ~400K

Yearly expenses - minimal/standard (also continuing to live like a resident as long as possible)

Ages - in early 30's

Family - married healthy couple with plan for children in near future

House - don't have the info with me at the moment, but would estimate we've paid off about 1/3 of a 200K home.

Goals - a lot of people ask this but never quite sure how to answer it. To live comfortably in retirement, maybe in the late 50's?

[FIREshrink]

It sounds like you plan to have modest expenses for a while, which is good. Once kids come expenses tend to rise. We stopped living entirely like residents once our second kid arrived and the first one entered day care.

I think saving 40-50% of your gross is a great idea while you can do it. If you can save $200k, pay taxes with $120k, and live on $80k, you'd still be upgrading your lifestyle a little while saving one million dollars in the first five years. After that you can back off and pretty much coast on the foundation you'll have built.

It sounds like both you and your spouse work. If each of you have access to a 401k/403b at work, max them out. If you don't have any IRAs, do a backdoor Roth IRA for both of you. The rest you can save in a mix of taxable accounts and paying down/off your mortgage. Even though I'm not a big 'pay off the mortgage' kind of guy, I'd be tempted to in your case because it is relatively small. It simplifies your life. Five years from now you could have over $1 million in retirement savings and no mortgage. Great place to be in!

[djohnflatfeecfp]

Congrats on finishing up with no debt!  Now, any other goals besides living comfortably in retirement which may be 20+ years from now?  What about hobbies you've wanted to take up?  Or places you have always wanted to go?  You definitely have the financial ability to do that now and more flexibility time-wise because there are no kids right now, but will be in the near future.

[DrHyde]

FIREshrink wrote:

It sounds like you plan to have modest expenses for a while, which is good. Once kids come expenses tend to rise. We stopped living entirely like residents once our second kid arrived and the first one entered day care.

I think saving 40-50% of your gross is a great idea while you can do it. If you can save $200k, pay taxes with $120k, and live on $80k, you’d still be upgrading your lifestyle a little while saving one million dollars in the first five years. After that you can back off and pretty much coast on the foundation you’ll have built.

It sounds like both you and your spouse work. If each of you have access to a 401k/403b at work, max them out. If you don’t have any IRAs, do a backdoor Roth IRA for both of you. The rest you can save in a mix of taxable accounts and paying down/off your mortgage. Even though I’m not a big ‘pay off the mortgage’ kind of guy, I’d be tempted to in your case because it is relatively small. It simplifies your life. Five years from now you could have over $1 million in retirement savings and no mortgage. Great place to be in!

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Follow up questions, how would you prioritize contributing to those different components? Would you max out your 401b prior to going towards the backdoor roth? Would there be any reason to contribute to backdoor roth and then going back and maxing out a traditional roth? Also, just a general question: when you contribute to a 401b retirement plan through your work, do you have any control in where those funds are invested? Is it pretty standard, or institution based? Would that affect your decision in any way?

 

 

[FIREshrink]

In your tax bracket you want to defer as much tax as possible. That argues for maxing out 2 403bs or 401ks first. That would be $36,000 max employee contribution, plus whatever your employer provides. If you are self-employed please let us know or this entire conversation goes in a different direction.

 

Then you want to fill your IRA. Because your income is too high to deduct your IRA contributions or contribute to a Roth IRA, your only option is to make non-deductible contributions to a traditional IRA, then convert it to a Roth IRA (the so-called backdoor Roth). This is simple and works well if you have no other IRA holdings (you only mentioned a Roth IRA). This is limited to $5500 each per year, or $11,000.

 

That adds up to $47,000. If you are on a high deductible health plan and have access to an HSA, max that out at $6750 per family per year. The other $46,250 would be saved in a taxable investment account or used to pay down your mortgage.

[DrHyde]

FIREshrink wrote:

In your tax bracket you want to defer as much tax as possible. That argues for maxing out 2 403bs or 401ks first. That would be $36,000 max employee contribution, plus whatever your employer provides. If you are self-employed please let us know or this entire conversation goes in a different direction.

 

Then you want to fill your IRA. Because your income is too high to deduct your IRA contributions or contribute to a Roth IRA, your only option is to make non-deductible contributions to a traditional IRA, then convert it to a Roth IRA (the so-called backdoor Roth). This is simple and works well if you have no other IRA holdings (you only mentioned a Roth IRA). This is limited to $5500 each per year, or $11,000.

 

That adds up to $47,000. If you are on a high deductible health plan and have access to an HSA, max that out at $6750 per family per year. The other $46,250 would be saved in a taxable investment account or used to pay down your mortgage.

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Thank you, you have been extremely helpful. I am not self employed.

I've been told that it is better to invest into Roth IRAs first, because you will be taxed on a larger sum of money when the funds are withdrawn at a later date in the 401B vs. being taxed now with Roth IRAs. Is there any truth to this and am I understanding this correctly?

[PhysicianOnFIRE]

DrHyde wrote:

I’ve been told that it is better to invest into Roth IRAs first, because you will be taxed on a larger sum of money when the funds are withdrawn at a later date in the 401B vs. being taxed now with Roth IRAs. Is there any truth to this and am I understanding this correctly?

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Who told you that?

That may be true for a low wage earner working a 40+ year career.

But for you, with $400k in combined salary, you're currently near the highest tax brackets that exist. You'll max out your retirement accounts with a portion of your savings (preferably tax deferred investments!) and still have a lot leftover to invest in a taxable brokerage account (i.e. buying mutual funds / ETFs).

There's a very good chance your tax bracket wil be lower in retirement, particularly if you retire a decade or two before age 70.5 when you are forced to start depleting your IRA / 401(k).

I have a salary similar to yours, have been out of residency for 11+ years, have put as much as possible into retirement accounts every year, but most of my investments are in taxable. Continue to live on half or less of your takehome pay, invest the rest, and you just might pay no tax at all as a retiree.

The only Roth money you should be investing as an attending is the backdoor Roth -- that's $5,500 each annually for you and your spouse.

Cheers!

-PoF