Physician Retirement Planning: Your Options When You Owe Student Loans

No one wants to be an old, broke doctor. Yes, you might make a good salary in medicine now but you need financial planning and a savings plan. Physician retirement planning is exactly how you can avoid going broke as you age. The American Medical Association reports that 27% of physicians retire after the age of 71 and are less satisfied when they do so. If you want to be able to put away the stethoscope sooner, you can take steps toward your doctor retirement plan now.

It’s no secret that doctors take on large sums of student loan debt for years of medical school. Focusing on this debt instead of savings is one of the reasons physicians aren’t prepared for retirement. It’s time to change that and balance the student loan debt with retirement planning.

The way you approach physician retirement planning can vary based on where you’re employed and what plans are available to you. Below are the basics of retirement planning and how to invest in your future, even when you’re paying off student loan debt.

Physician retirement planning basics

Investing in your retirement is financially responsible. Not every responsibility is fun — but this kind is one of the most rewarding.

When you’re planning for retirement, it’s important to cover some of the basics. Keep the following in mind as you approach your physician retirement plan:

• Your investment timeline: The length of time you’re putting money away for retirement is important. The earlier you save money, the more potential your investments have to grow and recover from the ups and downs of the market.
• How long you’ll be in retirement: Equally important is the number of years you’ll need to rely on your retirement savings. Your retirement years should be roughly estimated to make sure you can sustain your lifestyle with your retirement planning funds.
• Compound interest: Understand the power of compounding interest. Compound interest is when your money earns money. Interest that compounds is added to your principal balance. This new amount then earns interest and so on. Over time, you can see your money start to grow substantially.

Putting together the amount of time you’re investing and compounding interest is how to map out your retirement goals — ideally, before the age of 71. Of course, where you put your money for retirement is also essential.

Related: What Physicians Should Do With Retirement Accounts From an Old Employer

Retirement investment risks

When you invest your money in retirement accounts, you’ll likely be investing in stocks and bonds. A combination of these are pooled together in one bag called a fund. Examples include mutual funds or index funds. You need to have some level of risk tolerance when you’re investing in stocks and bonds within these funds, as your money goes up and down with the supply and demand of the market.

Stocks are riskier than bonds because they reflect the volatility of the current stock market. Bonds are much more consistent because you’re buying a fixed-income investment where the interest rate is steady. The riskier you are in your investments early on, the higher your earning potential.

Again, this is when time factors in. The length of time you have to invest determines how risky you can be with your investment options while saving for retirement.

A diverse portfolio of investments is always recommended. Look into the funds that your retirement account offers and determine your own risk tolerance.

Retirement accounts

Retirement accounts house the funds that you choose to invest in. There are many retirement savings vehicles with different contribution limits. Some may be offered through your employer to employees, like a 401(k), and some you can open up on your own, like an Individual Retirement Account (IRA). You can also see if your employer offers any pension plans as well.

You can make pretax contributions to both 401(k)s and traditional IRAs. This means the money comes out of your paycheck before your earnings are taxed. You pay taxes later on when you take the money out for retirement.

A Roth IRA is another type of retirement account. You’ll pay taxes upfront for this account — not when you withdraw. So your withdrawals are tax-free. You can choose to open up a traditional or Roth IRA anytime.

At some point, all physicians are going to need to open up more than one investment account if they want to retire before age 65. We recommend Betterment for physicians. It helps manage your investments for you, taking one more thing off your already busy calendar. You can use its IRA calculator to determine which account might better suit you.

When choosing retirement accounts, research if your employer offers a match. Some employers will contribute a certain amount to your retirement account based on your own contributions as part of your benefit plan; this is called a match.

Also investigate what funds are available for you to invest in. As a physician, you often have more than one option for retirement accounts, so take advantage of as many retirement accounts as you can. You can also check with the IRS to learn more about tax-deductible contributions and the maximum amount you can contribute.

Your exclusive physician retirement savings

Physicians may have access to a 403(b) and 457 retirement accounts. These are typically in addition to other retirement accounts. They can be a great way to increase your investments and get on track for retirement.

A 403(b) plan is similar to a 401(k) in structure, and occasionally, employers will offer a match. It’s a retirement plan specific for public schools or tax-exempt organizations. You can invest in annuities or mutual funds, and you won’t pay taxes until you withdraw the money. In 2021, you can contribute up to $19,500 annually. If you have an employer match, the total contributions from both of you are limited to $58,000.

Another type of retirement account offered by state, local government and some nonprofit employers is a 457 plan, sometimes called a Deferred Compensation Plan. Your contributions are made pretax. The money will compound until you withdraw it, which is when you’ll pay taxes. A 457 retirement account is especially beneficial because you can withdraw from the account early without any penalties. In 2021, you can contribute up to $19,500 per year.

You can max out these accounts by contributing the full amount each year to build your investments, but there are some disadvantages to them. For example, 403(b) accounts can be laced with fees and have an early withdrawal penalty. You should always look into the details of the accounts before you invest or speak to a financial advisor.

Physician retirement planning changes with student loans

Physicians often have large sums of student loan debt. According to a Student Loan Planner® investing survey, only 10% of student loan borrowers have a savings rate above 20%. This is probably because they’re focused on student loan debt payoff, not investing. But the fact is, you need to concentrate on both.

The retirement steps you should take depends on your student loan debt payoff approach.

Physician retirement planning: paying off student loans

If you work at a for-profit hospital or you have private medical student loans, you may have decided to go with aggressive student loan debt payoff.

Travis Hornsby, the founder of Student Loan Planner®, recommends investing in retirement before paying off student loans. If it takes you 10 years to pay off your student loans and you're not investing, that’s a huge chunk of time where your money wasn’t growing. Playing catch-up when saving for retirement is much harder than paying down student loan debt.

1. Build an emergency fund: You need about three months’ worth of expenses put away in savings before starting your retirement investing. Make the minimum student loan payments while you do this.
2. Increase your retirement savings: The goal is to max out one of your retirement accounts. This should be your 401(k), especially if your employer matches your contributions. If you max your retirement account, your adjusted gross income drops, reducing your tax liability.
3. Put all your extra money toward student loans: Get these paid off. From there, you can think about putting more into your optional 403(b), 457 or even a Roth IRA.

Physician retirement planning: working toward loan forgiveness

If you’re like many physicians and pursuing Public Service Loan Forgiveness (PSLF), then your retirement planning will look a little different:

1. Make sure you qualify for PSLF: File the proper PSLF paperwork and get on a income-driven repayment plan. If you’re looking into other student loan forgiveness options, then the same general steps apply.
2. Make the minimum monthly payment: If your student loans are going to be forgiven in full, there’s no reason to throw more money at them than you absolutely need to.
3. Create an emergency fund: You always want to cover yourself and your family in case disaster strikes.
4. Focus on putting at least 10% of your income toward retirement: Get the employer matches first. If you don’t have any, you can decide to break up the investments across your accounts.

Whatever you do, don’t throw money at a student loan balance that will be forgiven.

It’s time to start planning for retirement yesterday

According to a Fidelity investment study on physicians, 48% are saving less than 15% for retirement, with an average of 9%. That’s just not going to cut it for the future. The survey also noted that 48% of physicians aren’t maxing out contributions to workplace retirement accounts. With that number in mind, it makes sense that 71% of physicians aren’t contributing to a non-qualified plan like a 457.

Physician retirement planning can be accessible if you know the direction to go. The longer you can let your money grow, the sooner you can relax in retirement.