What’s Next After Retirement Savings?

Quite often, financially intelligent young professionals get out of school, start in the professional world, and actually stick quite strongly to the “spend less than you earn” mantra. They fund their Roth IRAs and their 401(k)s, but they still find themselves spending much less than they’re bringing in. And they wonder what’s next.

“Fred” writes in with a question along these lines:

I’m in my mid 20′s and just got my first job, currently make ~$50k. In 3 years I will graduate from medical residency and be making 3-4x that. I’ve had a very fortunate upbringing- no student loans, no credit card debt, and about $100k invested in securities. My question is regarding IRA and 401k contributions. Once I’ve contributed up to my 401k’s match, and max out my Roth IRA what should I do next? The current wisdom is to max out my 401k contribution. I feel quite certain that my taxes (once I make ~$200k annually) will eventually be much higher because of our spiraling debt/ Obama tax plan. Would it still be wise to max out my 401k?

There are several pieces of the puzzle worth discussing here.

First, never, ever count your chickens before they hatch. The most common mistake that I see people making is their assumption that they will be earning more in the future. That may be the plan, but plans can change – they are often derailed by life, health, changing interests, opportunities both missed and otherwise, and so on. Do not make spending decisions now based on what you hope will happen in the future.

When I found myself in a very long-term stable job in 2004, I made the mistake of essentially betting that I would have that income in perpetuity – nothing would keep me from earning that money until retirement. Flash forward to 2009 and what do I see? An opportunity came along and I jumped on board. I’m earning less than I might have otherwise, but every morning I feel absolutely that I made the right choice.

So many things can happen over the next few years. You might become disenchanted with your current work. You might fall in love and have a child. You might fall into ill health. In each of these events, you likely will not be earning three times your current salary in a few years.

Instead, a much more prudent path is to build a firm foundation for whatever may come. As I noted above, many people are at least peripherally aware of this, investing money into retirement. But retirement investing is just the start.

Build a very healthy emergency fund. It’s always useful to have at least six months’ worth of living expenses available in a very liquid place, like a high-interest savings account. Don’t be afraid of the size of the goal – just start an automatic plan to scoop some portion of your paycheck right into that savings account. Hold onto it – use it for big emergencies, then replenish it afterwards.

Invest in yourself. Never be afraid to invest money in making yourself better. Lose weight – if you have difficulty doing it on your own and can afford it, hire a trainer to motivate you. Get your teeth straightened and cleaned. Work on your self-confidence and take opportunities to speak in public. Invest in clothes that are well-made and durable – ones that will last through whatever may come.

Invest in a taxable account. If you’ve got an emergency fund, no debts, and a well-padded emergency fund, start investing in a taxable account. How exactly you do this depends on your risk – my recommendation is to invest in index funds using a buy-and-hold strategy. Hold onto that money for now and wait for opportunities to come to you. That money may eventually become a home. It may become the basis for a business. It may become the backbone of a very early retirement. Whatever it is, having it in a taxable account means you can utilize it for whatever you need, whenever you need it.

What about investing more for retirement? If you’re already maxing out an IRA and picking up all of your employer’s matching in your 401(k), your bases are pretty well covered for retirement. Investing beyond that can be helpful over the long run, but if you’re doing it at the expense of an emergency fund, your own personal health, or other personal goals, you should spend some time asking yourself what your true goals are.

My argument is simply this: money invested in a taxable account is likely a good option in this situation. While you do have to pay capital gains tax on the dividends (as well as on the gains if you sell the investments), that money can be used for any purpose without penalty: retirement, a home, startup money for a business, a wedding, education for a new career, or anything else that might come your way. Your future is not set in stone – don’t set all of your savings and investments in stone, either.

Good luck!

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  1. M says:

    Horray! Been waiting for a posting about this for a way too long as we are in a similar situation: doing the right thing for a long time. What about tax-free investments like municipal bond funds?

  2. Adam says:

    It’s best to keep in mind that once they are making more, they will no longer be able to fund a Roth IRA due to income restrictions. However, as most of you know, tax-deferred growth is always better than investing in a taxable account (that will be taxed immediately when investments are sold).

    Still, with that kind of income I would not be worried about taxes. Income taxes are never going to be dollar for dollar so earning that extra dollar (via investments) will never be a bad thing.

  3. Matt Jabs says:

    As soon as I have all I need saved, I plan to give the rest away.

    I’m going to write about it this week on fivecentnickel.

  4. The taxable account suggestion sounds good to me. And Trent’s suggestion of index funds is a great idea. Due to low portfolio turnover, they’re far more tax efficient than your typical actively-managed fund.

  5. Matt SF says:

    Great advice as I ran into this in my later 20s as my monthly cash flow situation improved.

    The only thing I could add is if you chose to use a taxable account, it might be in your best interests to reinvest any paid dividends to avoid paying capital gains taxes.

  6. KC says:

    As the wife and financial leader in a medical family I can tell you this, those first years out of medical residency aren’t all wine and roses. I don’t know what your field is, but likely you’ll have some buy-in into whatever practice you go into. So you won’t get the full benefit of your salary. About 20-25% will go towards this. So if you think you’ll make $200k, you’ll probably make closer to $150-$160k. If you are married you’ll be borderline Roth eligible. If you are single you won’t be eligible, but you can contribute to a regular and convert to a Roth regardless of your income starting next year. So you may have a backdoor into the Roth.

    Second of all, our taxes have actually gone down recently and are expected to next year. Looking any farther into the future is too difficult.

    Your 401k is very limiting in your selections of good investments. I would just max out the match and keep the rest in cash and smart securities.

    You will want money in the near future (next 5 years). You will want or need a car at some point – pay cash. You might want a home…a nice home. You’ll want to put 20% or more down.

    During my husband’s residency we wrecked a car, maxed out another one (16 yrs old), bought a small home, and then moved halfway across the country and bought a very nice home at the end of residency. Just think if we’d have had kids?! I’m glad we kept a sizable amount in cash and near cash savings (CDs). We took full advantage of our Roth eligibility and our 401k match, but beyond that we saved our cash and spent it as we needed to.

  7. Stephan F- says:

    For something more from left field you can invest in a good shop (wood, metal, auto, whatever) Having the skills and tools to build or repair something that people really need like a table, chair or a knife can see you through the worst of times.

    There there are always commodities, you may think gold and silver, but my Dad went with copper wire, pipes and fittings. Whatever intrinsic value gold is supposed to have, doesn’t seem to match the actual value copper has in wiring or plumbing a house. That is much easier to barter compared to gold or silver.

  8. Nathan says:

    What about “defense”? Need to make sure you’ve got good insurance (disability, homeowners, malpractice, life–if you have wife/kids, and maybe even umbrella–people like to go after physicians’ $$$).

  9. M says:

    I was in a very similar situation a few years ago. Two things to add to the conversation: You may have access to a Roth 401k. If that’s the case, you may want to contribute more than just the match to your 401k, given that you think taxes are going to go up by the time you retire.

    Second, I kinda glossed over building an emergency fund/cash reserves in my hurry to start buying index funds and enjoy stock market returns, and I advise you not to do that. As you can imagine, those funds are down compared to where I started, and I’m finding life requires a lot more cash on hand than I expected. This has put me in a tight spot a few times, since I didn’t want to sell my stocks. Furnace needing to be replaced, new appliances, car repairs, etc, etc. I highly recommend you build up a good sized emergency fund and “life happens” fund which are kept in cash/money market/cds. The first for genuine emergencies or job loss, the second for furnaces and roofs and car repairs and ridiculously expensive plane tickets to see your folks over the holidays. I’m aiming for 6 months living expenses in my emergency fund, and about $20k in my “life happens” fund.

    Good luck to you!

  10. CB says:

    I think the maximum 401K deduction is a good deal, even if the company doesn’t max. The fact that the money is not taxed and reduces the amount of income that I have that is taxed gives me an automatic 28% return. I’ve put about half in a mutual fund, so that hasn’t been lost.

  11. CB says:

    erratum: “even if the company doesn’t match.”

  12. Meri says:

    I totally agree with the “life happens” fund. I’m not quit to my six months of expenses in an emergency fund yet because I have to keep getting into it for the “life happens” expenses (new set of tires, something wrong in the exhaust system of the car, etc.).

    It’s funny, I was once in a financial education class and a lady said she had funded her Roth, did the matching on her 401k, had an emergency fund, and didn’t know what to do with the “extra” cash left over each month. It never occurred to her to start a savings account as a “just because” or “life happens” or “I want to buy something fun” account.

  13. Johanna says:

    “Never be afraid to invest money in making yourself better.” – I thought this was pretty insensitively phrased. A thin person is not better than an overweight person. Someone with straight teeth is not better than someone with crooked teeth. The general point you were trying to make – that it can be wise to spend money to improve your health (for its own sake) or your appearance (because like it or not, being physically attractive is an advantage, professionally and financially) – I think is fine, though.

  14. Gregfox says:

    Two points I loved here.

    First, “Invest in yourself.” In quitting my job to join a fledgling startup in the worst economy I’ll ever see, I’ve taken a lot of solace in knowing that most of my capital is human and social. Even if we fail in two months, I’ll be fine eventually (my rainy day fund helps!).

    Second, Matt Jabs’ comment about giving it away. Whether you believe in an afterlife, or karma, or just human decency, there’s folks starving in a lot of places. “Fred” acknowledges the luck of a fortunate upbringing; step 2 is acting on that acknowledgement.

  15. Sherry says:

    As an RN who works with very established surgeons, I will tell you they are ALL struggling financially. Life will & does happen & don’t think things will always been so phenomenal. The expenses of being a physician are unbelievable. Between malpractice, taxes, running a practice, etc, it is very expensive. I remember years ago, a couple, both who are MD’s, celebrated their anniversary by going to Kmart & buying Timex watches for themselves!! That is all they could afford!! Frankly, they said their staff was “taking home” more money than they were! So…don’t let the lure of the shiny new cars in the doctors’ parking lot lure you…keep your head on straight & do what you feel is best for you & not what the others are doing.

  16. lurker carl says:

    No one ever complains that they have too much money in savings.

    Get the biggest bang out of compounding interest while time is still on your side. You’ll eventually need some of that cash to pay for a wedding, house, children and some unexpected disasters and expenses that will undoubtedly crop up over your lifetime.

    So, keep saving as much money as possible and learn how to manage this money yourself. Become your own financial planner, you know your goals and aspirations better than anyone. No one is as interested in safeguarding and growing your money as you are. You evidently have some smart money managers in the family, take advantage of their knowledge.

  17. Marsha says:

    Ditto the “life happens” sentiment. It’s hard to have too much in savings.

    Does Fred have a mortgage? If so, maybe he can start paying that down – if he doesn’t, then maybe he might consider buying a home of some kind.

  18. Margo says:

    At that age, I’d build up a stockpile of cash for:
    -House & spouse
    -Business opportunities

    Make sure you’ve got sufficient disability insurance, which should be “own occupation” not “any occupation.”

    I’d also recommend a good umbrella policy added onto the homeowner’s or renter’s & auto insurance, because if the OP gets in a car accident, the other party may see “doctor” as “meal ticket” and sue for ridiculous $.

  19. I agreed with Margo, but I would prioritize a business opportunity first.

  20. You could do what I did. Concentrate on the taxable accounts while learning to barter, network, maintain, fix, repair, etc. and generally live well with few expenses where money leaves your hands. You will have a “30 year emergency fund” in a handful of years and you could retire when you’re 30 (I retired when I was 33). Spend some time on investing it and get active. No need to ride the bus with the average — as an individual investor you will not be subject to the same restrictions as the institutional and mutual fund investors and so you can beat them (with a few years of experience e.g. the same knowledge as an finance major which should be no problem to an MD). Your taxes will be low to nothing if you’re comfortably in the lowest tax bracket as only your modest financial activities are taxed (whereas the potatoes you grow and eat yourself or the maintenance work you do on your residence or the medical bills you’re not paying by staying super healthy aren’t). Now go and do whatever you like — I suggest something worthwhile. A reader of mine, who’s a dentist, does pro bono work for low income children, another does open source programming. I (ex-nuclear physicist) am working on sustainability research. The world can always use more highly qualified people doing good things.

  21. k2000k says:

    “Second of all, our taxes have actually gone down recently and are expected to next year. Looking any farther into the future is too difficult.”

    They have gone down now, but that will not be the case in the future, 100%. You cannot borrow trillions of dollars without raising taxes, its just the way it goes, sure we could borrow money to pay off our current debt, but the tab will come due eventually; either way my generation is stuck with that bill. My suggestion to the writer would be to put some money in some index funds, or even keep some of it as investing ‘play’ money.

  22. Solid advice– one always has to plan for the unexpected. Change happens!

    Always have a back-up!

  23. Lizz says:

    Read the comments to this article with great envy as most seem to be at the beginning of their careers. My husband and I are both 62 and thought we had done all the “Right Things” for a financially secure future. But last Friday, after 41 years at the same company, he was laid-off. Although we have a 6 month emergency fund, it is becoming rapidly clear that this probably will not be enough if his job search goes on for months or he never finds one. COBRA alone will be almost $1000 a month! So I would say your emergency fund can never be big enough and would love to see an article on Laid-Off? What Now??

  24. Sheila says:

    Thank you for mentioning that the unexpected, like ill health, can happen. A disability can strike at any time (have insurance!), which can reduce your income significantly and cause expenses to rise. Having a solid emergency fund is crucial at any age. We recently lost a family member and had to pay for other family members to come to the funeral–a large, unexpected expense, but we have a big cash cushion so we are able to ensure that our family is together at this time.

  25. The authors of the Millionaire Next Door also wrote on why physicians are UAWs–under accumulators of wealth. I would suggest reading The Millionaire Next Door and also the work the authors did on physician finances.

    I would guess that physicians are under accumulators would involve “need” to give off aura of success (cars, houses, bling). I think Stanley and Danko also discuss how physicians tend to work more (for huge “hourly” wage) and respond too readily to cold calls from sales people rather than handling their own finances.

  26. Quinton says:

    If the future Dr. can become self employed (or any other reader who is self employed), you can start a Solo Roth 401(k). which allows up to 25% of income to be stashed away, via profit sharing.

    See link for more info: (I do not write the blog)

    http://moneygirl.quickanddirtytips.com/solo-401k.aspx

  27. Sara says:

    I wish I were in this situation! Consider yourself lucky. After student loans, rent, ect…I find myself in my late twenties working at a 30K job plus a part-time gig to pay the bills and chipping away at my education debt and slowly, slowly building an emergency fund.

  28. Christine says:

    I worked at a hospital and saw so many doctors living the showy life with the mercedes, mcmansion, 4 kids and stay at home trophy wife with a nanny, housekeeper, pool dude and yard dude but they are up to their eye balls in student loans. Do yourself a favor…do not reproduce if you must get married…stay in the junky studio apartment, drive the clunker for a few more years and camping vacations. Live like a hermit. You can retire those loans in no time if you throw every spare penny at it. I do recommend the emergency fund, then get started on the loans.

  29. K says:

    It seems like a pretty healthy picture financially. I would also echo Trent’s idea to find your goals, as well.

    However, if your projections are correct, it seems you are in a very good position to do some serious wealth building, simply by saving and paying for things with cash. Instead of getting a mortgage like the rest of us, you could bank a considerable amount of that $150-200K and pay cash for a house in a few years. Ditto for other things. If you want a Mercedes, go for it — but go for the one that’s two years old and off lease. And pay CASH for it for additional bargaining power.

    Also, just like people will come to see you for your medical expertise, you might want to employ a financial professional of some type to help you out navigating the weird advantages and disadvantages of tax law. I’m betting you (as a doctor) don’t like it when people diagnose themselves off of the Internet, so why rely on blogs and bits of information to plan your financial future?

  30. John says:

    @Christine: He already said he doesn’t have any loans. Please read the article before you comment.

  31. Sharon says:

    When you get that disability insurance, “own occupation” for sure, and don’t get it from Unum-Provident. Do some serious research on the company.

    In this case, getting an insurance broker is probably worthwhile.

  32. Johanna says:

    @John: Yes, Christine made a mistake, but there’s no need to be snippy about it. Haven’t you ever overlooked something in an article you’ve read?

  33. @Matt

    Whether or not you reinvest the dividends, they are still taxable. Capital gains tax, which you referred to, only kicks in when you sell an investment. This also occurs when you own mutual funds and the fund manager sells stocks within the mutual fund.

  34. Nathan brought up a great point about umbrella insurance — once you begin to accumulate assets, it is a great thing to have to protect them. Umbrella is usually fairly inexpensive, but it does require maximum coverage on your auto and home liability.

    Regarding loans — although you said you don’t have any now, I recommend keeping it that way (except for a house). I was in my doctor’s office once and saw the bill for his BMW sitting at his “station.” I didn’t look at the amount, or anything like that — it wasn’t my business. But I thought it was a bit tacky.

    Anyway, my wife is a physician and we are working our way out of student loans and a loan for her buy-in to the practice. Because the buy-in immediately increases your income and possibly adds some profit sharing, that would be the other loan that I would recommend. But I certainly can’t wait to get ours paid off!

  35. "Fred" says:

    Hi,

    I’m “Fred” as mentioned in the article- many thanks to Trent for posting my question so quickly and for his thoughts. Equal heartfelt thanks to everyone in the Simple Dollar community for sharing your time, wisdom and experiences. Going forward, I have a much better idea of what holes I need to fill in. I hope to be able to contribute equally in the future!

    Best wishes,

    “Fred”

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