Now that I am in my late 20s I am thinking of starting to invenst for my retirement. I am a resident physician with the UW Physcian Group, which is linked to Fidelity, with a good sum of low-interest student loans (<1/4 million), and with no retirement plan. Student loans are getting IBR payments, and we are considering putting some money towards a Roth IRA. However, we don't know where to start. Do we start with UW Physican Group/Fidelity. They have a Roth, but I believe it's different than a Roth IRA. My understanding is that while your income is low you should start with Roth IRA. With only <15-20K to invest, how and where do we start. Do we shop around for a financial advisor? Will financial advisors be interested working with physican residents given our currently meager earnings despite our future projected income? How do we find a finacial advisor in our budget? Any red flags to avoid? Do we save on fees by using my employee retirement option at UW Physcian Group Fidelity vs. shopping around? How does one judge the best Roth IRAs to invest in to? Or are Roth IRAs at my age/income the best option? Do we just keep the money in the bank?
Looks like Rich beat me to the punch while I was composing this...hopefully there won't be too much repetition with these thoughts.
Kudos to you in taking steps now to save for retirement! You’ve posed a lot of great questions and I'll take them in the order you asked:
• We are considering putting some money towards a Roth IRA. However, we don't know where to start. Do we start with UW Physician Group/Fidelity? They have a Roth, but I believe it's different than a Roth IRA.
You’re right, your UW retirement plan offers a Roth 403(b) option and the key features are similar, but there are some differences.
Both a Roth 403(b) and Roth IRA allow you to make after-tax contributions (i.e. no tax deduction up front), with the potential for those contributions to grow sheltered from tax over time. When you take out (“distribute”) your funds, you won’t pay income tax on any growth in your account, provided you’re at least age 59 ½ and you’ve had the account for five years.
For 2014, with a Roth 403(b) you can contribute up to $17,500 of earned income. It’s only $5,500 for a Roth IRA.
Double check me on this, but I believe UW will match your 403(b) plan contributions up to 5%, 7.5%, or 10% depending on age. This is critical because you won’t want to walk away from “free money” by contributing to a Roth IRA (no match) funds that you could’ve contributed to the Roth 403(b), at least up to the maximum that UW will match.
Depending on the custodian/financial firm you use, with a Roth IRA you may have a universe of investment options to choose from. With the UW Roth 403(b), you are limited to the funds in the plan’s line-up.
With a Roth 403(b), you contribute through payroll deductions. With a Roth IRA, you typically will contribute totally separate from payroll.
• My understanding is that while your income is low you should start with Roth IRA.
That’s generally true (both Roth 403(b)/Roth IRA) if you anticipate that your income tax bracket will be much higher when you draw out the funds (presumably in retirement).
You may also find that, as your physician earnings power grows over time and you’re in a much higher tax bracket, at that time you may want to switch to making regular 403(b) contributions. The income tax deduction may be worth a lot more to you at that time. Thankfully, since Washington has no state income tax, all you need to worry about is the federal tax implications.
• With only ~$15-$20K to invest, how and where do we start?
If you and your spouse/significant other already have set aside a sufficient “emergency fund,” then you may wish to contribute $5,500 each to Roth IRAs for 2013. (You have until 2013 tax filing deadline in April to do so.) That would cover $11,000. You could then make Roth IRA contributions for 2014 (any time after January 1).
But beyond contributing your current funds, you may be best served setting up Roth 403(b) contributions directly from your payroll starting in January.
• Do we shop around for a financial advisor? Will financial advisors be interested working with physician residents given our currently meager earnings despite our future projected income? How do we find a financial advisor in our budget? Any red flags to avoid?
There are some advisors who only work with clients who’ve already accumulated substantial assets to manage. But a lot of advisors would be pleased to work with young physician clients. And there is also a growing number of fee-only advisors who charge by the hour who might be ideal in helping you be sure you’re covering all the bases, not just retirement and investment.
There are lots of “red flags” to avoid. This link at the Financial Planning Association may help you think through the questions and issues that are most important for you:
• Do we save on fees by using my employee retirement option at UW Physician Group/Fidelity vs. shopping around?
If you’re simply talking about your retirement plan, then almost certainly the expenses will be lower in the plan. But that’s a very different matter from the fees that an advisor may charge who will actually provide broad-based financial review and guidance. You’ll want to decide what you need at this stage.
• How does one judge the best Roth IRAs to invest into? Or are Roth IRAs at my age/income the best option?
There are many Roth IRA options. Keeping investment expenses low is important. A Roth IRA/Roth 403(b)—or both—make a lot of sense in your current situation.
Jess, I would suggest asking other doctors or people you trust for the name(s) of their financial advisor(s). I would meet with a few of the ones they recommend and see if there's a good fit with any of them. Many advisors will be happy to work with you, realizing that as a resident physician, you have very good long-term earnings potential. Working with you would also give them potential referrals to other physicians. While some of the more established advisors may require higher minimums, you should not have a hard time finding a good, qualified advisor to work with you.
The advisors who require higher investment minimums generally charge a fee based on assets under management. An alternative to advisors who charge an asset-based fee would be an advisor who charges an hourly fee. There are some good advisors who will help you with all of the items you mentioned above for an hourly or project-based fee. While they do not invest money for you on a discretionary basis or monitor your investments on an ongoing basis, they will likely give you a recommended asset allocation and help you select appropriate investments. Then, why will review your portfolio and progress on a periodic basis, for the same hourly fee.
In regard to the Roth IRA, I am a big fan of Roth IRAs, especially if you will be in the same or higher tax bracket in retirement. You can obtain Roth IRAs from most brokerage firms and banks. If your physician group has a 401K, it's likely that they will have a Roth 401K option. "Roth" simply describes the type of IRA and determines how the account is treated for tax purposes. At a brokerage firm like TD Ameritrade, Schwab or Fidelity, you should be able to invest in anything from stocks to bonds to mutual funds… the same investments you could purchase in an individual taxable account or a traditional IRA. Some banks or brokerage firms may have limited investment options or your physician group plan may have limited options. That's why it's best to work with a financial advisor who can review your financial situation, goals and objectives and help you make smart choices. Hope this helps.
Best regards, Rich Winer
Hi Jess, With Larry and Rich both providing a lot of good information in their lengthy answers, I'd rather not repeat what they have already mentioned in another long response. Going through a lot of those same issues and questions myself over the last few years as a late 20's professional, message me if you would like to talk sometime and hear what I have done for myself, which will be very applicable to your situation.
Jess, it's great that you are forward looking enough, in your 20's, to think about investing for retirement. The good news is that you have several options to invest through, what we call in trade, "buckets". The trick is to identify the first "bucket" to start pouring savings in, and as each bucket fills, you go to the other. The size of each bucket is define by regulatory requirements, IRS, DOL, etc., and the tax-efficiency. Your should start by analyzing your employer provided retirement plan, since this may offer most tax-advantageous structure and possibly employer matches. The second and third buckets may be IRA and Roth IRA accounts, subject to your specific conditions analysis. Good luck!
You have gotten some good, and very specific, advice already. There are only a few things I would add from personal experience. Years ago a resident at a local teaching hospital contacted me to help with his wife’s modest IRA, something I was happy to do. After graduation he set up in practice in another state but we retained our relationship. We set up his retirement accounts and when those were maxed out we set up individual accounts for his family. It’s been a good working relationship, even at long distance.
Let me provide one piece of cautionary advice. As a physician, you are going to be the object of lots of investment solicitations. The medical profession’s relatively high income will make you the object of a great many investment pitches. If you can find a trustworthy investment advisor to manage your investments you can also use him to provide the due diligence on those too-good-to-be-true proposals you will be receiving.
In my practice, if I met you the first recommendation would be to get a a good disability insurance coverage. I am a RIA so I have a fiduciary responsibility and based on what you are saying I really should talk you out of opening a ROTH IRA first and focus on disability insurance review. You may have some group coverage but it is probably not sufficient for your future lifestyle. You can invest in a low fee ROTH IRA and put 5500 but then if you get permanently disabled your 5500 would have to double almost every week to give you a decent retirement. No advisor can get you that kind of return. I would speak to several financial advisors both commissioned based and fee based and find someone you like and who is open about how he gets paid. Check references too.
Jess, Great idea to start early. You have received very good advice so far and I just wanted to piggy back on something you have already heard. Because of your profession you will be heavily solicited. I really like the idea of someone in your position asking people you work with who they trust and what specifically those advisors are great at in financial services. You deserve to find people who specialize in certain areas like disability income, retirement consulting and tax planning. With some of the referrals you receive from the people you work with try and find someone who can simply give you advice for a small fee and point you toward experts in different areas of financial services. Grow a relationship with this advisor over time, he may also be an expert in one of these areas you need assistance with. Last word always include your accountant in on your planning. The more they know ahead of time the better an advisor they will be to you. Good luck with your career!
Look me up if you ever work in San Diego, CA Successful clients do certain things. 1. Pay themselves 20% of their Gross Salary every month by automatic programs through their 401(k) or IRA plans, and automatic credits to a brokerage account. 2. Borrow money only to buy a home. 3. Set aside money monthly to accumulate dollars to be used when cars should be replaced. 4. Pay all credit card bills in full every month. 5. Revise their Net Worth statement twice a year, so as to ascertain progress and boost incentives. 6. Fund generous college saving programs. 7. Learn how to enjoy life monthly with what dollars are left to spend. 8. Exercise and eat sparingly. 9. Shop wisely including appropriate negotiating. 10. They organize paperwork including recommended legal documents. 11. Never pay taxes today that can be deferred as laws and circumstances can change in the years ahead to reduce or eliminate the taxes.