Today's guest post comes from Ryan Inman of Physician Wealth Services. He tackles a common question that's written all over forums and discussion boards. It's not an easy one to answer, but he does a fantastic, thorough job. Take it away, Ryan.
Student loans and retirement planning are often two of the bigger stressors in doctors’ financial lives. Most of the articles and advice out there suggest that you need to pick one. However, I believe you can work towards both goals simultaneously.
Think about it. If people waited to save for retirement until they were debt free, then no one would ever save. This post is meant to give you some encouragement to tackle both your student debt and plan for your retirement at the same time.
However, before you can think about attacking your student loans and retirement, you need to have the basic foundation in place. Below are the items to focus on before getting aggressive with loans and retirement:
Step 1: Getting Your Personal Finances in Order
- Attack your high interest debt first.
This is usually your credit card debt. If you have credit card debt that is currently at a teaser rate of 0% and is due within 12 months, divide the total amount due by the number of months remaining with the 0% interest rate. Put that much away in a separate savings account each month. This will allow you to instantly pay off all of your credit card debt right before it starts to accumulate interest. Do not let it start accruing interest!
- Build An Emergency Fund.
Have approximately 3-6 months of expenses to cover yourself in the event of an emergency. The range of 3 to 6 months is quite large, especially if you have a high monthly budget. It varies greatly on your personal circumstance.
For example, if you are single or married but only one spouse works, you should have closer to 6 months of reserves saved in the emergency fund as you do not have a spouse that could provide some additional cushion. If you are a dual income family with both incomes over 6 figures, you might only need to have 3 months in your emergency fund. If you have kids, you can almost always double your emergency fund reserves to cover all the unforeseen circumstances that revolve around the little ones.
Your emergency fund doesn’t need to sit collecting next to no interest in the bank. The funds could be invested in various types of bond investments to increase your return on your overall portfolio, but shouldn’t be invested too aggressively as you want to be able to fall back on it if a true emergency arose.
- Create a Budget.
Create a budget and follow it. You can do this by looking at your last three months of spending so you can create expense categories within your budget. It’s very important to understand your relationship with money as well as seeing how money flows in and out of your accounts.
It’s also important to get a firm grasp on your monthly after tax income, your fixed expenses (items such as mortgage/rent, utilities etc.), your savings and what your variable expense are (think fun money or non essential purchases).
When you’re just starting out, your savings rate is the most important part of your investment plan. Setting up a foundation for responsible spending will allow you to invest your savings and reach financial independence sooner than you could ever imagine.
Step 2: Finding the Best Way to Pay Back Your Student Loans
Now that you know some of the personal finance tasks you need to master, it’s time to think about paying back your student loans. Before you determine how you’re going to pay back your student loans, you really need to know what you’re dealing with. Type, status, and term make up the anatomy of a student loan. In order to determine your circumstance, you need to take an inventory of your loans.
Do you have federal loans or private loans? Are they subsidized or unsubsidized? What’s your interest rate? What type of repayment plan are you on?
If you don’t know how to access that information, here’s how to find it:
For Federal student loans, follow the steps below:
- Federal Student Loans
- Visit NSLDS.ed.gov
- Click the Financial Aid Review button
- Enter the following information:
- Your Social Security number
- The first 2 letters of your last name
- Your date of birth
- Your PIN (get it at pin.ed.gov)
- You’ll see a summary page and can click the blue numbers in the far left column to find more detail on each loan.
- Click to download an ugly .txt file chock full of important details.
For Private student loans, follow this set of steps:
- Private Student loans
- Visit Annualcreditreport.com
- Click Request your free credit reports button
- Fill out a form
- Pick one (one will suffice) of the 3 credit reports
- Request and Review your reports online
- Save the report as a .pdf
Once you have an idea of the type of student loans you have, your interest rates, etc., it’s important to find a repayment plan that’s right for you. Below are some of the repayment plans available when you have federal student loans.
- Standard Plan
- Income Sensitive Plan
- Graduated Plan
- Extended Plan
- Income Contingent Repayment Plan (ICR)
- Income Based Repayment Plan (IBR)
- Pay As You Earn (PAYE)
- Revised Pay As You Earn (REPAYE)
To learn more about these repayment plans, if you qualify, and how they work, visit StudentLoans.gov. Essentially, you want to pay off your student loans, but you also want to leave enough room in your budget and cash flow to invest. So, it’s important to choose a repayment plan that allows you to save for retirement.
For the record, this doesn’t mean you should drag out your student loan payments for 25 years, but it does mean you need to be more educated about the process.
You might find that refinancing your federal student loans into a private loan might work best for you or perhaps an IBR plan is better for your particular situation. You also want to keep an eye on Public Service Loan Forgiveness, which is an incredible opportunity to have your debt forgiven after 10 years if you work for a qualified workplace. However, there has been a lot of recent news about this going away, but current people working towards the plan should be ok. All that said, it’s important to keep an eye on the status of PSLF and keep your options open.
To sum it up, your plan for repaying your student loans really depends on your income, the amount of student loans you have, and what your goals are. This will be different for everyone, but at least you now know how to find all of these answers, so you can start saving for your future, which we’ll talk about next.
Step 3: Saving for Retirement
Learning about investing and saving for retirement doesn’t have to be complicated. The first thing you should do is find out what types of retirement benefits your work offers. If you have a company matching policy, contribute up to (but not more than) the company match as your first step for saving for retirement.
After contributing enough to get your company’s match you should then set up a Roth IRA and contribute up to $5,500 ($468/mo) per year until your income hits the income limit.
Then, if you still have funds left over after investing in your company’s match and your IRA (or if your employer didn’t match any contributions to your 403b/401k) you can now completely max out your contributions to your work 403b/401k. You are able to contribute $18k per year. If you are paid via 1099, there are other options you can take advantage of, such as a solo 401k, however, they are beyond the scope of this post.
You can also fund a Traditional IRA if you weren’t able to put money into a Roth IRA due to making more than the income limit. Fund your Traditional IRA with a $5,500/year contribution. Look at a Traditional IRA and the concept of Backdoor IRA conversions if you or your family is above the limits to contribute directly to a Roth IRA.
Then, funnel all extra money to pay off debt or add to a taxable investment account. Once you have filled up all the retirement accounts available to you, $18000 and $5500, then you can either set up a taxable account or accelerate the payoff of your student debt.
Remember, the whole time that you’re saving as much as you can for retirement, you’re also making your student loan payments on time every time. This is a non-negotiable part of your budget, much like your mortgage payment. The way you will accelerate your student loan payments is to increase your income enough to where you have extra money to throw at your debt to accelerate your debt payoff.
While saving for retirement and paying off student debt on a resident’s salary is nearly impossible, after your training it becomes a lot easier to build wealth as long as you don’t let your spending get carried away.
Following the steps listed above might seem complicated at first, much like your medical training. However, just as you learned about medicine throughout school and residency, you can also learn and understand your finances to build wealth over time.
Luckily, as a physician, you have a high income, which is a great wealth building tool. As long as you pay yourself first, track your spending, invest consistently, and pay down your student loan debt, you will be well on your way to establishing a bright financial future.
Remember, when just starting out, your savings rate is the most important part of your investment plan. Develop a budget and stick to it. In the long run you will be thankful that you did.
Ryan Inman is a fee-only financial planner who specializes in helping physicians and their families build a solid financial future through his firm, Physician Wealth Services. As the husband of a pediatric pulmonologist, Ryan has a unique insight into what it’s like to be a part of a physician family and thoroughly enjoys helping his clients. Feel free to contact Ryan Inman here.