Welcome to the third edition of ACOG Rounds' financial health series, brought to you by the ACOG Member Insurance Program. If you didn't catch our second session on growing your wealth, you can read it here.
This month, we're tackling a topic that will leave your finances in shambles if you fail to properly prepare for it—retirement.
Does this sound like a dry topic? One you can put off for another decade or two? If so, you're not alone—that's the same shortsighted approach many Americans take. In fact, according to a 2015 study by the National Institute on Retirement Security:1
- The average working household has only $2,500 in retirement savings
- Almost 45% of working households have no retirement savings
- 62% of households close to retirement age have retirement savings equaling less than a single year of their annual income
It shouldn't be surprising, then, to learn that the United States has the third highest poverty rate2 of retirees amongst the 34 measured Organisation for Economic Co-operation and Development (OECD) countries.3 And that's not even counting the much larger number of Americans who are technically above the poverty line, but still live far below the levels of financial comfort they had during their working years.4
By choosing to put off retirement savings, you're setting yourself up for economic hardships that could echo throughout an entire quarter of your lifespan.
Properly planning for retirement is paramount for successfully bookending your career. Here are four prescriptions that can help.
Prescription 1: Start now, regardless of age
The most important step in building your retirement plan is to stop putting it off. Some of you have already begun, which is wonderful—but statistically, many of you have not.
Here's a quick example to illustrate, courtesy of JP Morgan's 2016 Guide To Retirement.5 Two people invest $10,000 annually into their retirement fund, with an interest rate of 6.5%. Both do this through age 65—the difference is that one begins investing at age 25, while the other waits until 35. Despite a mere ten-year difference, the person starting earlier ends up with almost twice as much money: $1,870,480 vs. $950,588, to be precise.
This effect of diminishing returns naturally becomes more exaggerated the longer you wait. Beginning at age 45 will slash your compound interest potential far more than if you had started at 35, and so on. And since medical professionals begin their careers later than the average worker due to extended schooling time, this is a particularly important concept to be aware of.
But no matter your age today, when it comes to finances (and most other things in life), it's always better to start late than never. As the old Chinese proverb goes: The best time to plant a tree was 20 years ago. The second best time is now.
Prescription 2: Don't leave easy money on the table
Most employers offer a savings match for an employee's 401(k) account—typically between 3% and 6%. Even if you aren't planning on saving much right now, at least save enough to fully meet the employer match—otherwise you're refusing free income.
Also, consider social security. While it's impossible to fully predict what the program will look like in the coming decades, as of now, workers are eligible to begin withdrawing benefits at age 62. Doing so, however, comes with a sharp payout reduction6.
To qualify for full social security amounts, you must wait to begin claiming your benefits until age 67. If you're planning on retiring early, be absolutely certain you have enough other resources to live off of until then so you don't tank your own social security reserves.
Prescription 3: The more the merrier
There's no fixed percentage for the amount of yearly salary that should be invested into retirement accounts, but there is a cap. In 2016, $18,000 is the maximum allowed into a 401(k) for those under age 50. For IRA accounts, the magic number is $5,500.7
With the average annual wage for ob-gyns climbing over $222,000 in 2015,8 it's not a stretch for your job path to allow you to hit those yearly maximums. Since schooling forced your career to get a late start anyway, you shouldn't let the opportunity to catch up go to waste.
Also consider the various types of retirement accounts you can invest in:9
- 401(k): An employer-provided plan, oftentimes featuring a price-match benefit
- Traditional IRA: An individual retirement account where money contributions aren't taxed upfront
- Roth IRA: An individual retirement account where money contributions are taxed upfront
As previously mentioned, always invest in your company's 401(k) plan at least up to the employer match percentage. After that, the ways in which you distribute your savings may differ. IRAs tend to offer a wider mix of stock and mutual fund options available for investment, which could potentially earn higher levels of accrued interest. On the flipside, 401(k) investment mixes are typically designed to always have some base level of stability, reducing the chances of stashing your savings in a risky portfolio that doesn't pay off.
The other big consideration is factoring in taxes. Traditional accounts let you invest tax-free—but of course, the piper has to be paid eventually. Taxes in these accounts are taken after you retire and start withdrawing your money. Roth accounts work inversely: you pay taxes on your savings with each deposit, so you can withdraw without taxation upon retirement. Sometimes both traditional and Roth options are available for 401(k) accounts, giving you added flexibility in how you construct your plan.
Don't forget the importance of personal savings accounts, either. Building your own nest throughout the years can help ensure you've built a robust wall of financial security to keep you thriving years after clocking out from your final shift.
Prescription 4: Plan for the long-term
When will you die?
That's a question you can't answer—which is why you may be surprised to learn that it's woefully common to underestimate your own life expectancy.
A BlackRock study from 2015 found that the average millennial's guess about their own expiration date was age 79—a typical shortchange of 10 years.10 And make no mistake: leaving an entire decade out of your financial plan will yield disastrous results. Not to mention the ever-present possibility of medical breakthroughs drastically increasing life expectancy.
Don't assume the worst about your own longevity, because it could result in your final years being spent impoverished. After all, the older you get, the higher your health care costs will climb. That's an absurdly large expense alone—even before factoring in life's other necessities.
Be sure to think through how much money you'll need per year in retirement. Just because you save enough to fund living through age 90, doesn't mean you'll have enough to support a lifestyle that's still comfortable.
This is why, almost more so than any other personal wealth topic, your retirement savings plan should be built with the guidance of a financial planner. Everybody's needs are different, and the stakes are far too high to rely on blind guesswork.
You've already worked hard to reach your income bracket—don't forgo the few extra steps it takes to ensure you stay above an economic pit that barely allows you to make ends meet in your twilight years.
Stay tuned for the next installment in our financial health series, coming in September's edition of ACOG Rounds!
1Rhee, Nari, PhD, and Ilana Boivie. "The Continuing Retirement Savings Crisis." National Institute on Retirement Security. March 2015. Web. 27 May 2016.
2McCarthy, Niall. "The Countries With The Highest Levels Of Poverty For Retirees [Infographic]." Forbes. 2 December 2015. Web. 27 May 2016.
3"Members and Partners." The Organisation for Economic Co-operation and Development (OECD). Web. 27 May 2016.
4Cubanski, Juliette, Giselle Casillas, and Anthony Damico. "Poverty Among Seniors: An Updated Analysis of National and State Level Poverty Rates Under the Official and Supplemental Poverty Measures." The Henry J. Kaiser Family Foundation. 10 June 2015. Web. 27 May 2016.
5"Guide to Retirement." J.P. Morgan. 2016. Web. 27 May 2016.
6"Benefit Reduction for Early Retirement." Social Security Administration. United States Government, 25 November 2008. Web. 27 May 2016.
7"Contribution Limits for Retirement Accounts." Fidelity Investments. 2015. Web. 27 May 2016.
8"Occupational Employment and Wages, 29-1064 Obstetricians and Gynecologists." Bureau of Labor Statistics. United States Government, May 2015. Web. 27 May 2016.
9Holsopple, Scott. "Retirement Basics: IRA or 401(k)?" U.S. News & World Report Money. 7 July 2015. Web. 27 May 2016.
10"Millennials Expect To Retire Earlier Than Their Parents And Live Till They Are Just 79." BlackRock. 11 November 2015. Web. 27 May 2016.
The purpose of this article is to provide information, rather than advice or opinion. It is accurate to the best of the author’s knowledge as of the publication date. Accordingly, this article should not be viewed as a substitute for the guidance and recommendations of a retained professional. Any references to external websites are provided solely for convenience. The ACOG Member Insurance Program disclaims any responsibility with respect to such websites.