Tax Free Coffee Money (aka My Residency Roth IRA)

There I was, a newly-minted intern, hanging out with my fellow newly-minted interns.  Somehow the discussion turned to retirement accounts–I swear, it wasn’t I who introduced the topic!– and V. says that his dad recommended he put money away for retirement.  His dad had done so during his residency, and still had that money in its own account.  It wasn’t much, but he told V. it was enough “to buy coffee when he retired.”

At that time, I wasn’t a coffee drinker, but I took the advice; especially as I was feeling left behind on the financial front, compared with my friends with real jobs.

I looked into my institution’s tax-deferred retirement account, the 403(b), and found that there was no match for residents.  No free money for me there.  But, a newer type of retirement account was available, something I could do on my own: a Roth IRA.  I wouldn’t get a tax benefit when I put money in, so I would have to pay out of my (already taxed) paycheck.  But, when I wanted to use it in retirement, I would pay no taxes then–neither on what I had put in, nor on any profit (returns) I made over the years.  Perfect for a resident making very little, and being taxed at the correspondingly lower tax rate.  I was hopeful I would be making more than my resident salary by the time I wanted to retire!

I went back over my records, which are complicated by Back Door Roth contributions in the past 6 years.  But, from what I can piece together, my initial investments from my residency years are now–with the help of the stock market, through the Great Recession and the subsequent bull market of the last decade–worth more than 5 times as much. Hooray for portfolio growth over time!

One benefit I don’t see often mentioned of investing early–say, during residency–is the power of habit.  It’s the same reason your alma mater asks you to give as soon as you graduate, even it it’s just $5, or $1.  It probably costs them more to process your donation than you are giving.  But, they want you to become habituated to donating; if they get you going early, you may find that 2 or 3 decades later, you are giving “real money.” Similarly, by getting used to putting aside money in residency, even if 10% of your small salary is practically miniscule, you get in the habit of saving for retirement.  When you are an attending, your 10% can be a much larger amount.

Now that I have been an attending for many years, my Roth IRA is worth millions (NOT!). But even now, well before my planned retirement, the amount is high enough that if I could withdraw 4% each year (the ballpark amount that is probably safe to withdraw in retirement, in that you likely won’t run out of money before you die), I could buy overpriced coffees for me and my husband every day for the rest of our lives.  I’ll keep putting my money away, though; I have my eye on the croissants too.