WCI #15: What to do if you have No 401K as a New Attending

This is the White Coat Investor Podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high income professionals stop doing dumb things with their money since 2011. Here's your host, Dr. Jim Dahli. Welcome to podcast number 15 where we'll be talking about what you should do as a new attending if you don't have a 401k. But before we get into that, I want to thank you for listening. It's really quite a treat to interact with listeners and readers of the blog from time to time, by email and in person and just realize how big of a difference this is making. Please share it with those around you and send us any feedback that would help us to improve the podcast as well as the blog and everything else. And of course we sure appreciate it when you leave positive ratings for us on itunes and other places where you get your podcasts.

If you're like most doctors, nobody taught you anything about personal finance or investing during your undergrad, professional school or residency. Even though your family and perhaps even your business rely on you to be the Chief Financial Officer, you have never been given the tools to succeed. Enroll in WCI Financial Boot Camp, a free educational email series, and learn to convert your high income to wealth. You will learn the basics of investing, saving, insurance and more. Your high income alone will not lead to financial success, but as always, we want to help you on your financial journey. Go to whitecoatinvestor.com financialbootcamp to sign up today. You can do this and the White Coat Investor can help.

Our quote of the day today comes from Rick Ferri who said, gurus don't make money predicting markets, they make money marketing predictions. Isn't that the truth? Well, our subject for today is introduced by Brian, who wrote in to ask I am in the very beginning stages of planning to save for retirement and invest as I will finally be starting as an attending in August. What should I do to start investing for retirement, et cetera, if I do not qualify for a 401k account through my employer for the first 12 months? Ah, that mad rush. The first year where you have so many good things to do with your money but not enough money to do them all? I remember it well. It turns out that not having access to a 401k for a year really isn't that big of a deal because there's so many other good things to do with your money. I've certainly been in that situation Both with a 401k and with a defined benefit plan when I change jobs. And so I can talk a little bit about my experience with that. Basically, I just looked for all the other good things I could do with my money and prioritized those until I was eligible for the retirement plans. But think about all the stuff that you have when you come out of residency that you need money for. For example, lots of docs have credit card debt. This is a great time to pay that off. I'd try to pay that off by August. You may have an automobile debt or you may owe your family some money. This is a great time to get that monkey off your shoulders. Since your spending has probably gone up a little bit, you probably need to beef up your emergency fund as well. So I would do that. You may want to go on a trip or spend something. Shoot all that delayed gratification. It helps if you can at least spend a little bit and treat yourself a little bit. But you got to be careful that the treat is, you know, a trip to Mexico maybe, and not a brand new Tesla that you can't afford. Also, you're likely looking at some moving expenses so you can use your newfound money for that rather than putting it in a 401k. You may also need to save up a down payment or max out other retirement accounts that you're eligible for, such AS backdoor Roth IRAs. You may also want to do a Roth IRA conversion of any money that you have in a tax deferred account from residency or prior to going to medical school and residency. Also, be aware that your spouse probably has some retirement accounts if he or she is working, and you can use the money to max those things out. If you have children, you may want to start 529s. And of course you can always invest in a taxable account. There's no limit on that and it's not like that's a bad thing to do. Whether you're investing in tax efficient mutual funds or investing in real estate, it's always reasonable to make those investments when you're not eligible for a 401. And of course, at a certain point you're going to become eligible for the 401 and you can have a lump sum ready to go as soon as you are and you can max it out right away. The most important thing in that first year is not so much where your money goes, but that it's going toward building wealth. Whether that's paying down debts, credit cards, auto loans, family loans, student loans, or whether it is going toward investing both of them. Increase your net worth. And that habit of carving out a huge chunk of your income and using it to build net worth matters probably far more than where the money actually goes, whether it goes for a down payment or whether it goes toward debt or whether it goes toward investments and what type of account those investments are in. So I would not necessarily avoid investing or worry what you can do when you're not eligible for a 401k. It's a problem that's very common, not only among doctors, but among any job, really. Most 401 s don't let you contribute for a year. When I changed jobs and joined the job I'm at now, I became eligible for a defined benefit plan, but not for about 18 months after I started. And that was fine. I had so many other good things to do with my money for that 18 months that it really wasn't an issue. We put some of it toward down payment and some moving expenses and invested in other accounts. And it really was one of those situations where we had far more good things to do with money than we had money. All right, let's move on to some other questions I've got. This one comes in from a reader who said, the time has come. I'm finishing residency. I'm sure you've all been through this and I'm wondering how to deal with the pay gap. I just got a physician loan flyer in the mail. How many of you have done this? Obviously I should have just planned ahead and figured out how to save, but it's too late now and I think I'll have four to eight weeks with no pay because residency gave us a full paycheck. Two days into residency and the new job will have at least a two week delay in pay. I tried to move up my start date, but apparently that's not happening. I'd rather not stress any more than necessary because I'm already moving across the country with two cats and don't have anywhere to live yet. So I was thinking maybe I should just take this loan, worry about paying money when I start making money. What do you think? Oh, and if you have any thoughts about what to do for health insurance for a month, that would be helpful too. Well, first of all, doctor, congratulations on finishing residency and getting a job. That's the best financial thing you've done for yourself in the last 10 years and will make a huge difference in your future financial picture. So let's not lose track of the big picture. What you've done is really, really impressive, but this is a good Example of why saving money in residency is important. Both because it develops habits for long term kind of saving, like retirement, as well as short term saving. I mean, this pay gap between residency and attending hood was very predictable. It's like interviewing expenses or moving expenses. When you came into residency, you knew those were coming. So if you think of it that way, hopefully it'll motivate you to save a little more later. But here's the way I would think about it to really get yourself into the mindset for saving. As a resident finishing a three year residency, you've now made $150,000 because the average household income in America is about $50,000 and you've made three years of that and you basically have nothing to show for it. Many attendings are the same way. After 20 years of an attending income, let's say they make $400,000 for 20 years, that's $8 million total. They've only got a net worth of a couple hundred thousand dollars to show for it. So I think it's really good for young docs to ask themselves this, how much should I have 20 years after residency? And when you think about that, you'll come up with a rather large number and hopefully that will motivate you to reach that goal. At any rate, all of that lecturing is really water under the bridge now for you. You have a cash flow issue and it's not an uncommon one. It's eventually solved by living like a resident for two to five years after residency. But in the meantime, you've got to cut expenses to the bone, maybe even borrow a little bit of money since it will be very short term. Right. I would probably use a 0% short term credit card deal over the loans you get in the mail for 7 or 8 or 9% for private physician loans, or maybe even borrow a little bit from family since you'll be paying it back so quickly after you start working. I mean, because, because of all that, because you'll be paying it off quickly, the interest rate doesn't matter so much. I mean, the interest on a loan like that for three or four months just doesn't add up too much. So if you really want to get the private loan, it's not the end of the world. But really this is more of a symptom of the condition. The condition is you're spending too much money. So. So you really need to start getting on top of this financial stuff soon or you'll be one of those folks I use as examples in my Talks who are 68 years old and still working 12 night shifts a month because they have to. Now, as far as the health insurance issue, remember that health insurance can be COBRA ed when you're coming from an employer and in between jobs, you can actually pay for the health insurance yourself. You just have to cover what your employer used to be covering. That's called cobra, after the law that made it so you could do that. But the cool thing about COBRA is it's retroactive, so you can wait until you get sick or until you get hurt and then buy the insurance. Whereas if you get through the one or two or three months without insurance, without any illness or injury, you can just never pay the premiums. It's crazy, but true. That's the way COBRA works, so that can be a really good deal as well. All right, one more question. This one from a pharmacist. My student loan Debt is about $150,000. My interest rates vary from 5.1 to 6.8%. I've looked into SOFI to check the rates and they're between 4.1 and 5.5%. Is it possible to refinance only the higher interest loans? My goal is to have it paid off within three years. So any tips are appreciated? Well, yes, you can. When you go to refinance student loans, see what rate they give you. If they give you a really good rate that's lower than all of your student loans, we'll refinance all of them. But if the rate isn't that good and you've got some loans at a better interest rate than what they're offering, you just don't refinance those loans, only refinance the ones that have a higher rate than the interest rate that you're being offered. That certainly is the way to minimize the amount of interest you pay while you rapidly pay back those student loans.

If you're like most doctors, nobody taught you anything about personal finance or investing during your undergrad, professional school or residency. Even though your family and perhaps even your business rely on you to be the Chief Financial Officer, you have never been given the tools to succeed. Enroll in WCI Financial Boot Camp, a free educational email series, and learn to convert your high income to wealth. You will learn the basics of investing, saving, insurance and more. Your high income alone will not lead to financial success, but as always, we want to help you on your financial journey. Go to whitecoatinvestor.com financialbootcamp to sign up today. You can do this and the white coat investor can help.

Head up Shoulders back. Be confident you can lick this money stuff and we'll see you next time.