How to get the most money put away for retirement, tax-deferred for white coat investors

Struggle with putting enough money away for retirement? You’re not alone.

One in four Americans has no retirement savings at all. It can be easy to push off your savings goals for another day or time, but when it comes to the power of compound interest, the best time to start is right now.  

We do not have to tell you this. By starting your retirement investing as early as possible, you are giving your money ample time in the market to grow, resulting in compound interest. Soon enough, your money will be working for you instead of the other way around.  

Many high-income individuals, such as physicians or other medical professionals like yourself, may struggle with putting money away for retirement. This may be due to the stress of the career, time constraints limiting the ability to focus on it, awareness of opportunities, or others. These individuals may also have a unique situation due to student loans and extended periods of schooling and are likely to start their investment journey later in life (which may mean catch-up contributions). 

If you are confused on how to get started or not sure what your next steps are to begin your retirement investing journey, keep reading. 

Define Your Savings Goals 

The amount of money you will contribute to your retirement is based on many factors, such as your age, income level, disposable income, savings goals, etc. Start estimating your contributions by defining your savings goals and what you hope to achieve in retirement.  

Are you looking to work part-time in retirement? Travel the world in your camper? Live luxuriously by the beach? These are a few questions you will need to consider when you think about the lifestyle you want to have during retirement.  

Once you have this determined, you will also need to determine how much you will need in your retirement account to sustain that lifestyle. Will your current annual income be enough? Keep in mind to account for inflation and any expenses that may arise during retirement, such as health insurance/healthcare costs.  

After determining your needed retirement income and expenses, you can finalize your retirement game plan by using an online calculator to plug in your current age, age of goal retirement, and needed income. This allows you to see if you are on the right path (or how much you will need to contribute to meet your goals).  

Types of Plans 

The next step in your retirement game plan: putting your plan into action by opening a retirement account. This step can be confusing for some, due to all the options on the market.  

As you probably know, retirement plans are not a one-size-fits-all. It’s important to find the plan that best suits you and your family’s needs. There are some great options out there for physicians and other white coat investors, such as Cash Balance Plans, SIMPLE IRA, and 401(k) Accounts with Profit Sharing. 

Cash Balance 

A Cash Balance plan is essentially a pension plan where employers can contribute a set percentage of their employee’s annual income that translates into an annuity at retirement age. This is a popular choice among employers and business owners with a smaller number of employees. Check with your practice to see if one is available or consider setting one up on your own.  

The best part about the cash balance plan is the high contribution limit, $245,000 per year for an individual, and can be doubled for a married couple. This does not include the employer’s contributions to employees’ accounts, which can result in even further tax savings. Every dollar contributed up to the annual limit is tax deductible and can result in immense tax savings.  

For example, say your annual income is $550,000 and you contribute the maximum amount ($245,000) to your cash balance plan. Your new taxable income is $305,000, which puts you into a lower tax bracket. 

This plan is considered a “Defined Benefit” plan, meaning that the amount the employee will receive in retirement is a defined amount and will not subject to swings, or possible downturns,  in the market like a traditional 401(k). The employer bears the risk (not the employee) which makes this plan attractive to risk-averse investors.  

Cash Balance plans are a great option for the following groups: 

• Doctor’s offices and other independent practices with small offices.   
• Real estate agents and brokers with their own agency/employees. 
• Individuals who work both a full-time job and own a business on the side. 
• Small businesses with fewer employees or subcontractors. 

SIMPLE IRA 

A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE IRA) is available to employers with 100 employees or fewer, and is similar to a traditional IRA, which you may be familiar with. A key difference between a traditional IRA and SIMPLE IRA, is that the SIMPLE IRA is set up by the employer on behalf of the employee and the employer must contribute to the plan. The employee has the option to contribute a portion of their salary as well.  

The SIMPLE IRA allows for an annual contribution limit of $14,000 while a traditional IRA caps at $6,000 per year. The SIMPLE IRA is another example of a tax-deferred retirement account that allows the employer/employee to contribute pre-tax dollars and defer taxes to retirement.  

401(k) With Profit Sharing 

Another option for those looking for a tax-advantaged retirement (or a higher contribution limit) is a 401(k) With Profit Sharing. This account allows employers to make contributions to employees retirement accounts after the end of the year which are then tax-deductible for the previous year.  

The 401(k) With Profit Sharing also allows for employers to determine the exact amount to be contributed to the employee’s account. It can be treated like a bonus for the employee when the company has a financially sound year, without increasing the employee’s taxable income for the year. It can give the employer flexibility to plan their finances for the year and determine how much they want to contribute to their employee’s plan. The contribution limit is set at $57,000 per year (with additional catch-up contributions for those over age 50).  

Investment Style (Offensive Vs Defensive) 

Now that you have determined your savings goals/contribution amount needed for retirement and selected a plan that best suits your needs, it is time to determine your investment style.  

If you are focused on maximizing your return on your account and tend to gravitate towards a “buy and hold” approach (I.e. you do not feel the urge to sell when the market fluctuates), you are an offensive investor. This approach is for investors who are confident in the long-run stability of the market and believe the market will be higher at the time they will need to access their savings. 

On the other hand, if you find that you practice a “buy and sell” approach to investing and wish to protect what you already have, you may be  a defensive investor. These investors tend to be closer to retirement age, are generally risk-averse, not as confident in near-term market growth, or primarily focused on protecting what they have accumulated in their account. If you are a defensive investor, it is important to understand that timing the market is extremely challenging and individuals that practice this are subject to emotional behavioral mistakes that historically have cost them in the long run. This strategy is best handled by financial professionals that have the time and systems in place to make those types of decisions for you. 

This distinction is important to make so you can allocate your funds properly and ensure you meet your financial goals. If you are unsure of which type of investor you are, there are educational videos that can help, or you can take a short questionnaire with Artesys to determine your individual approach to investing. Check out our Participant brochure here (page 6) for more information. 

After determining your investment approach, it can be a good idea to speak with a trusted financial professional to determine your tolerance for risk and a corresponding investment allocation/strategy to ensure that you stay on track with your retirement game-plan.  

Key Takeaways 

• Retirement investing is not a one-size-fits-all approach, different accounts will serve different benefits 
• There are quite a few plans that can provide Tax Deferred retirement savings, such as a Cash Balance Plan, Simple IRA, and 401(k) With Profit Sharing. 
• Determine your investment approach (Offensive vs Defensive Investor) to discover what allocations and asset classes should be part of your portfolio. 

No matter what stage of life you are in, it is never too late to start thinking about your future. By beginning as soon as possible (and creating a game plan) you can reach your retirement goals.