One of my goals with this blog is to educate physicians on financial planning, investment and other concepts so that they can make good decisions and call BS on any adviser that is not. No one has the perfect financial plan, and we all are in a constant state of learning about what else we can do to put us in the best position possible. Run through this list to make sure that each item is on your radar:
Ten Retirement Planning Mistakes
- Living beyond your means. There is a fairly simple formula for retirement planning, and saving is the only variable that you can control. Pay yourself first with a savings rate of at least 10% of your salary and then worry about your spending.
- Not contributing enough to your 401(k) to get your employer’s match. That match is equal to a 50-100% rate of return, so it is crucial that you take advantage of it.
- Missing out on a HSA, IRA or Roth IRA contribution. Each of those accounts are “use it or lose it” on an annual basis, and each provides tremendous tax-deferral benefits.
- Not taking advantage of a backdoor Roth IRA. If you can contribute to one without creating a tax burden, then its a high priority.
- Not having disability insurance or enough life insurance. A physician’s greatest asset is his or her future income. That future income needs to be protected through insurance until the protection is no longer needed.
- Purchasing a home if you are probably going to move in the next five years. Young physicians, and especially those in academics, tend to be more transient than their older colleagues. Buying and selling a home is an expensive process between the real estate commissions, repair costs and all the stuff people buy when they get a new house. Then there is the fact that very little equity builds in the first five years, and there is no guarantee that your house will increase in value.
- Working for credit card companies instead of making them work for you. With 0% interest offers, free rollovers, and credit card rewards of 2-3%, credit card companies can be used to knock out a high interest student loan and pay you hundreds of dollars a year in rewards. They can also cost you thousands of dollars in interest if you have high-interest rate cards and carry a balance. The pendulum right now is in favor of card holders, but that could eventually change. Take advantage of your opportunities while you can.
- Banking on an inheritance or gift. Several physicians that I have spoken with have wealthy parents and expect to receive periodic gifts, or a large inheritance, that is essentially their retirement plan. The problem is that even if the parents don’t spend it all (that’s my parents’ goal), what happens if they are victims of adviser fraud, have significant tax liabilities or an undisclosed lover or child who ties up the assets in litigation after the parent’s death? Then the hopeful beneficiary is out of luck. For it to happen even once is too often, but it does happen and you can’t rely on that inheritance.
- Contributing to a 529 too early. A 529 is a great tool, but it is pretty low on the list of priorities with your money. Paying off high interest debt, building an emergency fund and maxing all of your tax deferred investment opportunities are higher priorities.
- Not having an estate plan. Whether you are 35 years old and still trying to get out of debt, or 60 years old and winding down towards retirement, the last thing you want is for your wealth to go to the wrong people. A good estate plan can make sure your kids have the right guardian and trustee, that your assets are protected from creditors and help minimize taxes.