I’ve been teaching a “personal finance basics” 16-hour course for 3rd year pharmacists for a few years now and I am starting to get this question a lot from other students and other pharmacists who know I teach the course.
What kind of student wouldn’t want to enroll in this course and talk about numbers for 2 hours at-a-time?? Come on! Aren’t we all accidental Pharmacists who really wanted to be Accountants?!?!? Ooh, maybe it’s just me…
I decided it probably makes sense to finally write something down and post it, so I can reference something rather than having the conversation again and again.
Let’s get going!!!
Ok, wait – let’s delay take-off for one second… sorry… A couple assumptions before we get rolling:
- You are a soon-to-be or recent graduate, or at least have 20-plus years until you want to retire
- If you want to retire in <10 years or are 50-to-60 years old – this might not be the post for you
- BUT I do have a post in the pipeline for those “shorter” timers – so post a comment below if you want to hear it sooner than my other ideas!
- For this scenario – you are a pharmacist making $100,000 per year (the Bureau of Labor Statistics says we make ~$122,000/year on average – but feel free to change the numbers for your situation)
Take 2 – Let’s goooooooo!!
Good news first – you make $100,000 per year! Woohoo!
- That means you make more than ~88% of other families in the United States (i.e. a fairly large amount of money)
- Globally – you now make more than nearly 99% of people in the whole world… let that sink in.
Now some bad news:
- Also, you are going to have to pay taxes on your income
- You’ll also have some other expenses – namely, Student Loans
You haven’t told me anything useful??!
Ok, here’s the skinny.. You likely aren’t going to have a job that pays you a pension…
So that means it is on you. I’m going to dive into some more specifics in my subsequent posts on how to build a Cash Management Plan (a fancy word – errr, a fancy phrase – for budget).
You need to save 15-20% of your gross income for retirement
- What does gross mean? I don’t want booger-covered income…
- Gross income means the total income you make before taxes, expenses, etc
- $100,000 is your gross income (in this scenario)
- Which means saving $15,000 to $20,000 per year
Wait, wait – Don’t leave yet!!!
Who am I kidding, if you scrolled this far, you’re pot-committed – you aren’t going anywhere…… right?
Ok, queue more good news!!
You have a tax-advantaged account you can put this money into that will soften the hurt while you save 20% of your income… your employer-sponsored 401(k) or 403(b) retirement accounts.
- Remember those boring packets of stock market fund options and other information your Human Resource person made you take when you got hired?? Unfortunately, they were important – luckily they still have a copy if you threw yours out already.
When you invest in a 401k or 403b, you get to do so PRE-TAX. That means before you pay taxes on your income and in 2018 that means you get to save about 24% in taxes.
- Which basically means – you get to keep/save 24% more money than you would have if you didn’t save for retirement (which you needed to do anyway!!!!)
One note on the 401k/403b – you are limited to contributing $18,500 per year in this account. So if you want to save more than that, you’ll need to use a different type of savings account. We’ll touch more on that in another post.
OK, OK – it took 550 words – but now you are listening
Here is an average paycheck example (assuming $100k/year and 26 pay-periods):
|Gross income on that happy Fri-Yea payday||$ 3,850|
|Taxes to Uncle Sam||$ 880|
|Take Home Pay||$ 2,970|
Remember that I say you need to save 20% of your income
- 20% of $3,850 is… $770
If you just transferred $770 per paycheck to an account – this would obviously decrease your pay from:
|Current Take Home Pay||$ 2,970|
|20% Retirement saving||$ 770|
|Take Home Pay Now||$ 2,200|
Now through the magic of tax-advantaged retirement accounts – this is what happens if you put the same money in your 401k or 403b:
|Gross income on that happy Fri-Yea payday||$ 3,850|
|Money put in retirement tax-deferred account(s)||$ 770|
|Taxable Income is now||$ 3,080|
|Taxes to Uncle Same (way less than $880, wizardry!!)||$ 708|
|Total Take Home Pay||$ 2,372|
Compare this to the $2,200 above, which has you saving same amount outside 401k/403b!
There is no free-ride to retirement – you are going to have to save the money.
- Or just commit you and your future family to eating cat food late in life…
Saving in your 401k/403b account is a really good option that let’s you keep Uncle Sam from getting some of your hard-earned money too.
What about this retirement “match” I hear about?
I haven’t even talked about the sweet “retirement match” your employer probably provides that instantly gives you a 50-100% return on your money – no tricks, no lies, all guarantee.
We’ll talk about this more in a subsequent post, but any money your employer gives you does count toward getting you to 20% saving
- So really you are saving a bit less than $770 per pay check
- You still get the tax break discussed above!
- And you get the employer match (which is really a part of your salary whether you contribute money to earn it or not). GET THAT FREE MONEY from the retirement match!
What do you think? Who is saving in a 401k/403b? Who is saving 15-20% for their retirement already? Tell me below!