“I have little doubt that any pharmacist who is doing adequate planning over his/her career shouldn’t be able to retire as a millionaire.”
- Your Financial Pharmacist
What basis do I have for making this statement?
According to the Bureau of Labor Statistics, the median pay for a pharmacist in the US is $120,950. If a pharmacist making this income saves 10% of their income per year ($1,008 per month) over 30 years earning 6% growth on the investments, he/she will have just over $1,000,000 saved. If planning early, one could and should do much better than this since I would argue 10% for 30 years is not good enough. To be conservative, I recommend saving 15%-20% of your income over 40 years depending on your other financial goals.
In order to be successful with your investment plan and strategy, you have to first know what goal you are trying to achieve. Therefore, trying to project the amount of money you need to have saved at retirement is an important step to determine what you will do on a monthly basis to make this goal a reality. Without that goal, you may lose sight of the importance of making saving a priority in your monthly budget.
Build Your Launch Pad
While it is much more exciting to talk about investing, there is a very first important step to protecting your financial plan. If we think of investing as a rocket launch, then think of this step as building your launch pad. The launch pad consists of three major parts.
First, build an emergency fund of 3-6 months of expenses (not income). If your monthly income and expenses are the same, it is time to get serious about a budget!
Second, evaluate all of your debts and set a plan to pay off your debts. Notice I didn’t say you had to get rid of all your debts before investing. That decision should be based on your feelings and philosophy towards debt and the interest rate on those loans. You can read about my personal journey and budget that allowed my wife and I to pay off $200,000 in non-mortgage debt. One of the keys to winning with long-term savings is to get out of debt as soon as possible; especially high interest rate debt. This will free up your income for saving early and often.
Third, make sure you have the appropriate baseline protection in place. For the sake of the brevity of this article, this should include at least some term life insurance (e.g., 20 or 30 years) and long-term disability insurance if your family depends upon your income. There are all types of insurance policies and you should be cautious in choosing those that are necessary and play a valuable role in protecting the rest of your financial plan.
Utilize Tax-Advantaged Retirement Savings Vehicles
So, where should you start with retirement savings? Some employer-sponsored options (such as a 401k/403b) offer tax advantages on contributions whereas others (e.g., Roth IRA) offer tax advantages on the growth of your investment. You should take any tax-advantage savings before looking elsewhere.
I would recommend the following order of savings for retirement:
- If your employer offers any type of match in an employer sponsored retirement plan (e.g., 401k or 403b), take it. It is 100% free money.
- Max out a Roth IRA ($5,500 limit per person in 2016) if you meet the income eligibility requirements. If your household income prevents you from contributing to a Roth IRA, you should see if you could get access to a Roth 401(k) through your employer and/or take advantage of a backdoor Roth IRA.
- If applicable, go back to your employer-sponsored plan (e.g., 401k/403b) and put further contributions until steps 1-3 combined match your goal for retirement savings (which hopefully is 15-20% of your income!).
If you don’t have access to an employer sponsored retirement plan, I would recommend establishing services with one of the well-known robo-adviser companies such as Betterment (ed: Blair’s referral link that gets you 6 months of free investing) that provides you with good investment options with low fees. If you already work with a financial advisor and feel comfortable with that individual in terms of the advice they are giving and the fees they are charging, he/she should be able to help get you started.
Personally, I like to have a balance of retirement savings that are tax-advantaged on the contributions (e.g., 401k whether through an employer or self-funded) and others in a vehicle that are growing tax-free (e.g., Roth IRA).
Why is that the case?
The big question to answer (if you could) to help determine whether you should save more in an account where you pay taxes on your contributions but the money grows tax free (e.g., Roth IRA) versus an account where you don’t pay taxes on your contributions but will on the distributions (e.g., 401k or 403b) depends upon your income tax rate today versus your projected income tax rate at retirement.
There are lots of opinions out there as to whether income tax rates may go up or down in the future but the reality is we do not know and I think there is wisdom in having a balance between the two.
It is important to remember that the vehicles noted above (401k, 403b, Roth IRA, etc.) are just that, vehicles. They are not your actual investments. Within those vehicles, you will have to select your investments. There is a common mistake I see that everyone should be aware of. Often someone will get so excited that they are saving 15-20% of their income in the right vehicles but they then forget to carefully select the individual investments (e.g., mutual funds) within those vehicles.
If your hard-earned money is going to be put away for retirement, it is worth this extra step to make sure that you are selecting the best options that match your long-term goals.
This is where you can truly win long term by making sure you have a diversified portfolio of investments that have a strong track record of performance with as low as fees as possible. If you aren’t comfortable selecting individual investments, you should consult a licensed financial advisor.