Written By Jared Costigan, CFP®
Updated on May 8, 2024
After working your way through medical school and the grueling hours of residency or fellowship, facing 80-hour weeks and 24-hour shifts, the idea of retirement planning might seem almost laughable. You’re earning a PGY salary that amounts to around 20% to 35% of what you’ll receive in your first year as an attending physician.
It’s enough money to cover your basic living expenses — housing, food, transportation — and even enjoy an occasional evening out with your family or coworkers. But there isn’t a lot left over at the end of the month. Still, finance blogs, reels from finance influencers, and even your own family are telling you to SAVE, SAVE, SAVE.
You might have heard that contributing $23,000 annually to your 403(b) can set you up for retirement, but with what's left of your salary, finding $1,900 a month to save feels next to impossible.
Sound familiar? If so, I have good news: you shouldn’t stress too much about hitting high savings targets during your residency. The reason is based on an economic principle known as consumption smoothing. Let me explain how it ties into retirement planning for resident physicians to give you some peace of mind.
Consumption smoothing: The economic secret to living well today
In economics, there is a theory called consumption smoothing. When you’re currently living on a lower income but are confident your income will increase over time, you can aim to maintain a relatively consistent lifestyle.
For resident physicians, this means that when a substantial salary increase as an attending is relatively certain, the money you earn today holds more value for your current lifestyle than it will later on when you’re earning a high income.
The common personal finance advice to “live like a resident, and you’ll be rich” has some truth to it. The adage reflects the wisdom of consumption smoothing, but it lacks some context as to why a financial advisor might advise this strategy.
Stop the savings guilt and live comfortably during residency
Saving for the future is an important part of your financial plan. The key is to avoid retirement planning mistakes and focus on when to save to give you greater financial flexibility. Living a reasonably comfortable lifestyle in residency isn’t something to regret or feel anxious for FOMO on your retirement savings — it can actually help to prevent unchecked expenses when “lifestyle creep” becomes an option as your income grows.
By allowing yourself some leeway with spending money in residency, you ease the current financial strain and set a sustainable pattern. This makes it easier to commit to maintaining a similar lifestyle once you’re earning more as an attending and playing catch-up when it comes to financial goals like retirement savings.
Leveraging employer retirement benefits
Even if you’re okay with minimal retirement savings in training, I’d advise against banking your savings plan entirely on consumption smoothing. After all, getting the most from employer matches should be a priority.
Start by reviewing your employer’s retirement plan benefits to take advantage of any available matching retirement contributions. It represents additional compensation on top of your salary and should definitely be utilized.
In the grand scheme of your financial life, you’ll need to find a balance between your income, spending, savings, time and health. Residency program training years, while financially challenging, are also taxing on your time and your health. It’s important to prioritize physical and mental well-being and allow for some discretionary spending that brings joy and energy.
Remember, you have many years to save for retirement. If you take your investment plan seriously and earmark 15% to 25% of your gross income for savings in your higher earning years, anything you save now is a bonus.
3 approaches to saving while in residency
Let’s explore how three medical residents with similar incomes use different financial strategies to save and plan for their future financial needs.
Kayla: Consumption smoothing
Let’s take Kayla, a PGY2 in Florida who plans to practice family medicine straight out of residency. Her current income is $65,000, and she anticipates she’ll earn $215,000 in her first year as an attending physician.
Here’s her financial situation:
- Monthly, Kayla earns $5,416, which leaves her with $4,491 after taking out federal income taxes and payroll taxes.
- Her employer offers a 100% match on the first 3% of her contribution, so Kayla contributes 3% or $1,950 per year to her 403(b) retirement savings account.
- She and her partner jointly purchased a home, and her share of the mortgage, taxes and insurance costs her $2,200 per month.
After covering a car payment, utilities, insurance policies (auto, disability insurance, life insurance), groceries, dining out, entertainment, streaming subscriptions, and salon visits, her budget is tightly stretched. However, she manages to travel to see friends across the country when the opportunity presents itself and tries to do an international vacation every other year.
When all the spending is done, she doesn’t have much left to save in her retirement plan. Her spending is relatively high compared to her income, with housing alone taking up 40% of her gross residency pay.
Post-residency, she plans to stay in the same home and continue her current level of spending. She may splurge on a more frequent vacation or two, but she intends to incorporate a maximum 401(k) contribution ($23,000), a maximum backdoor Roth IRA contribution ($7,000), and an additional $1,000 each month into her brokerage account when she starts her attending position.
Katie: Max retirement savings
Katie is Kayla’s co-resident. As a PGY2, Katie makes the same income and expects the same salary as an attending. She views retirement savings as a priority and plans to get as close as possible to contributing the maximum amount to her 403(b) each year.
Here’s her financial situation:
- Katie earns $5,416 each month, which yields her an after-tax amount of $4,491.
- She’s left with just $2,859 for the month after her retirement contribution.
- She rents a one-bedroom apartment to keep her housing costs down.
After managing essential expenses such as utilities, groceries, an auto loan, life and disability insurance, Katie largely spends her remaining paycheck. She can afford some small luxuries, like getting organic strawberries and going to the movies with friends but feels she should postpone travel and vacationing until she’s more financially stable.
After she’s an attending, Katie is excited to get an electric car and to buy what she considers her forever home. She also plans to continue maximizing her 403(b) each year until retirement and spending the remainder.
Kingsley: Max retirement savings plus IRA and investing in a taxable account
Another co-resident, Kingsley, has the same career position as Kayla and Katie. However, she really optimizes her finances to save as much as possible — she forgoes current expenses to contribute the maximum to her 403(b) during residency and plans to continue this trend.
Here’s her financial situation:
- Kingsley earns $5,416 each month, leaving her with $4,491 after taxes.
- Like Katie, Kingsley has just $2,859 per month after her retirement contribution.
- She also plans to max her IRA contributions and add $1,000 each month into a brokerage account as an attending.
All of these savings don’t leave her much cash flow, so she limits eating out and traveling. And even though she really wanted to attend the anime convention last year in L.A., she decided not to because she felt she couldn’t afford the cost.
Smoothing out the financial ride: Outcomes and projections
At age 65 (34 years from now), these are Kayla, Katie, and Kingsley’s ending investment balances:
| Resident | Strategy | Ending investment balance |
|---|---|---|
| Kayla | 3% 403(b) in residencyMax 403(b)/IRA as attending$12k brokerage as attending | $6.97 million |
| Katie | Max 403(b) in residency and throughout her career, no other savings | $4.49 million |
| Kingsley | Max 403(b) in residencyMax 403(b)/IRA as attending$12k in brokerage as attending | $7.40 million |
Although Kayla’s retirement savings journey started more slowly, she prioritized saving aggressively in her higher-earning years as an attending physician. This strategy allowed her to do more spending in residency while maintaining a strong savings habit that leaves her prepared for retirement.
Each $1,000 that she earns in residency is much more valuable to her than each $1,000 she earns as an attending — in economics, we call this value utility. It demonstrates why smoothing out the utility over a long period, even at the expense of getting a head start on retirement savings, can lead to a more balanced lifestyle. In this approach, you can enjoy your income while you need it and save for the future by managing lifestyle creep.
In these three scenarios, all of the residents committed to consistent retirement contributions throughout their careers and ended up with account balances that could support a comfortable lifestyle in retirement. But notice that the ending results between Kingsley, who sacrificed a lot in residency to save, and Kayla, who spent most of her paycheck in residency but was serious about saving later, landed pretty close to each other.
Balancing savings and lifestyle
A word of caution, though — if you don’t plan to save much during residency and continue that habit as an attending physician, the lifestyle creep can really hurt you when it comes to investing. Early contributions create a pattern that benefits enormously from compound growth over time, even with relatively small contributions.
Don’t continue to delay the savings indefinitely. It’s increasingly difficult to catch up when your most valuable asset, time, begins to dwindle.
Financial planning incorporates more than just the math and investment management strategy. It’s also about balancing your savings with your lifestyle and personal values to live a rich and fulfilling life. Our physician-specific planners at SLP Wealth work with physicians at all levels of training to align their money with their values and goals. If you’d like to work with a financial planner who understands residency and fellowship and the realities of lifestyle creep, schedule an onboarding meeting.
