Even though she is just starting her career, Erin has already put a lot of thought into her retirement. She has considerable student loan debt but with a high-paying job in medicine, she shouldn’t have any problems keeping up with the monthly payments and setting aside some money for her later years.
“It’s really smart that [Erin is] thinking about retirement at 32 years old,” says New York-based certified financial planner Stephanie Genkin.
Even before she finished medical school, Erin was saving for her future. Her three-year medical residency, which wrapped up in 2015, offered her a 401(k) plan with a company match of up to 4%, which Erin took full advantage of.
Employer-match programs are a big motivator to participate in 401(k) plans. According to a study by the Pew Charitable Trusts, 81% of workers with access to an employer-sponsored retirement plan have a match or contribution program. Such plans have a 16% participation rate than those without company contributions.
However, Erin hasn’t made any contributions to that account since she finished the program three years ago. Her new job will offer a 401(k) but only after she completes her first year.
Genkin says Erin should prioritize “maxing that out next year,” as soon as she can enroll.
Looking to IRAs
Since Erin isn’t currently eligible for an employer-sponsored retirement plan, she opened a Roth IRA earlier this year and invested $2,700. She says she plans to take an additional $2,800 from her savings and add that to the Roth IRA to maximize her retirement saving for the year.
The maximum contribution for a Roth account in 2017 is $5,500 (The limit is $6,500 for those age 50 and older). Genkin says investors like Erin should try to reach the limit if they can afford to because of the tax benefits.
The IRS’s Retirement Savings Contribution Credit, also known as the Saver’s Credit, allows individuals aged 18 and older who are not students or dependents a tax credit for making eligible contributions to IRAs or employer-sponsored retirement plans. The amount of the credit depends on the taxpayer’s adjusted gross income.
In addition to her retirement savings, Erin has $30,000 in a fund her parents set up for her when she was a baby. She also has a brokerage account with about $6,000 in individual stocks, including Facebook (FB), Snapchat (SNAP), General Electric (GE) and Under Armour (UA).
Erin says she enjoys researching and investing in individual stocks, but Genkin warns, “working with individual stocks is like gambling with your money.”
Genkin suggests that Erin sell the $6,000 in stocks and invest that money in an S&P 500 Index fund which tracks the 500 largest publicly-traded companies in the U.S.
Investing in an S&P 500 fund will give her exposure to growth in U.S. companies without the risk of owning individual stocks. “This will really help [her] with diversifying [her] investments,” says Genkin.