Now that I have my first attending job outside of residency, its time to set up my first 401k. I opted not to create one during residency which I discussed in my post about my retirement mistake during training. No need to dwell on the past, I’ve already learned from it and moved on. Looking forward, I plan to take full advantage of tax deferred accounts which means I will max them all out this year.
Establishing My 401k
During my orientation before I started work I was greeted by a financial adviser who handles the groups 401k plan. He tells me that most doctors in his experience tend to enter into the retirement plan that their group actively manages. He quickly goes over some of his favorite funds and then tells me that at least once a year he throws a party for all the doctors in the group. I hate to judge people, but by the sales pitch I walked away feeling a little uneasy. I knew right away who is paying for those yearly parties (the doctors in the group). Seems like a large conflict of interest to be recommending funds that you make the most money off of. I politely declined and told them that I would go home and read things over.
When I get home I read through a booklet that his group provided that included all the funds and fees. Turns out that his favorite funds have an average ER of about 1% and he charges another 0.5% per year to actively manage your funds, if you so choose. All in, it looks like if someone elected this type of plan they would end up paying about 1.5% per year to have someone else manage your retirement account! On the back of one of the pages in the handout in small print is a form for those who it states “… want to be in control, I will keep my investments in my hands.” This area you can opt out of the management fee and choose which fund you wish to invest in. This also seems a little unfair that the booklet has a total of about 70 pages and at least 10 of them are about actively managed funds. Turning to the page that describes the yearly costs of the funds, I can easily see that the ER’s range from a high of 1.8% to a low of 0.05%. Quite the difference!
How Much Will An Actively Managed Fund Cost Me
Lets say I ended up choosing this adviser and his average ER funds. I started to wonder how much this would cost me over time, assuming I could invest in a 3 fund portfolio with an average ER of 0.25% (actually the funds available to me have a lower average ER but lets just make the math simple). Since I am currently 30, lets say I plan to retire at 67 to get my full benefits. Using my calculator to determine compounding interest, it turns out that I will end up paying an additional $196,304.79 in fees (Assuming I invest 18,000 per year with difference in percent of 1.25). That’s definitely nothing to laugh at and assuming I withdrawal lets say 70k a year in retirement, that adds up to almost 3 extra years worth of retirement spending money available.
What I Decided To Go With
The funds that I ended up picking was a modified 3 fund or lazy portfolio. Since I still consider myself young with a long time till payout, I am opting to only have a maximum of 10% bonds for the next 2 years. The other 90% will be split between two vanguard funds. One, a fund that mimics the S&P500 and another that has international stocks. With each year that passes I plan to change the ratio as I continue to get older and closer to retirement to favor more stable funds such as bonds. The other priority at this time besides investment is paying off my student loans and saving for a house. Between all 3 of these and living expenses, I plan to continue living as frugally as possible for the next several years to come. In my mind I’m acting like I continued on with my education and will try to live like a resident or fellow as long as I or my better half can stand it.
Don’t fall for the salesman pitch. You worked hard for your money and be sure you are putting it in a location that will serve you well, not someone else’s pocketbook.