Residency: The financial bitter-sweet spot

Many of my colleagues see residency as the hardest financial years because

1. student debt of 300-400k is compounding away at 6-9%
2. annual income is about 50k-70k depending post-graduate-year
3. work hours are long: 80+hrs/wk
4. there is no money, after monthly expenses, to be put away in retirement funds

I had a small epiphany and realized that this period between being student who pays to work, and being a fully trained attending doctor who makes the “big” buck, could be a sweet spot.

1. Due to the relatively “low” income, you can contribute to ROTH 403b up to 18k per year  @ very nicely low marginal taxes as compared to doing so as an attending with 4x your current income! So in my case, if I max out ROTH 403b during next 5 years of training, I would have put away 90k in ROTH by the time I become an attending. It will be a pretty decent nest egg of tax free retirement fund…
2. When you make 200-300k per yr as an attending physician, the most ROTH you can do is $5500 after some hard work to do so via the “Back door.”
3. Yes you can still max out your ROTH 403b, but it will be MUCH higher marginal tax rate! Often because of the high tax rate, attending will choose tax-deferred account instead of ROTH account.
4. It’s VERY costly to convert traditional IRA to ROTH IRA as an attending physician. Because whatever you convert is counted as INCOME additional to your attending income of (200-300k+). Imagine the marginal tax rate on those dollars of IRA converted!

But how can a resident with  mere 50k income, max out 18k in POST-tax retirement savings?

If you have been reading my other posts, you would have probably guessed it! CREDIT CARDS 🙂

After I paid off my student loan (6.8% interest rate), my highest interest debt is now my home mortgage, at 3.375%. I’m pretty confident that by putting money towards Vanguard index funds/ Vanguard stocks, I’ll enjoy a higher return than 3.375%.

Since my credit card is still paying me to borrow interest-free $ from them, I decided to funnel my “limited” cash flow to my retirement savings.

This is my plan,

1. I updated my budget
2. I divided my monthly expenses into “can be charged onto credit cards” vs. “must use existing cash”
3. I found that only my mortgage payment and credit card payment needs to be paid with ACTUAL cash. It amounts to a mere $1500 per month.
4. All my other expenses can be charged on my credit cards, at 1-2% cash back bonus, + interest free for 12-18 months.
5. Since my take home pay is round $3000, by using credit card for “chargeable” monthly expenses, I free up $1500 for retirement savings.
6. So I signed up for ROTH 403b today @ max annual max contribution of 18k, which comes down to monthly post -taxed contribution of $1500.
7. By the end of 2015. I would have netted
   1. 18k on credit card balance, @ 0% interest rate
   2. $400-500 in cash back bonuses (every day purchase 1%, food 2%, gas 3%, + first $500 dollar spending earns $100)
   3. 18k in ROTH 403b, which likely would have grown at least 5-6%, at new value of 19k, conservatively speaking. Since this is ROTH account, the growth is tax free 🙂
   4. So my net would be $19,000 in ROTH + $ 500 cash back- $18,000 credit card debt= $1500 gain ($500 cash back I will pay some taxes on because it is considered interest income on 1099)
   5. Note, this is very conservative calculations. Many of my friends’ retirement index funds made 11% last year. If this rate of return is used for the above calculation. 18k contributed to 403 ROTH can easily end up around 20k. Then one would stand to gain about $2500 from this simple operation 🙂
8. When the 0% interest is up on this particular credit card, it’s just time to apply for a card that has balance transfer offers. Which usually charges 3% transaction fee for 18 months 0% interest rate, which basically is 2% effective annual interest rate .
9. So during this 18 months, one will still enjoy borrowing the money @ 2% (just the rate of inflation) while making 6-12% return in the retirement index fund.
10. I can easily have several parallel operations as such, so that each year, I can max out 18k contribution to ROTH 403.

I project that at the end of my training (still have 5.25 years left), when I emerge as an attending physician with 4-6x my current income, the sum of these operations will amount to:

credit card revolving balance: 90k

• 2015: 18k, balance transferred 4 times @ 2% interest rate
• 2016: 18k, balance transferred 3 times @ 2% interest rate
• 2017: 18k, balance transferred 2 times @ 2% interest rate
• 2018: 18k, balance transferred 1 times @ 2% interest rate
• 2019: 18k, still riding initial purchase interest @ 0%

interest paid: $3600 over 5 years for borrowing sequential 18k each year.  If you find FEE-less balance transfer offer, you may be able completely avoid interest during these 5 years.

ROTH 403b retirement fund:

• 2015: 18k grew 5 years at 6% to 24088
• 2016: 18k grew 4 years at 6% to 22725
• 2017: 18k grew 3 years at 6% to 21438
• 2018: 18k grew 2 years at 6% to 20225
• 2019: 18k grew 1 year at 6% to 19080

total ROTH retirement fund: $107,556

Thanks to credit card company competing for my business and begging to fund my retirement, I would have netted $13956 using a VERY conservative rate of return (again my peers who have put money in Vanguard Target funds made 11% return.) This not counting the near $500 cash back bonus (that you need to pay taxes on via 1099) each year! That’s another $2500- tax in your pocket!

For the overly optimistic, assuming your average 5 year return was 9%; you would have accumulated $117,420 in your ROTH retirement fund, having made $23820 AND cash back bonus. 

For the super pessimist, assuming your average 5 year return was 2% (at mere inflation, haven’t heard of this in a 5 year run); you would have accumulated $95546 in your ROTH retirement fund, having made $1946 AND cash back. Which means, you still  net 4 grand more than you would have if you didn’t use the credit cards to fund your ROTH!

What can one lose? Do I need to run the scenario where an index fund’s average 5 year return is -2%? I have not heard of such an index fund!

This is what I started doing TODAY. After doing the math for the next 5 years, I am convinced that I have nothing to lose but plenty to gain.

I will check in at the end of 2015 and let you know how much I have in ROTH, and at what cost to me (if any) since at this point, I’m only getting rewarded with cash back bonus as I charge my monthly expenses on my credit cards…

The biggest benefit of this operation still, has yet been revealed, is

You GOT TO MAX your ROTH retirement fund @ a low tax rate!!!

Attending have the paycheck, but the HIGH tax rate to contribute to ROTH.

Average residents, have the LOW  tax rate, but no $ to fund their ROTH.

Residents who use this operation have

BOTH the $ and the LOW tax rate to max their ROTH in their YOUTH. 

Remember the saying “If youth knew and age could?”

Now attending COULD NOT grow their ROTH account without paying hefty taxes to fund ROTH 403b or to convert traditional to ROTH IRA.

Residents didn’t know that they can use credit cards to funnel their “limited cash flow” towards maximizing ROTH accounts.

Residents, now you know why residency is a sweet, not bitter spot, because YOU KNOW & YOU CAN!

• What are your thoughts?
• Does this operation make you nervous? excited?
• Does the math fundamentally make sense to you?
• Convinced, but not sure how to start? Comment below!