Should Young Doctors Pay Down Loans Or Invest In Retirement?

Bradly Bussewitz DPM

How should I invest my money? The options are loan repayment, mortgage, car loans, stocks, bonds, 401k, IRA and partnership buy-ins. There are too many options and too many variables for a cookie cutter approach. The answer is not straightforward. It depends on a host of things such as income, debt, lifestyle, one’s feelings about debt and feelings toward savings. The answer is to do what you were trained to do, treat the foot and ankle, and seek financial guidance from someone you can trust.

We should prepare ourselves to seek guidance. Consider a few thoughts on this topic. The first consideration is your cash flow. Do you have enough discretionary cash flow to accelerate the payments on your loans? If you are exhausting all of your income on fixed costs or those you have to make, then there is no surplus to put toward early loan repayment.

If you do have excess funds at the end of each month, consider the current borrowing cost of the loans. Typically, if the loan interest rate is low enough, it may be wise to pay minimum requirements. Unfortunately, many student loans do not qualify for refinancing to take advantage of the record low rates we are currently experiencing.

If you are fortunate enough to have low rate student loans and you have discretionary funds, consider directing more of your discretionary cash flow toward retirement, which may be able to provide higher returns than your loan rate. However, this can be tricky because investments typically come with risk. This is where I would steer clear of do-it-yourself attempts (one example is Ameritrade although there is a place for that too). Instead, consult an advisor to help calculate if this strategy could be rewarding for you.

Managing one’s finances may involve more than just a numbers game. While at times it may make more “financial sense” to start saving for retirement, there remains the emotional factor of carrying loads of debt. For some individuals, the day the loans are paid off can be a life-changing stress relief.

On the contrary, others cannot emotionally fathom delaying starting substantial retirement savings. If one decides to direct more cash flow toward retirement savings, he or she will want to consider the following: What is my tax bracket? Am I an independent contractor, employee or business owner? If you are an independent contractor, you will want to consider what your corporate structure will look like in the future.

Typically, if you are an employee, you will be able to contribute a maximum amount of $17,000 per year of annual income. This contribution is pre-tax, thus lowering your overall income tax liability. If you maximize that contribution, you may be eligible to contribute to either a traditional IRA or a Roth IRA. If your income is too high, you may not be eligible for either of these.

Now, if you are an independent contractor or own your own business, there are other plans available for you to set up. You could utilize a simple IRA, SEP IRA, Solo 401k or even a defined benefit plan. These choices all have different limits and I will not go into detail on each of these plans. It is best to contact an individual who specializes in these plans and can guide you in the right direction.

At the end of the day, there is no right or wrong choice. Many people like to take a balanced approach between savings and accelerating loan payments. The best idea is to work with someone to develop a strategy that works based on your own goals and your beliefs.

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