401(k)/403(b): The Money I Did Not Invest During Residency | MD&D #42

Evidence based insights into physician compensation, RVUs, contracts, healthcare economics, and personal finances. For residents, fellows, and early-career attendings.

Life and Finances, in Medicine.

When I was a resident, I didn't know much about retirement accounts, so for years, I didn't open one. If you are just starting in medicine, it is important that you understand the benefits of having a 401(k) or 403(b) retirement accounts. There are many, but let me focus on three.

1. The Tax Deduction

If you make $100,000 and contribute $10,000 to your traditional 401(k), you only pay federal income taxes on $90,000, before other deductions or adjustments. You get that tax benefit in the year you contribute and you pay income taxes when you withdraw the money in retirement. By then, you may be making less money than during your highest-earning years. So, you may be paying less in taxes then, anyway.

2. Compound Growth

Compound growth lets you accumulate money faster because your investment returns can generate additional returns. The principal (the original amount you invested) and the returns from that principal both generate new returns. So, let's assume you invest $100 in a fund that gives you a 10% return a year. The first $100 becomes $110 at the end of the first year, which becomes $121 the following year and so on. And that is only on the first $100. If you keep contributing every month, this can snowball fast.

Remember, a 401(k) is an account, not an investment itself. You need to invest the money inside the account, for example, in mutual funds, to generate returns. Although investment returns are not guaranteed, historically, the stock market has recovered from downturns, and to do so, the market needs time. No one can tell you how long. So, if you think about it, the longer you contribute and the more consistent you are, the better off you could be in the future.

3. Your Employer's Matching

If your employer matches your contribution, that is like getting free money. If they promise match your contributions up to 4% of your salary, for example, then by contributing 4% of your income, you are automatically contributing 8%. Just remember, not every employer offers a 401(k) or 403(b) retirement accounts, and not every plan offers matching contributions.

Why Should I Care About Retirement Now?

A 401(k) is designed for retirement. That is far away. That is an argument that I usually hear from medical students and residents. It is a valid argument. 401(k) and 403(b) plans are designed for retirement. But if you invest early, you may get to decide when to retire, by amassing a good amount of money. If you don't require much money in retirement, you can retire much earlier than you think. There's a whole community around this idea of financial independence and early retirement. Of course, withdrawing from your traditional 401(k) before age 59½ may involve income taxes and an additional 10% tax, unless you qualify for an exception. But if you plan carefully, taking this into account, you can retire much earlier than you think.

And to plan, one of the most important things is to have a budget. A realistic budget, not an idealistic one. Know how much you owe, how much you own, and how much money comes in. When you create your budget, decide how much you need for basic living expenses, how much you need to pay your debts, and how much you can put into your retirement account. Don’t invest only your extra money. You will never have enough extra money to invest.

Small Investments. Extraordinary Differences.

You don't need to start with a lot of money. You do not need thousands of dollars to begin investing. Consider two simple examples: investing $100 a month or $50 a week, starting at different ages.

These examples assume a hypothetical 7% annual return, with contributions at the end of each period and returns compounded. Actual returns vary and are not guaranteed.

The lesson: Someone investing $100 monthly starting at age 25 could accumulate approximately $262,000 by age 65. Starting at 45, the same investment would grow only to approximately $52,000.

The difference in these examples is time, not the amount invested. Think about this carefully. How much do you spend on a drink when you go out on a weekend? If you drink, of course. A cocktail here in New York costs between $15 and $20. Plus tip, that could easily be $25 per cocktail. And most people have more than one, especially in New York, where many of us don't have a car. So, if instead of having two drinks you have one, and you are disciplined about putting that money into an investment account, you will have the $100 a month that may lead you to hundreds of thousands of dollars later. The key is consistency. You don't need to invest a lot of money.

Maximize What You Can, When You Can

Residents may not be able to maximize annual retirement contributions. That is understandable. In 2026, the employee contribution limit for most 401(k) and 403(b) plans is $24,500 for those under age 50. Begin with what you can afford. Increase contributions as your salary grows. A small contribution today builds the habit that will support much larger contributions tomorrow.

You don't need to make a lot of money to start investing. You need a realistic budget, consistency, and time. Even $100 a month can make an extraordinary difference over several decades. The best time to start investing may have been years ago. The next best time is now.

1.      Start early. You don't need thousands of dollars to begin investing. Small, consistent contributions can grow significantly over time.

2.      Take advantage of your benefits. Traditional 401(k) and 403(b) contributions can reduce your taxable income today, and employer matching, when available, can help you build your investments faster.

3.      Make investing part of your budget. Don't wait until you have extra money. Decide how much you can afford to invest, start with that amount, and increase your contributions as your income grows.

“Someone’s sitting in the shade today because someone planted a tree a long time ago.”

Warren Buffett

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