Top 3 Questions Nurse Practitioners Ask About Retirement
Creating your financial plan as a nurse practitioner has a lot of areas that need to be checked on, from investment accounts to having the proper malpractice insurance. These are the vital aspects that can be the difference between a great financial plan and an amazing financial plan.
Today I am going to discuss the top 3 questions I get from nurse practitioners: how much should I be saving, where should I be saving and how much will I need to make work optional?
Why?
Because understanding these 3 questions will allow you to chart out the rest of your finances.
How Much Should I Be Saving?
Saving for what’s next becomes more and more important each year. This is because your time investment is just as important, if not more important, than the funds that you are invested in.
The rule of thumb for retirement saving is for you to save ~15% of your income each year. This does include your employer contributions also. So, if you have a 5% match on your employer retirement plan and contribute 5% your total savings would be 10%.
My firm is located right outside of Philadelphia so for example we will look at the average nurse practitioner salary in Pennsylvania, $116,643.
For an np that is making $116,643 with the goal to save ~15% of their income/year for retirement, they would have to save ~$17,497/year. If you are paid biweekly (26 times/year) this would be ~673/paycheck that is contributed to your 401(k) or 403(b). However, as mentioned prior the employer contributions would also go into this number.
Where Should I Be Investing?
After knowing how much you need to save, the next step is to understand where to save. Where you are saving will have an effect on your taxes both now and in the future.
Pre-Tax Account: 401(k) or 403(b)
Your employer's retirement account is usually the first place that people save, as a nurse practitioner, it’s no different for you. As a nurse practitioner, the key difference you might encounter when it comes to employer plans is whether you have access to a 401(k) or a 403(b).
There are a few differences between the two plan types, but the major difference is that a 401(k) is offered by for-profit companies and a 403(b) is offered by non-profit companies. The other differences I will discuss in a later blog.
When you make contributions to your 401(k)/403(b) the contributions are tax-deferred. This means you are deferring your contributions and the growth associated with them until the future when you begin to take income from the account.
What does deferring taxes look like to you?
If we use the example from above with the NP that had a salary of $116,644 and made retirement contributions of $17,497. If all the contributions were made by the NP and to the traditional 401(k)/403(b) their taxable income (before other deductions) would go to $99,147. This is because you are deferring the tax liability on this income to a future date.
Roth options may be available for these accounts which act more as a Roth IRA.
Tax-Free Account: Roth IRA
An IRA stands for an individual retirement account (not associated with your employer). The Roth IRA is a type of account where you put money into the account after you already paid taxes and then it grows tax fee.
Unlike other IRA accounts (401(k), 403(b), Traditional IRA*) your Roth IRA contributions are not eligible for tax deductions. However, the growth and earnings from the account will become tax-free in the future. Many people refer to this as paying taxes on the seeds rather than the tree. There are lower contribution limits ($6,000 as of 2022) to a Roth IRA than an employer plan.
*Depending on your income level contributions to a Traditional IRA might not be tax deductible.
Taxable Account: Brokerage Account
A brokerage account (taxable account) is a “tax now” account. Brokerage accounts are a great tool to use as a mid-term bucket. The assets will grow more than with a bank account and will not have penalties as retirement accounts would if you need to access the funds in the account. With a brokerage account, you will receive a 1099-B each year to file your taxes. You will only be liable for taxes if there is a taxable event.
A taxable event could be selling a stock, receiving a dividend, or when a mutual fund passes a gain to you.
With taxable accounts the funds can be withdrawn at any time, just be careful and understand the taxes associated with each transaction. The two types of taxes that would be associated with selling assets are short-term and long-term capital gains. A short-term gain is where you buy and sell a security within a year. A long-term gain is where the security is held for over a year.*
*Even if you hold a mutual fund for over a year you can have short-term capital gains because the mutual fund company passes its trading gains/losses to you. This makes most mutual funds less tax efficient than exchange-traded funds, stocks, and bonds.
How Much Do I Need To Make Work Optional?
There is not a dollar amount because a lot of different factors go into the answer, and it really depends on your situation. Some of the factors that can change this number are:
- Will you have other sources of income (real estate, part-time job, etc.)?
- How much will your monthly expenses be?
- Will you move to a state with lower state taxes?
There are a couple of general ways to come up with a goal number, but as I said before I would encourage you to speak with a planner to discuss your unique circumstances.
The 4% rule is commonly used to come up with a goal number or determine how much you can take out of your account as income.
Accumulating
To use the 4% rule while you are still saving for the next stage you would take your current income and multiply it by 25.
Salary X 25 = Goal Amount
$116,644 (above np example) X 25 = $2,916,100
This is using 100% of their current salary, some tools and advisors will say this number should be between 75-80% of your current salary because you are no longer saving for retirement, your house could be paid off, etc. In this case this number would be between $2,187,075-$2,332,880.
The reason why I chose not to reduce my income is that:
- It allows for more flexibility
- In your earlier retirement years, you might want to travel more
Neither option is wrong and the ability to have options and make adjustments as you plan is a great perk!
Retired
If you are retired and looking to see what income you can withdraw from your portfolio each year using the 4% rule here is how you would do that.
Say you have $2,332,880 in your investment portfolio; all you do is multiple that by 4%.
$2,332,880 X 4% = $93,315.2
The ~$93,000 would be the income you could withdraw from the investment portfolio. You would also have access to social security, pensions, and any other sources of income you own.
Final Thoughts
1. You should be contributing to all 3 types of accounts. This will give you the greatest ability to control your taxes in the future.
- If taxes, go up in your retirement you will be able to withdraw more tax-free money out of your Roth IRA.
- If taxes, go down in your retirement you will be able to withdraw more money from your tax-deferred.
By having accounts that are taxed differently you will create the diversification you need to be prepared for any changes in the tax code.
2. The earlier that you begin to save the better. Your time invested in the market is key. Choose the appropriate investments and let compounding interest do its job.
3. I did not discuss all the possible account types available for use in your financial plan.
4. If you’re unsure what direction to go don’t hesitate to reach out to us. We would be more than happy to point you in the right direction, even if you don’t become a client.
As always, remember to keep planning personal and not leave the IRS a tip in the process!
Additional Articles and Resources
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax, legal, or investment advice and may not be relied on for purposes of avoiding any federal tax penalties. Individuals are encouraged to seek advice from their accountant, financial planner, and counsel. Neither the information presented, nor any opinion expressed constitutes a representation by WM Wealth Planning as a specific recommendation to the purchase or sale of any securities/investment. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by WM Wealth Planning for educational purposes*