Wherever you are in your nursing career, planning for retirement may seem like a far off, confusing, or daunting task. But it doesn’t have to be that way! This four-part blog series is meant to help you understand that.
Part I, where you are now, is meant to give you a brief background on the world of finances and retirements savings.
Part II, A Simplified Guide to Nurse Retirement, goes into the specific accounts and savings methods you can take advantage of to prepare effectively.
Part III, How to Get Rid of Debt, present a four-step process for tackling debt along with some examples.
Part IV, Financial Independence / Retire Early, covers advanced strategies to financial independence.
To start...
And with the nationwide demand for nurses, the opportunities to act on the above are aplenty!
Disclaimer: I’m not a financial advisor (I’m a nurse!) and don’t pretend to be one online. We suggest consulting your tax and accounting professionals. This post is for informational purposes only.
Phew… now that I got that out of the way, let’s start with the basics.
While working at the hospital, I was the nerdy finance guy that my co-workers came to with questions about all things personal finances (which I loved). Over the years of helping my colleagues, I have learned that the vast majority of nurses aren’t contributing to their retirement accounts. When I asked why, the two most common answers were:
1. “Retirement seems so far away that I haven’t really thought about it. I don’t know where I’ll be at age 35, much less 65. I figure I can think about retirement stuff later.”
I completely understand this sentiment and identify with it myself. I struggle with my to-do list for next week… planning for 30+ years down the line seems less important when I’m putting out fires today.
As you’ll see with the data later in this article, the reason it’s critically important to start planning and investing now is because making smart choices early in your career will compound into huge gains after a few decades.
For example: two nurses, both age 28, contribute the same amount of money to their retirement accounts, but one has been investing since age 23, while the other started this year (at 28).
That five-year head start will lead to one nurse having $600,000 more when they’re both age 65.
2. “It’s going to take too much to sit down and get all my accounts setup, and the process is super confusing.”
If I asked you to work an extra 12-hour shift this weekend so that you could get paid $500,000 on your 65th birthday, would you do it?
The steps we cover in this article will take less time than a single shift. With a few hours of work, you can set your retirement investing on auto-pilot and potentially gain hundreds of thousands as a reward. How much is your future-self worth?
It might be easier to start with where you shouldn’t invest. One of the worst things you can do with your money is to stash it in a bank account (or even worse, under your mattress or in Venmo).
Seems counter-intuitive, right? But it’s true for two primary reasons: inflation and our inherent lack of willpower.
While this may seem like a super complicated economic topic that involves the Federal Reserve Bank, Consumer Price Index, Short-Term Interest Rates, and people tweeting angry things at the Federal Reserve Chairman, all you have to know is that it’s been about 3% (per year) for a long time, and the Federal Reserve Bank is super committed to keeping it between 0 and 3%.
Practically speaking, 3% annual inflation means that $100 today will be able to buy 3% less stuff next year, and 3% less the year after that.
Basically, you are taking a (-)3% loss on your money if you stashed it under your mattress.
“But don’t banks offer interest on the money in my accounts?”
Yes, but the best interest rate you will find on any high-yield savings account will be around 2%. Since inflation is eating your money at 3% every year, you end up with a (-)1% loss every year by just letting your money sit in the bank.
In other words, having cash isn’t a problem—not doing anything with it is. This leads us to the second problem…
A lack of willpower means spending what we make. We are conditioned at a fundamental level to feast on what is available and spend the money we have out of a lack of willpower. Even if we save up a bunch of money in a savings account, chances are we’ll talk ourselves into making a big purchase because we “deserve it,” or “we’ve been good.”
Unfortunately, we spend the most money on things that lose value at an even worse rate than the -3% rate of return we would get if we did nothing with the money, like a new car, which loses 10% of it’s value as soon as you drive off the lot. After 5 years, the car is worth 40% of its original value… totaling in a soul-crushing (-)60% loss on your investment.
Cars, jewelry, clothing, phones, eating out and meal deliveries, and all purchases using a credit card are all "loser" investments. That doesn’t mean that you are a loser because you made those purchases; we all buy those things. They are loser investments because the item you purchased loses value over time, which means you take a loss on your investment with every purchase. To make matters worse, if you purchase the loser investments with debt instruments like Loans or Credit Cards, you compound the loss on your investment with interest payments on the debt.
Spending money on things that lose value over time is by far the worst thing you can do with your money.
We all know we shouldn’t spend money on these things, but when you compare these purchases to the gains you could make with retirement account investing, the difference is mind-blowing.
Retirement accounts beat inflation AND banks.
Earlier, we established that the name of the game is beating inflation. If you’re holding cash underneath your mattress, you can look at it like you’re getting a (-)3% loss on your money every year, and we showed that even if you put your cash in a bank savings account, you still end up with a (-)1% loss every year.
BUT, if we put your money into a retirement account that is invested in the S&P500 index fund (more on this later), on average you will get a (+)7% gain on your money every year… and that’s factoring in inflation!
A few percentage points of difference may not seem like much, but going from -3% to 7% is a massive swing. For some context, let’s use the MoneyChimps Compound Interest Calculator,
Nope, that’s not a typo, that’s the magic of compound interest.
Warren Buffet, self-made billionaire and third-wealthiest individual in the world once said, “My wealth has come from a combination of living in America, some lucky genes, and compound interest.”
Now imagine the difference between investing $30,000 in a new car at a (-)11% annual return vs. $30,000 in the S&P 500 Index Fund at a (+)7% annual return…
[Spoiler Alert] It’s a S@#! Load of money!
And it gets better…
Retirement accounts allow you to pay LESS TAXES!
Have you ever met anyone that would be willing to pay more in taxes than they had to? Would you? In fact, the wealthiest individuals and companies in the world like Apple and Google, go through extreme (and sometimes illegal) lengths to avoid paying taxes. But again, it doesn’t have to be that difficult.
With retirement accounts like the 401k/401a, you don’t pay income taxes on the money you invest. Well... technically, you are just deferring taxes to a later date (when you withdraw from your retirement account). Since you are withdrawing this money after you’ve stopped working as a nurse, you won’t be collecting a paycheck, which means that your overall income will be much lower. Therefore, your taxable income will be lower in retirement than it was when you were getting a paycheck as a nurse, so you will automatically be paying less taxes on the money you invested.
Even better, as we’ll cover in the Advanced Strategies article, there are people who have found clever (and 100% legal) tactics for reducing their tax burden to almost zero when they retire.
Retirement accounts solve the psychological problems, too!
This is the most underrated component of retirement accounts in my opinion. As I mentioned before, I have zero willpower, just like everyone else. By automatically investing my paycheck into a retirement account, I effectively remove any temptation (and ability) to spend that money. The money is locked up, and it’s a pain in the ass to get out. Depending on the type of retirement account, you may also get hit once with early withdrawal penalties and again with having to pay taxes on the withdrawal as income. So it’s very painful (and nearly impossible) to spend that money.
It’d be like being on a diet where any time you reach for your favorite unhealthy snack, someone smacks it right out of your hands. Painful, but effective!
By investing money into assets that beat the -3% inflation rate, you’re setting yourself on a journey of accumulating wealth that generates more wealth.
At some point, you accumulate enough wealth that the annual return on your investments exceeds your expenses (food, shelter, transportation, etc.) and when you hit that magic number you are free.
That’s why I’m so passionate about personal finance for nurses. As I mentioned at the beginning of the article, time is the most valuable resource we have, but nurses deserve more of it!
Every nurse deserves the state of financial-nirvana known as: Time Freedom.
Having Time Freedom means:
“OK, we get it. Retirement accounts are awesome, and time freedom sounds amazing, but I don’t make enough as a nurse to be THAT wealthy.”
Nurses actually have an advantage over almost every other profession when it comes to generating wealth.
Through the process of discovering all the financial advantages nurses have, I started to think about our doctor brothers and sisters. They have a much higher average salaries than nurses do, but they also have to spend an incredible amount of time and money on medical school from an early age.
Knowing what we know about the effects of compounding interest, I wondered what the financial impact would be of taking on massive student loan debt as a medical student compared to nursing school.
Being the huge finance nerd that I am, I explored this problem in the best way I knew how… I made a spreadsheet.
I looked up the average medical school debt, average nursing school debt, the average age of MD and RN graduates, and the median salary of both MDs and RNs.
To make things equal and easy to calculate, I plotted some example scenarios where both RNs and MDs started with average student loan debt at the average age at graduation, and then contributed 15% of their salary every year toward paying off their debt. Once their debt was paid off, both the nurse and doctor would contribute 15% of their respective salaries to their retirement accounts that earned a (+7)% annual return until they reached the age of 65.
To my surprise, I found that not only would the average nurse retire with a similar amount of wealth than Pediatricians, Internal Medicine, and Family Medicine physicians, but there were also a few scenarios in which...
nurses with only a few extra years’ head-start could meet or even exceed the wealth of a doctor by age 65!
For the NP example on the spreadsheet, I had the nurse graduate at 23, save 15% of her salary until she had enough to pay her MSN tuition in full (Age 32), then after school, put 15% of her salary into retirement until 65. As a 30 year-old nurse, with many friends who are pursuing or just finishing their master’s degree, this seemed like a reasonable age for an NP graduate. Interestingly, in this scenario, she ended up with $1,852,506.
Less than the nurse who stuck with her original job.
This goes to show that if you are thinking about graduate school because you want to make more money, it’s really important to factor in the cost of tuition, the salary you’ll make after graduating, and the opportunity cost of losing years of income and compounding interest. There’s a very real chance graduate school may not be worth it from a purely economic sense.
Last but not least, I ran the same scenario as the NP example, except this time, our nurse became a CRNA — the highest paid nursing role on average. In this scenario, the CRNA ended up with $2,665,660 at 65, beating out Pediatricians, Internal Medicine, and General Practitioners, which are the the three biggest specialties in terms of the total number of graduates and fellows.
“Aren’t there doctors who make more?”
I opted to use the three lowest paid MD specialties because the higher paid specialties end up with significantly more wealth than even the most optimistic nursing scenario. Sorry, RNs, it’s likely that we’re never gonna challenge the wealth of our surgeon and anesthesiologist compadres.
However, as someone who grew up in a family full of doctors and worked in the Operating Room, I can tell you that the amount of stress and pressure these doctors go through is insane. They definitely earn all that money.
“Is paying off loans really that simple?”
The scenario I gave for both MDs and RNs of putting 15% of their salary to pay down their debt until it gets to $0 is not how student loan debt repayment works at all. For most cases of large debt, like mortgages and student loan, the structure of the payment plan is formed using something called a loan amortization schedule.
But to be honest, I couldn’t figure out how to combine a loan amortization schedule and compounding interest calculator into one line on a spreadsheet without making my brain explode.
The good news (for nurses) is that loan amortization schedules actually stretch out the amount of debt and the years it takes to pay. So using an amortization schedule in our spreadsheet would actually be even more favorable for nurses.
Pretty sweet, right?!
“What about getting a raise?”
I didn’t adjust the income over the career of RNs and MDs. Ideally, the income will go up every year as you get more experience, so the RNs and MDs in the examples should have much more money at retirement, even if they stick with the 15% salary contributions. There was no way of standardizing the income growth, so I stuck with the median salary data for their entire career.
In short, here are the three major takeaways:
If you’re interested in going down the rabbit hole and really mastering your personal finances… the next articles are going to cover:
Finally, here are the base averages that I used to build the spreadsheet and their sources, so that you can run your own numbers if you wish!
Congratulations! You made it through the first part of our four-part series on nursing financials. Continue on to learn more about retirement accounts for nurses!
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