How to Save for Retirement (and What Not to Do)
Updated: Apr 12
For veterinary professionals, keeping a business afloat can be challenging in and of itself. Putting aside extra money for retirement is rarely on the radar, never mind on the list of priorities. Between treating patients and meeting with clients, performing surgeries, keeping up with continuing education and managing all the day to day activities of business operations, saving for the future often takes a back seat.
But even if you don’t have a lot of extra time on your hands, it’s still important that you understand the basic concepts behind saving for retirement. Otherwise, you could find yourself unable to enjoy the later years of your life. To follow are a few of the most popular retirement savings options along with a few tips for what not to do when investing for your future.
Traditional Individual Retirement Account (IRA)
An IRA is a retirement savings vehicle into which money can be deposited on a pre-tax basis. There are typically investments within the IRA through which any monies deposited may result in gains (or losses). Any gains are not taxed while the account matures, which allows the funds to continue to grow over time. Funds are taxed upon withdrawal with the goal being that the account owner will be in a lower tax bracket at the point of retirement. IRAs have certain contribution limits and other requirements that should be discussed with an investment specialist.
Roth IRA
If you’re looking to put money away during your lower earning years, a Roth IRA may be your best option. The difference between this type of IRA and its traditional counterpart is that the money put in is not pre-tax. In other words, tax is assessed and paid before it is deposited into the account. The funds then grow tax-free, but can be taken out without paying taxes on the back end, provided certain guidelines are met. Again, speaking with an investment professional to understand the way Roth IRAs work is strongly advised.
401(k)
A 401(k) is an employer-sponsored retirement savings vehicle. Money is taken out of the employee’s paycheck and placed into the 401(k) account. That money is then invested into different asset classes of the employee’s choosing. Similar to a traditional IRA, the funds invested in a 401(k) are pre-tax and are allowed to grow tax-free as the account matures. Money is only taxed when it is withdrawn from the account. This is a nice option, however, many smaller vet clinics do not offer this type of plan.
What NOT to Do
Of course, knowing what your options are and actually saving for retirement successfully are two entirely different things. Unfortunately, there are plenty of mistakes to be made along the way – missteps that could end up costing you dearly in the long run. If you’re in the process of planning your retirement savings strategy, here are a few things to avoid:
Waiting too long. (The best time to start saving is NOW.)
Not taking full advantage of the available tax breaks (i.e. not investing the maximum allowed).
Underestimating your longevity. (You don’t want to outlive your retirement savings.)
Tapping into retirement funds before it’s allowed. (You’ll pay a hefty penalty, not to mention higher taxes while you deplete your savings.)
Failing to consider additional costs, such as health care, which may be higher during your retirement years.
To prepare properly for retirement and prevent any of the above mistakes from happening to you, your best course of action should be sitting down with a retirement specialist. He or she can help you determine how much you need to save and map out the best course of action for achieving your long-term goals with minimal issues along the way.
Our Advice on How to Save for Retirement in 2024
Why is it important to start saving for retirement, especially as a busy veterinary professional?
Starting to save for retirement is crucial for veterinary professionals due to the unpredictable nature of the profession and the tendency for immediate business demands to overshadow long-term financial planning. Without a robust retirement strategy, one risks financial insecurity in later years, potentially outliving their savings. Early savings contribute to compound growth, providing a larger financial buffer against unforeseen expenses, such as healthcare. Furthermore, early engagement with retirement plans allows for maximal utilization of tax benefits and avoids common pitfalls, such as penalties for early withdrawal or insufficient savings, ensuring a more stable and secure retirement.
What is a traditional IRA, and how does it work?
A Traditional Individual Retirement Account (IRA) serves as a tool for saving towards retirement, allowing contributions to be made on a pre-tax basis. This means the money invested within the IRA isn't taxed until it's withdrawn, typically during retirement, potentially placing the investor in a lower tax bracket. The account contains various investments that can grow over time without immediate tax implications, enhancing the potential for increased savings. It's regulated by specific contribution limits and conditions, underscoring the importance of consulting with an investment specialist to maximize its benefits effectively.
Are there penalties for early withdrawals from retirement accounts?
Yes, early withdrawals from retirement accounts, such as IRAs and 401(k)s, typically incur penalties. Withdrawing funds before the age of 59½ generally results in a 10% penalty on the amount withdrawn, in addition to being subject to regular income tax. This can significantly reduce the savings intended for retirement. The rules are designed to encourage long-term saving and discourage the use of retirement funds for immediate financial needs. Exceptions do exist for certain circumstances, but the overarching goal is to maintain these savings until retirement age to ensure financial security.
How do you create a realistic budget for your desired retirement lifestyle, and when should you start making those projections?
Creating a realistic budget for retirement begins with assessing expected living expenses, healthcare needs, and lifestyle goals. Factor in inflation and potential unforeseen costs. Use online calculators or consult with a retirement specialist to estimate the necessary savings to support your desired lifestyle. Start making these projections early in your career to allow compound interest to maximize your savings potential. Regularly revisiting and adjusting your budget as your income, expenses, and retirement goals evolve is essential for staying on track. The key is to begin as soon as possible, ideally when you start earning.
How can you protect your retirement savings from the impact of inflation?
To protect retirement savings from inflation, diversify investments to include assets historically outpacing inflation, such as stocks, real estate, and inflation-protected securities (TIPS). Consider allocating a portion of the portfolio to these assets, as they can offer growth potential over the long term. Regularly reviewing and adjusting the investment mix is crucial to maintain alignment with your retirement goals and risk tolerance. Additionally, maximizing contributions to retirement accounts and considering a slightly more aggressive investment approach during the early stages of saving can provide a buffer against inflation's erosive effects over time.
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