There are two things that every nurse learns early in their career:
- Time is the most precious resource we have.
And no matter what we do, or how hard we fight, we simply don’t know how much time on this earth any of us are given.
- Being a nurse is hard. Sometimes really hard.
And it’s hard to know how long we can physically, mentally, and emotionally sustain the lifestyle.
So let’s talk money. Wherever you are in your nursing career, planning for retirement may seem like a far off, confusing, or daunting task. But it’s not, and doesn’t have to be that way. This blog series is meant to help you understand that:
- Finance and investing are a lot less complicated than bankers and advisors make them seem.
- Taking the time now to setup your retirement accounts can lead to hundreds of thousands of dollars down the line..
- By understanding and implementing these strategies early, it’s possible for nurses to retire wealthier than many doctors, or many other professions!
- You don’t have to rely on working at the bedside until your body gives out (unless you want to!). You will be free to do what you love, whatever that may be.
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.
Lessons learned from other nurses
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:
“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. That five-year headstart will lead to one nurse having $600,000 more when they’re both age 65.
That’s enough to buy a house! (Even in a high cost-of-living area.)
“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?
What should we invest our money into?
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 Trump tweeting angry things at the Federal Reserve Chairman, all you have to know is that it’s been about 3% 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.
You can look at it like 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 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. Which leads us to the next problem…
Lack of willpower = 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, all purchased 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 Account Investing: Making Money While You Sleep
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,
- A $10,000 investment at age 30 that earns 2% annually will grow to $19,998.90 by the time you’re 65.
- The same $10,000 investment in an account that earns 7% annually will grow to a whopping $106,765.81 in the same amount of time!
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 reached for your favorite unhealthy snack, someone smacked it right out of your hand…Painful. But pretty damn effective.
In the next section, we’ll go over how life-changing these gains can be when we learn to get out of our own way.
Invest in your freedom
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.
Every nurse deserves the state of financial-nirvana known as: Time Freedom.
Having Time Freedom means:
- Time to spend with your family.
- Opportunity to take chances.
- Time to pursue passions.
- Opportunity to explore and learn.
“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. Here’s why:
- Great pay with an undergraduate degree:
There are very few (if any) degrees where you can make $50-80k/year in your first job out of college. Most professions start out with much lower paying entry level jobs, and require advancing with a Master’s Degree or many years of experience before expecting any significant increase in salary.
- Working 3 days a week:
Whether nurses should work 8-hour shifts vs 12-hour shifts is a hotly debated topic. From a strictly financial perspective, 12 hour shifts are better because we can use the extra days off to increase our income by picking up extra shifts or even starting a side business.
- Health benefits:
I definitely took this for granted when working for a big hospital – incredible health, dental, and vision insurance for little to nothing. As a freelancer responsible for finding my own insurance, I learned that very basic health insurance plans with no dental and no vision can cost over $360/month with huge deductibles. And that’s just for myself. If I needed to get hospitalized or treated for something, that could deal a major blow to my personal finances.
- Access to the best retirement accounts:
Since most hospitals are non-profits, and/or part of a huge corporations, nurses have their pick of some of the most robust retirement account options and employee matching programs that exist. Arguably, the only people with better retirement account options than nurses are high-level executives in banking companies, or the federal employees and large companies that get pensions. Fun fact: Nurses can get pensions too!
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 salary than nurses do, but they also have to spend an incredible amount of money on medical school at 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!
Some sample results for doctors and nurses…
- Physicians begin their career with 3+ years of residency training where they make less than $50,000/year in salary. As such, it’s common practice for MDs to defer payment of their student loans until after their residency, which is why in our spreadsheet examples the physicians debt increases their first 3 years.
- A Pediatrician who graduated with $196,000 in medical school debt, deferred paying her loan off during 3 years of residency, then put 15% of her salary into paying off her debt until the debt was paid off (~Age 37-38), then put the same 15% of her salary into retirement account @ 7% annual return compounding every year would have $1,748,176 at age 65.
- An Internal Medicine physician who graduated with the same debt and put in the same 15% salary as above would have $2,393,796 at age 65.
- A Family Medicine physician who graduated with the same debt and did the same things as the two doctors above would have $2,511,363 at age 65.
- Since nurses don’t experience a residency training period where they get paid less than half of what they would be paid were they fully trained, the nurses in our spreadsheet examples start their career putting 15% of their salary toward paying off their debt.
- To illustrate the difference starting a few years earlier can make we can look at the comparison between the avg. ADN and BSN graduates. The average ADN graduate is Age 33 while the avg BSN graduate is 28. Having each one start with the same debt and go down the same path of paying off the debt then contributing to retirement account leads us to $934,924 (ADN) and $1,371,662 (BSN) at age 65.
- For nurses fortunate enough to go straight from high school graduate at age 18 to nursing school graduate in 5 years at the age of 25, putting 15% of your salary toward debt then retirement ended up with $1,984,210! That is more than the example Pediatrician, but less than the Internal Medicine and Family Medicine physicians.
- Once I knew it was possible to end up with a bigger number than the docs, I played around with a few other examples just to see how far we could push the numbers in realistic scenarios.
- If the same nursing graduate from above, age 23, was able to graduate nursing school without any student loan debt, either through scholarships, grants, and/or working while in school, then she would end up with $2,421,639 at age 65! That’s more than both the Pediatricians and Internal Medicine Physicians.
What about NPs and CRNAs?
For the NP example on the spreadsheet, to simplify things, 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 when 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.
Limitations of the results
“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 as someone who 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. Most large debt like mortgages and student loan debt structure the payment plan 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 if 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.
Conclusions and Next Steps
In short, here are the three major takeaways…
- Debt matters a lot, especially when you’re early in your career. Do whatever you can to graduate with minimal debt, and you will be rewarded with hundreds of thousands of dollars later.
- Once you start working, the best thing you can do is to pay off your debt as quickly as possible, then start contributing to your retirement account STAT. Remember that delaying your investing by a small amount of time like 5 years can compound to a $500,000 loss or gain by retirement.
- It’s critically important to invest your money in the right types of investment vehicles because a small % difference can lead to millions of dollars gained in return.
If you’re interested in going down the rabbit hole and really mastering your personal finances…the next articles are going to cover:
- Step-by-step instructions for making sure that your money is invested in the right type of accounts
- How to get rid of debt as quickly as possible
- The best strategies for lowering expenses and increasing income so that you can retire early
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!
- Avg. nursing school debt in 2017: $29,000
- Avg. age of graduating nurse: 31 | ADN: 33 | BSN: 28
- Median RN annual salary: $70,000
- Median Salary for NPs and CRNAs: $103,880 and $160,270, respectively
- In 2015, the specialties with the largest number of first-year ACGME residents and fellows were the primary care specialties of internal medicine (9,076), family medicine/general practice (3,419), and pediatrics (2,849). All 3 of the medical specialties above have a residency length of 3 years
- Avg. medical school debt in 2018: $196,000
- Median salaries for Internal Medicine, Family Medicine, and Pediatrics are $192,930, $198,784, and $172,650, respectively.