When I started my first nursing job, one of my first questions during orientation was “How do I set up my nursing retirement plan?”

Starting a retirement account as a nurse is probably easier than you think. Many hospitals will open a 401k or 403b plan for new nurses automatically, and some will even start to contribute a small percentage of your pay by default unless you choose to opt out. It’s important to set up your retirement account as soon as you can and contribute at least enough to get your employer match.

I made the costly mistake of “waiting until later” during orientation 12 years ago, and my procrastination will literally cost me over $100k in the long run.

How to Get Started

In 2021, setting up a retirement account for nurses is a lot easier than it used to be. Most hospitals and employers provide help to get started during orientation. You don’t have to be a financial whiz.

The old days of filling out lots of paperwork are mostly gone. Usually, you can do everything right on a website, and most of those sites are pretty easy to use.

If you’re already working but haven’t started to contribute to your plan, it’s not too late. The day you started the job was the best time to start investing. The next best time is today.

Make an appointment with HR as soon as you finish reading this if you need extra help. I can’t emphasize enough the importance of getting your account set up as early as possible.

How Much Should I Contribute?

Short answer: Contribute as much as you can to your nursing retirement plan, but at least enough to get the full employer match.

Why? The employer match is like free money, and you can’t ever get it back if you don’t start contributing now.

This number will vary, but it’s common to see anywhere from a 3%-6% employer match. Often, you’ll see a partial match, usually 50%, but some hospitals do offer a full match up to a certain percentage of your contributions.

Confused? You’re not alone, but it’s easy to break down.

My hospital’s wording is: “The match formula is $0.50 of each dollar up to the first 6% that you contribute.” That simply means if I contribute 6% of my pay, the hospital will contribute an additional 3%.

The 3% is the free money mentioned above. Three percent may not sound like a lot, but it adds up quickly, and you don’t have to do any extra work to get it. I’m all about working smarter, not harder, and you should be too.

The maximum you can choose to put into most work-based retirement accounts for 2021 is $19,500. If you’re 50 or over, add an additional $6,500 for a total max of $26,000.

The $19.5K annual max only applies to money that you put in. The employer match doesn’t count toward that maximum — it gets added. Let’s look at some numbers.

Scenarios

Example 1:

If you start at age 25 and contribute the same amount until age 65 with an 8% annual rate of return, at age 65, the balance (without fees) will be $1,577,654.84

Congratulations! You’ve become a millionaire just by saving $75 per week for yourself.

Example 2:

If you start at age 25 and contribute the same amount until age 65 with an 8% annual rate of return, at age 65 the balance (without fees) will be $6,030,149.07.

Congratulations! You’re a millionaire 6 times over! What could you do with $6 million in retirement?

Types of Nursing Retirement Plans

Here are the most common nursing retirement plan types. Depending on your employer, you will probably have one, or possibly a few to choose from.

401(k) Plans

A traditional 401(k) plan allows eligible employees to make pre-tax contributions through payroll deductions. The maximum that you can contribute in 2021 is $19,500, but if you’re 50 or over, that amount increases to $26,000.

Your employer has the option to match the amount you contribute by some percentage. Sometimes, the employer match portion is subject to a vesting period, which just means that you don’t get to take it with you if you leave, at least not 100% of it, until you’ve worked there for a certain amount of time.

With many hospitals, the employer match is immediately 100% vested. That’s the way my plan works.

With a traditional 401(k), your contribution goes in pre-tax. That means you pay less in taxes now. If you earned $75,000 last year but were able to max out your 401(k) contributions, you would only pay income taxes on $55,500.

The minimum age to withdraw money without penalty is 59 1/2.

403(b) Plans

This type of nurse retirement plan is specific to not-for-profit organizations and government employers. 403(b) plans for nurses are very similar to 401(k) plans with one exception: the investment options in some of these plans are not as heavily regulated as in 401(k)s. Fees and commissions may be higher, and that matters a lot. This is the type of account I have access to and the fees are very low.

As with the 401(k), most employers have some sort of matching program. You should always contribute at least up to the match amount to get the free money.

Contributions to your traditional 403(b) are also pre-tax, which lowers the taxes you pay today.

As with the 401(k), you can’t withdraw any money without a 10% penalty until age 59 1/2.

457 Plans

The 457 is a less common type of plan available to some state, county, or local government employees and some other groups. As with 403(b) plans, investment options in a 457 may, but not always, have higher fees.

In the early retirement world, the 457 can be a superpower. Here’s why: withdrawals made prior to age 59 1/2 are not subject to the 10% early withdrawal penalty. You usually have to separate from service (quit the job) to take money out, but this can be a huge benefit if you stop working long before traditional retirement age.

Employer matches for 457 contributions are less common. However, you should still strongly consider contributing to your 457 if you are able for the reasons mention above.

Pensions or State Retirement Plans

Often known as “state retirement,” these types of plans are sometimes available to nurses at state or government funded hospitals or agencies. Pension plans are “old-school” retirement, and many aren’t as lucrative as they used to be.

With these plans, a fixed amount is deducted from each paycheck. At “retirement age” as defined by the plan (usually a specific number of years worked), employees receive a fixed amount which is usually defined by some complicated calculation made based on earnings during working years.

It’s important to understand that pension payouts are not directly based on how much you contribute to the account.

Many pension programs have run into trouble within the last ten to twenty years. A lot are significantly underfunded – that means that without a change, they will struggle to pay out what they had planned to.

I had access to state retirement in the early 2000’s as a paramedic, and 5% of each paycheck went into the program. Contrast that to today; almost 10% is deducted from state employees’ checks for the same benefit amount.

Traditional vs. Roth

Many nurses have an option to make traditional or Roth contributions to the first three types of plans mentioned (401k, 403b, 457).

Traditional contributions are tax-deferred. This means you pay no taxes on the amount of money when you put it in. It grows tax-deferred, and taxes are paid when money is taken out.

With a traditional plan, by age 72, you must begin to withdraw a certain amount, known as a required minimum distribution, to avoid some significant tax consequences.

Roth contributions are taxed up front. The major benefit is that no more taxes are due – growth and withdrawals are completely tax free. This will leave you with a lower take-home amount today and obviously greater payout later. There are no mandatory withdrawals at a certain age.

Also, if you make Roth (after tax) contributions, the employer match portion is always made as a traditional contribution.

Choosing Investments in Your Nursing Retirement Plan

After setting up your retirement account, you’ll have to decide what to invest in. Most plans will have 15-20 options.

Entire books and courses are written on investment choice. Here are a few of the most important points to remember when choosing what to invest in within your retirement plan.

Fees Matter

Fees, sometimes called “expense ratios,” should be one of the biggest parts of your decision on which options to choose in your retirement account. Although most appear low at first, higher expense ratios have a dramatic effect on your balance as it grows.

1% doesn’t sound like a lot, especially in years where your balance may grow as much as 15-20%, but a one percent fee is huge.

For comparison, most funds I choose have a 0.04% annual expense ratio. That’s 4 one-hundredths of one percent each year – $40 for each $100k invested. Contrast that with a 1% (or higher fee) – $1,000 lost to fees for every $100k invested each year.

How much does 1% really cost? Let’s go back to the 40-year examples and add in fees.

Example 1:

After 40 years:
With a 0.04% annual fee, the ending balance is $1,560,832.27
With a 1% annual fee, the ending balance is $1,209,852.56
That’s a difference of $350,979.71

Example 2:

After 40 years:
With a 0.04% annual fee, the ending balance is $5,965,848.88
With a 1% annual fee, the ending balance is $4,624,325.49
That’s a difference of $1,341,523.39

1% is a lot more than it sounds when compound interest is involved!

Stocks vs. Bonds

Simply put, over a long period of time, stocks will grow more than bonds, but bonds don’t have as much potential to decrease (or increase) in value.

Since we’re talking about investing for many years, at a young age, it’s wise to choose mostly stocks. My hospital 403(b) is 90% stocks and 10% bonds. As I get closer to retiring, I’ll probably increase bonds and decrease stocks.

It’s not unreasonable for a new nurse to choose to invest 100% of money in stocks.

Conclusion

Although starting a retirement account may seem confusing for nurses, it’s usually pretty simple. Don’t be afraid to ask for help from your Human Resources department if needed.

Start to contribute to your retirement account as early as possible – it will have a huge impact on your savings in the future. Even waiting a year or two might cost over $100,000 in the future.

Picking good investments is important too. Make sure to choose low fee options to maximize compound growth.

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