Investing

The Graduate Student Savings Act Fixes a Major Flaw in Tax-Advantaged Retirement Accounts

October 14, 2019 by Meryem Ok Leave a Comment

In this episode, Emily interviews Abigail Dove, a PhD student at Johns Hopkins. Abby spent last summer as a science policy fellow at the Federation of American Societies for Experimental Biology (FASEB). Her major policy accomplishment during her internship was to secure FASEB’s endorsement of the Graduate Student Savings Act of 2019 (GSSA), a bill that has been proposed in both chambers of Congress. Graduate students and postdocs are not currently permitted to contribute their non-W-2 income, which typically comes from fellowships and training grants, to Individual Retirement Arrangements (IRAs). The GSSA would allow this type of income to be contributed and have a very beneficial effect on the PhD trainee workforce. Abby explains her role in shepherding the GSSA endorsement through FASEB, what the GSSA would do for graduate students and postdocs, and how the GSSA relates to the SECURE Act, another bill that has passed the House and is before the Senate.

Links Mentioned in the Episode

Teaser

00:00 Abigail: But it was a little tricky for FASEB to first navigate the waters. They’ve never supported a tax legislation before. You think that experimental biology doesn’t have that much to do with legislation on tax. But here was a perfect one for them to start.

Introduction

00:22 Emily: Welcome to the Personal Finance for PhDs podcast, a higher education in personal finance. I’m your host, Dr. Emily Roberts. This is season four, episode nine and today my guest is Abigail Dove, a PhD student at Johns Hopkins and recent science policy fellow at FASEB, the Federation of American Societies for Experimental Biology. Abby’s major policy accomplishment during her summer at FASEB was to secure FASEB’s endorsement of the Graduate Student Savings Act of 2019, or GSSA, a bill that has been proposed in both chambers of Congress. Graduate students and postdocs are not currently permitted to contribute their non-W2 income, which typically comes from fellowships and training grants to individual retirement arrangements or IRAs. The GSSA would fix that problem and have a very beneficial effect on the PhD trainee workforce. Abby explains her role in shepherding the GSSA endorsement through FASEB, what the GSSA would do for graduate students and post docs, and how the GSSA relates to the Secure Act, another bill that as of this recording has passed the House and is before the Senate. Without further ado, here’s my interview with Abigail Dove.

Will You Please Introduce Yourself Further?

01:33 Emily: I have joining me on the podcast today, Abigail Dove, and she is a PhD student who completed an internship at FASEB last summer. And she has a lot to tell us about the Graduate Student Savings Act. So if you have been wondering about your IRA and why you can or cannot contribute to it, that’s what we’re going to be discussing in today’s episode. Abby, thank you so much for joining me today and will you please introduce yourself a little bit further?

01:59 Abigail: Sure. Thanks for having me. My name is Abigail Dove. Currently, I’m a PhD student at Johns Hopkins and I just started my sixth year. I work in fruit flies and study the gonad development. A little bit of my background: I first started as an undergraduate at Bard college, a small liberal arts school in upstate New York. And then I did a postbac for two years at the NIH NIDDK (National Institute of Diabetes and Digestive and Kidney Diseases) before starting at Hopkins. What we’re talking about is kind of the work that I did at my internship at FASEB, which is the Federation of American Societies for Experimental Biology, which I guess to be a little more descriptive it’s a society that represents 29 member societies, which has about 150,000 scientists that they represent.

Tell Us More About Your FASEB Internship

02:57 Emily: Excellent. You and I have common that we both did a postbac at the NIH. In fact, I’ve interviewed several other people on the podcast who have that on their resumes as well. So very popular program. Anyone still in college considering going for a PhD in biomedical sciences or related areas should definitely consider the NIH postbac program. It’s amazing. Okay. So you had this internship at FASEB last summer. What exactly were you doing in that role? Because it’s a little bit unusual for a graduate student to have an internship. And I think especially a graduate student in the biological sciences because, I don’t know about you, but I sort of observe the culture as like, “ah, you need to stay at the bench 120% of your time and never do anything away from the bench.” So please tell us a little bit more about what you were doing in that internship.

03:40 Abigail: Yeah, so I was really fortunate. I have a PI that–we both know that I’m interested in a career that is outside of the academic track. So, I did a lot of science outreach and I knew that I like communicating science to the public. So I wanted to pursue this career of science policy as a way to talk to the public about science and its importance. So what I did at FASEB, I had a lot of responsibilities. I was particularly interested in training and workforce policy. So, policy that relates to students, postdocs, and even faculty as it’s something that everyone can relate to. So that was one of the reasons that I was most interested in it. And I did a wide range of things. I hosted a webinar on work-life balance and the lab culture and we can include a link to that if anyone wants to watch it later. I represented FASEB on Capitol Hill and at the NIH for different events and I generated comments on sexual harassment that will soon be sent to the NIH. I also helped organize an online symposium series for the FASEB Science Policy Committee on challenges facing women throughout their career lifetime. And then I compiled minutes for the meetings, I drafted talking points for committee members, and then the big thing that I did was I spearheaded FASEB’s endorsement of the Graduate Student Savings Act.

How to Land a Science Policy Internship

05:13 Emily: Excellent. And we’ll get a lot more into that in a moment. But that sounds like a really exciting internship. It’s absolutely fabulous that your PI was supportive in you completing that. I actually did a science policy internship as well. The Mirzayan Policy Fellowship out of the national academies. That was actually after I finished graduate school. But it’s available to current graduate students as well. So, if what Abby was describing sounds amazing to you, that’s another potential avenue for you to get that kind of experience in science policy. Okay. So how did you actually land this internship if other people are interested in doing something similar?

05:46 Abigail: Yeah, so I first started–we have an office at Hopkins, it’s called the Biomedical Careers Initiative Office. And it’s really great for people that are looking for careers outside of the academic track. They were offering a course on science policy and advocacy that was actually being taught by the Director of Public Affairs at FASEB, Jennifer Zeitzer, and the Director of Science Policy, Dr. Yvette Seger. So the class gave us a background on legislation and how bills get enacted into law. And we did some case studies on different issues in science policy. They also taught us how to be a science advocate. But finally, we had to write a policy memo on an opportunity or challenge in research activities supported by federal funding, and we had to give an elevator pitch on that to the class as well. And I did mine on saving for retirement as a graduate student and a postdoc.

06:48 Emily: Yeah. Excellent. And so was it through that paper and that pitch that you gave that you found the Graduate Student Savings Act?

06:56 Abigail: Yes, that’s how I found it. Oh, I guess we didn’t cover how I got the position too. So this office that hosted the class actually also hosts internships for students. And so FASEB was also accepting applications for science policy fellows through the Biomedical Careers Initiative Office. So I applied for that directly. But they also have internships for a wide range of different careers outside of the academic track, including industry and consulting and patent law as well as policy.

What is the Graduate Student Savings Act?

07:33 Emily: It sounds like a great deal of support actually, that Hopkins is providing and helping you sort of step a little bit outside of academia into another role that can really presumably help your post-PhD career, should you decide to pursue one in science policy. So let’s kind of back up a second and explain more about what the Graduate Student Savings Act is because it’s probably not one that most people have ever heard of. Right? Like probably a lot of people in my audience, they know about IRAs. Maybe they don’t have one, but they sort of know they’re supposed to or maybe they know they might not be able to have one. So what is the Graduate Student Savings Act?

08:06 Abigail: Yeah, so the Graduate Student Savings Act. There’s a bill in both the House and the Senate and they’re essentially the exact same bill, so they’re called companion bills. And they would allow graduate students and postdocs who receive their income through either a fellowship or stipend to contribute to an IRA or an individual retirement account. The current issue right now is that on the current tax law, trainees who are receiving their income through a fellowship or a stipend are actually prohibited from contributing to an IRA because it’s not considered compensation or earned income.

08:44 Emily: Exactly. And I like to further kind of clarify this for people by saying within academia we might use the word fellowship in different ways. We might use the word stipend in different ways. Nobody’s ever heard the word compensation. But what it really boils down to is, is your graduate student or postdoc income reported on a W2 or not reported on a W2? It could be reported somewhere else, it could be reported not at all. W2 income is the kind of income, taxable compensation, or earned income that can be contributed to an IRA under the current law. And anything else in terms of graduate student, postdoc income non-W2 does not fall into that category, unfortunately. So that’s how things currently stand. The Graduate Student Savings Act includes this type of non-W2 or fellowship income in taxable compensation for the purposes of contributing to an IRA. Is that correct?

09:39 Abigail: Yes. And unfortunately, it doesn’t change its designation universally. It doesn’t make it earned income or compensation, but it just allows it to be saved for retirement purposes in an IRA.

09:51 Emily: Yeah. This is one of those confusing things about the tax code in general is that they use these terms like “taxable compensation” and “earned income” under different contexts. And so sometimes they have different definitions under different contexts. So earned income has other implications in the tax code, like around the earned income tax credit. Whereas, taxable compensation has a different meaning. It’s under the section for IRA contributions and so forth. So it’s sort of defined there as “taxable compensation for the purposes of contributing to an IRA is these things,” and currently, it says explicitly, “does not include fellowship income, not reported on a W2.” So that’s the current status. But then there’s this Graduate Student Savings Act bill as you said, it’s sort of on the floor in both the House and the Senate.

How Abby Got FASEB to Endorse the GSSA

10:37 Emily: I was looking at the history of this and I think the first time it was introduced was 2016 and it’s introduced every year I think in more or less the same form until now, 2019. We should actually say we’re recording this interview on September 25th, 2019. It will be released within a couple of weeks of that date. So things might have changed. But as of September 25th, 2019, the Graduate Student Savings Act has not been passed but it is, I guess, available to be passed. So, what was the process like for getting FASEB to ultimately endorse the Graduate Student Savings Act, and what work did you do to make that happen?

11:15 Abigail: Yeah, so originally before I even did the class, FASEB was not aware of the Graduate Student Savings Act at all. It wasn’t on their radar. It wasn’t until I wrote my policy memo on the issues of graduate students saving for retirement, and I actually did the research and I was just Googling it and I came across it on my own, that we both kind of became aware of it. And so I kind of took this on as a task that I wanted to complete in my fellowship and I thought it was an important task and FASEB was great. If there was an issue that I really wanted to take on and it was something that was good for FASEB to endorse, they would have no problem with me taking the lead. So this was my big accomplishment of the fellowship.

12:04 Abigail: And since FASEB is a nonprofit organization any bill that they support needs to have bipartisan support for endorsement. And that thankfully both the House and Senate bill had bipartisan support on both pieces of legislation. I think some of the previous iterations of the Graduate Student Savings Act didn’t have bipartisan support. So this was really important for FASEB to get on board. But it was a little tricky for FASEB to first navigate the waters. They’ve never supported a tax legislation before. You think that experimental biology doesn’t have that much to do with legislation on tax. But here was a perfect one for them to start.

Personal Impact of Flawed Tax Legislation

12:49 Emily: Yeah. As you were saying earlier, it’s a clear workforce issue. Right? So that’s the definite connection or conduit between what they do generally and this weird little tax quirk that happens to deeply affect their own workforce.

13:03 Abigail: Well, yes. So this actually personally affected me. From when I was in college and doing other side jobs, I was always contributing to an IRA, if possible. My dad is very financially responsible and he just told me when I was young, “you need to have an IRA.” He always recommended a Roth IRA. He always thought it would be better to get tax first and any profit you make later you don’t get taxed on. So there’s two different IRAs, a Roth and the standard IRA. So maybe some clarity on that. But this personally affected me when I was a post-bac for those two years I was receiving stipend income and wasn’t reported on a W2 so I couldn’t contribute to an IRA for those two years.

13:51 Abigail: Then my first year in graduate school I was on a training grant, so also not receiving a W2 so I couldn’t contribute. My second year I was actually a teaching assistant, so I was being employed by the university somewhat and getting my income reported on the W2. So I was for that year able to contribute, which was really great. And then I got awarded the National Science Foundation, Graduate Research Fellowship award.

14:20 Emily: Congratulations, but also, dun, dun, dun.

14:23 Abigail: Yeah. So it was really great. But then I also couldn’t contribute to my IRA because it wasn’t reported on a W2. So that affected me for my third and fourth year of graduate school. My fifth year I got married. So that changed things a little. I was still on my NSF fellowship. But because I was married to someone who had a real job and was receiving income that was deemed compensation, I was able to contribute to my Roth IRA just because I was married to my husband. so that was my last year of my fellowship. Now I’m back at Hopkins and I’m TA’ing for this year. So I will again be able to contribute even if my husband wasn’t receiving earned income himself.

15:14 Emily: Yeah, I have a little bit of a similar story of flip-flopping between RAs and fellowship income. And at some point I got married and so my husband, having a similar situation of flip-flopping between RAs and fellowship income, it helped in certain years one of us would have a taxable compensation, maybe the other one wouldn’t. So one of the things that helps people in this situation–under the current status of fellowship income, non-W2 income is not eligible to be contributed to an IRA–one thing that helps is that the academic year and the calendar year do not line up. So, if you have different sources of funding in two different academic years, maybe you can be covered for one calendar year in terms of being able to contribute. It helps if you’re married of course, to someone with taxable compensation. And the other workaround is actually having a side hustle that is self employment income. So self-employment income is taxable compensation that can be contributed to an IRA. So that’s something I sometimes float with people who are frustrated by their multi-year wonderful fellowship packages that don’t allow them to contribute to an IRA. If it’s possible to side hustle, that’s another way to kind of sneak in that eligibility. So, your stipend wouldn’t be eligible, but that side hustle income would be eligible. All these are workaround solutions, the real main solution is just changing the tax code because this is ridiculous that this is happening, right?

Commercial

16:35 Emily: Emily here for a brief interlude. Through my business, I provide seminars and webinars on personal finance for graduate students, postdocs, and other early-career PhDs for universities, institutes, conferences, associations, etc. I offer seminars that cover a wide range of personal finance topics and others that take a deep dive into the financial topics that matter most to PhDs, like taxes, investing, career transitions, and frugality. If you are interested in having me speak to your group or recommending me to a potential host, you can find more information and ways to contact me at pfforphds.com/speaking. That’s p f f o r p h d s.com/speaking. Now back to the interview.

Anything Else About Your Role in FASEB?

17:25 Emily: Okay. So, anything else to add about your role with getting FASEB to endorse the GSSA?

17:31 Abigail: Yeah. So, because it was a tax bill and FASEB had never endorsed a tax bill before, they want it to go through full process of endorsement. They wanted to get everyone’s feedback on it. So the first step was going through their Training and Career Opportunities Subcommittee. So, they have a monthly meeting, I prepared talking points for the chair of that committee, and we discussed it and they couldn’t see anything wrong with it. So, we got a full endorsement from that subcommittee. Then we had to go up one level to the Science Policy Committee and did the same thing, had to talk to the entire committee, got overwhelming support of it. So, it got pushed up to the next FASEB tier, which was the executive committee. They gave the final approval. Actually, for the Training and Career Opportunities Subcommittee and the Science Policy Committee, I made a one-page summary of the current situation and how the Graduate Student Savings Act would change that. So, a one-page review for them. And then when we went for approval for the Executive Committee, we had the full letter drafted for them to approve, and we can also give you a link to the FASEB’s endorsement letter too, as well.

18:56 Abigail: Normally, it would go to the FASEB board for approval, but the board was jam-packed with what they had to do for that month. So, because we got unanimous support from the two committees before that, they thought that the Executive Committee approval would be sufficient. But I started my internship in June and it wasn’t approved until the first week of September. So, it does take a long time for this approval to go through because you have to wait every month for the next committee to happen. And if there are changes and edits to it, then it can also take a lot of time. You want to do it as quick as possible so the endorsement actually has an effect if the bill is getting voted on soon.

19:47 Emily: Yeah, exactly. This is fascinating to hear kind of how the sausage is made, and not even to make the policy, but just to get something like this: an endorsement from group whose endorsement matters in this kind of thing. What I’m just thinking is how good it is that FASEB has connections to the current trainee workforce like through you and other interns they accept because they had you to tell them, “Hey, this is an issue that’s going on. And by the way, there’s a solution to it and it’s in front of Congress right now.” So it’s just, I guess it’s really good for them to offer these kinds of internships programs to get those fresh ideas and those connections to people who are still in training.

20:30 Abigail: Yeah, I think they really appreciate the fellowship program for that same perspective. The younger generation. People serving on these committees and the boards are faculty members that have been serving for a while and they’re very removed from this training portion. I think there might be–and correct me if I’m wrong–but I think there could be a few postdocs who are serving on boards, but I think that’s very unlikely. Most of it’s always faculty. There’s never a postbac representative in these meetings. So, having a fellow there, they really value so they can get that younger perspective on what’s happening currently.

What is the SECURE Act?

21:10 Emily: Yeah. That’s excellent. Okay. So that was your role with FASEB and then with respect to the GSSA, the Graduate Student Savings Act. There is a different bill before Congress that has sucked up a lot more attention in terms of changing the tax code than the GSSA has, and that is the SECURE Act. Can you tell us what the SECURE Act is? Not in a lot of detail, but basically just how it relates to the Graduate Students Savings Act?

21:35 Abigail: The SECURE Act is Setting Every Community Up for Retirement Enhancement Act of 2019, and it’s just a massive retirement savings bill. For some perspective, the Graduate Student Savings Act is a two-page bill, whereas the Secure Act is 124 pages. So it’s just way too large for FASEB to endorse something so big. But fortunately, it has almost the exact same wording as the Graduate Student Savings Act in one of its sections. So it would get across the same thing as the Graduate Student Savings Act. It would allow graduate students receiving unearned income to contribute to an IRA account. It just was too big of a bill for FASEB to endorse because we can’t vet everything and it’s a little bit out of FASEB’s wheelhouse.

22:22 Emily: Yeah. So, basically what sounds like has happened is that the Secure Act has absorbed the Graduate Student Savings Act pretty much verbatim. And it’s making a lot of other changes as you said to retirement accounts. I’ll link to a couple articles on the Secure Act from the show notes, but some other things that caught my eye that it’s trying to address are like having part time workers have more access to 401k’s. It’s changing a little bit of the distribution rules, like once you’re actually in retirement and about inherited IRAs and there’s just a lot of changes there. Abby and I were glancing over it and we saw something that, “Oh maybe this addresses the kiddie tax.” We’re not even sure about that, which would be amazing if it does. So there’s a lot of different things that it touches.

23:02 Emily: And as you were saying earlier, like for FASEB being able to endorse the GSSA, the GSSA had to have bipartisan support. In fact the Secure Act does have bipartisan support. It passed the House and is currently hung up in the Senate as of, again, September 25th. Because the Secure Act passed the House with such strong bipartisan support, everyone kind of thought that it would pass the Senate really quickly. But it’s been hung up, so its future is uncertain but hopefully it will get through. And the wording that was adopted from the GSSA, hopefully that would actually be maintained. And in the final version we would actually see this benefit be extended to graduate students and postdocs where it wasn’t before. But that’s kind of where things stand as of today as of this recording. Hey, maybe by the time this is published something will have changed on that front. That would be awesome.

23:56 Abigail: I think something also important to note is that the wording of the bill, I don’t think that it would also apply to postbacs. It seems very specifically to graduate students and postdocs. So I think, unfortunately, postbacs would be still excluded from the Graduate Student Savings Act.

How Will the Internship Help Your Future?

24:12 Emily: Hmm. Interesting. Yeah. I’ll have to take a look at that because I didn’t realize there were distinctions being made among different levels of training. We’ll see how that actually shakes out. It’s always sort of uncertain until kind of the next tax cycle rolls around how these things are actually going to be implemented and everything. Thank you for pointing that out. For postbacs out there, this might not be the news you’re looking for. Maybe you still need the side hustle or maybe you still need to get married to have one of these workarounds. Just kidding, people don’t do that. Okay. So Abby, how do you think that this internship experience with FASEB is going to benefit your future career?

24:52 Abigail: Oh, I think it benefited me already tremendously. Besides from just getting a sense of what science policy really is and getting to immerse myself in it and what I would expect in a job. I got great networking. I already met a bunch of people because FASEB represents so many other societies. You know, I really got to get my name around and people know my work now. I also just got a ton of experience. I generated a bunch of writing samples, which is really crucial in the science policy job search, and I think I’ll get great references also for future jobs. So, it’s benefited me tremendously.

25:30 Emily: Do you have specific plans yet for after you finish? Like what positions you might apply for?

25:35 Abigail: Yes, I’m probably looking for science policy analyst positions. When I graduate. I don’t see really any benefit of doing a postdoc afterwards. There are people that continue to do more science policy fellowships. I’m kind of in the boat where I would just like to be out of fellowships and schooling and just want a real job. And I think with this internship I generated enough experience that I would be able to get an entry-level position and be a sought-after candidate.

Final Advice for Early-Career Grad Students

26:08 Emily: Yeah, I have a great deal of sympathy with that position of, “okay, I don’t need any more training. I’m trained. Let me have a job. Finally.” Definitely. So Abby, last question here, which is one I ask all of my guests. What is your best financial advice for another early-career PhD? And that could be related to something we’ve talked about today or it could be something entirely different.

26:29 Abigail: Yeah. So I think of course I would recommend that everyone should open and save in a Roth IRA account and start saving what they can, even if they can’t hit the max. But I think more importantly, we know that graduate school is a really stressful time, and I think it’s really important to invest in your personal wellbeing. And so if that means, paying for workout classes or traveling or if it’s even retail therapy. I think whatever it is, if it’s important to you and if it makes grad school a little bit saner for you it’s important to put some money aside and make time for yourself.

27:08 Emily: Yeah, it’s, it’s actually a little bit weird that sometimes we have to give graduate students permission to spend money on themselves. But if you think about it like more broadly, other people when they receive the financial advice to cut back on those discretionary expenses, cut back on those Wants and so forth, it’s usually because they’re spending at such a level that’s actually endangering their other financial security.

27:35 Emily: Graduate students I would say in general are not spending a sufficient percentage of their income on discretionary things for themselves. Actually, sort of to tie this back to the GSSA, one of the co-sponsors of the GSSA is Senator Elizabeth Warren. She’s sponsored every year in the past, whatever, four years that it’s been up. Many years ago, back when she was a consumer advocate, basically, she wrote this book called All Your Worth. She co-authored it with her daughter. And that book promotes the balanced money formula, which is to spend, of your after-tax income, no more than 50% of your after-tax income on Needs, 30% on Wants and 20% to Savings. And I was looking at that the other day and I’m thinking that graduate students, I would be surprised if they spent 30% of their income on their Wants.

28:28 Emily: Usually, it’s that Needs category that gets up to 60, 70, 80% or more because of rents and high costs of living areas and low stipends and all of those kinds of problems. So yeah, in fact, sometimes we do need to hear the advice that it is okay to spend a little bit of money on yourself to help bolster your mental health and help you get through graduate school in great shape. Of course, it’s ideal if you can do that alongside saving for your future and doing all these other great things, but we want you to get through graduate school in one piece. So yeah, thank you for that advice, Abby, and for giving this interview today.

29:02 Abigail: Well, thank you for having me.

Outtro

29:05 Emily: Listeners, thank you so much for joining me for this episode. Pfforphds.com/podcast is the hub for the Personal Finance for PhDs podcast. There, you can find links to all the episode show notes, a form to volunteer to be interviewed, and a way to join the mailing list. I’d love for you to check it out and get more involved. If you want to support the show and my business, please go to pfforphds.com/helpout. There are plenty of ways to do so without laying out any of your own money. See you in the next episode! And remember, you don’t have to have a PhD to succeed with personal finance, but it doesn’t hurt. The music is Stages of Awakening by Podington Bear from the free music archive and is shared under CC by NC.

What to Do With Your 401(k) or 403(b) When You Start Grad School

April 29, 2019 by Emily Leave a Comment

One of the common perks that companies and organizations give to their employees is access to a workplace-based retirement account such as a 401(k) or 403(b). They may even match your contributions to a degree! Unfortunately the great majority of universities do not give their graduate students access to their 403(b)s. (This does happen rarely, so it’s worth inquiring about.) If you had a 401(k) or 403(b) in a prior job, what do you do with that account when you leave your job for grad school?

Further reading: Financial Reasons to Work Before Starting Your PhD

Your Three Options for Your Workplace-Based Retirement Account

In general when you leave a job, you have three options for what to do with your 401(k) or 403(b).

Leave It Where It Is

Most of the time, your former employer will permit you to leave your 401(k) or 403(b) where it is and continue to manage the account for you while you are in grad school. Employers usually have a minimum balance requirement to maintain these accounts, so your account has to meet that bar.

The upside to this approach is that you don’t have to do anything, and if you liked the investment options and account fees, you can keep using it.

The downside to this approach is that you have to stay in some degree of contact with your former employer and go through them if you want to make any changes to the account.

Roll to Your New Workplace-Based Retirement Account

If you have the option to open a 403(b) with your university, you may be able to roll your previous 401(k) or 403(b) into that account. Again, this opportunity is rarely extended to grad students.

Roll to an IRA

You always have the option when you leave a job to roll your 401(k) or 403(b) into an Individual Retirement Arrangement (IRA). An IRA’s tax advantages are similar to those of a workplace-based retirement account, but you manage the account yourself instead of your employer managing it. Be sure that you have instructed your firms to execute a “rollover” directly to your IRA and not to cash out your account and send you a check, which would be a hassle to correct. You can use an existing IRA account or open an IRA account specifically to receive this transfer.

Which Option Should You Choose?

The general personal finance advice is to always roll your 401(k) or 403(b) when you leave an employer to avoid eventually having accounts scattered across many employers and potentially losing track of one. Whether you should roll into your new employer’s 401(k) or 403(b) or your IRA is debated. If you are trying to optimize the investments inside your retirement account, IRAs have an advantage because the entire world of investment options is open to you, whereas the options inside a 401(k) or 403(b) are only what your employer decides to make available. Sometimes, 401(k) or 403(b) plans are more expensive than what you can get inside an IRA, and since cost minimization is a key tenant of successful investing, again IRAs are preferred.

However, this general advice is not necessarily fully applicable to grad students.

First, your options are mostly likely to be either to leave your 401(k) or 403(b) where it is or to roll it into an IRA.

Second, you may not want to manage your own investments. While managing your IRA can be easy and hands-off, it may still be intimidating, and some students might prefer to simply choose among the options offered by the former employer to opening and managing an IRA.

Third, the investments available to an individual investor inside an IRA may not be as attractive as the institutional-level investments available inside a 401(k) or 403(b) in terms of their fees. To paint with an overly broad brush, 401(k) and 403(b) options at smaller companies and organizations may be more expensive than what you can buy inside an IRA, whereas 401(k) and 403(b) options at larger companies and organizations may be less expensive than what you can buy inside an IRA. So if you were employed by a university or a large company before starting grad school, compare the cost (expense ratios) of your current investment options with those at the brokerage firm you’re considering for your IRA. It may turn out that your existing options are more favorable.

Further reading:

My advice to entering grad students is to roll your 401(k) or 403(b) into an IRA unless you have high-quality, inexpensive investment options inside the workplace-based retirement account and do not want to manage your own account.

Other Advice Related to Retirement Saving

You’re on a great path already by starting to invest for retirement through your job. If at all possible, continue to make excellent choices related to retirement investing during grad school.

Contribute Money to Your 401(k) or 403(b) While You Still Can

It’s a great idea to kick your retirement savings rate into an even higher gear in the months you have left at your job. You’re likely to not have access to a 401(k) or 403(b) again for quite a while, so any additional money you can get into that tax-advantaged account will be a huge boon to your post-PhD self. (Plus, you’re forcing yourself to deflate your lifestyle, which you’ll have to do in a few months anyway!)

However, don’t become so zealous about retirement saving that you compromise your cash position. It’s going to take a good amount of cash to transition into grad school between moving costs, start-up expenses, and university fees. You don’t want to put a lot of money inside your 401(k) or 403(b) only to turn to credit cards to make it until your first grad school paycheck.

Keep Investing for Retirement!

Yes, it is sometimes possible to invest for retirement during grad school, but it heavily depends on your stipend, the local cost of living, and the rest of your financial situation. If you have no pressing debt, enough cash savings for emergencies and short-term expenses, and some excess cash flow, please continue to invest for retirement!

Further reading:

If you have W-2 income as a grad student (typically from an assistantship) in a given calendar year, you can contribute to an IRA. If you don’t have IRA eligibility due to receiving only non-W-2 (typically fellowship) income in a given calendar year, don’t let that stop you from investing for retirement! You can still use a taxable brokerage account. Between tax-efficient investments and your low tax bracket, you are likely to still enjoy tax benefits of investing even outside of an IRA.

Further reading:

Consider Traditional to Roth Conversion During Grad School

During your time in grad school, you may be in a lower tax bracket than you were while at your previous job. Grad students, unless married to someone with a much higher income, are usually in the 12% marginal tax bracket at the highest.

If you have any money in a traditional 401(k), 403(b), or IRA (which you certainly would if you ever received a retirement contribution match from your employer), consider converting it from traditional to Roth during your lower-earning grad school years. It’s pretty unlikely that you’ll ever be in the 12% (or lower) tax bracket again after you finish grad school due to both your personal earning potential and today’s rock-bottom income tax rates, so it makes sense to do the conversion at that low tax rate to gain the benefits of a Roth IRA. (People are flocking to do this type of conversion even in much higher tax brackets!)

Further reading: Why the Roth IRA Is the Ideal Long-Term Savings Vehicle for a Grad Student

When you do the conversion, you’ll have to pay income tax on the full balance of your traditional retirement account. Before you start the conversion process, be sure that you 1) have enough cash to pay the tax and 2) are not bumping yourself into a higher tax bracket with that income infusion.

You don’t have to rush to do this in your first full calendar year as a grad student if you’re not ready, but you should do it as early as you can, and keep an eye on that year in which you expect to finish and get a higher-paying job.

This conversion can be slightly complicated if you only want to convert part of your traditional money in any given year, so be sure to discuss your plans with the brokerage firm that houses your IRA.

Conclusion

Great job on contributing to a 401(k) or 403(b) prior to starting grad school! The positive financial habits you’ve already cultivated will serve you well during and after grad school. If you want to take any steps at all with your existing workplace-based retirement account, they are quite straightforward and easily accomplished.

Why You Should Contribute to Last Year’s Roth IRA

April 9, 2019 by Emily 2 Comments

Good news for you investors: The calendar may say 2019, but you can contribute to your 2018 Roth IRA up until tax day! Why is this good news? Because you can continue to contribute to your Roth IRA (if you have contribution room) without taking up contribution room in 2019. In this way, you can roll forward some of your contribution room, even over multiple years. This is particularly useful for those of you expecting income increases in 2019 or so.

The IRS’s Retirement Account Contribution Window Extends until Tax Day

Every calendar year from January 1 to December 31, you can contribute to your retirement account for the current year. (This applies to IRAs (Roth and traditional), 401(k)s, 403(b)s, etc.) You can also contribute to last year’s retirement account in the subsequent calendar year up through tax day. You can even open and fund an IRA for the previous year!

Right now, between January, 1, 2019 and April 15, 2019 (tax day), you have the choice of contributing to your 2018 IRA or your 2019 IRA (assuming you are eligible and have contribution room in both years). In fact, you should contribute as much as you can to your prior year IRA before switching over to the current year IRA.

Download Your Tax "Cheat Sheet"

Essential information to help funded US domestic graduate students with their federal tax returns

Eligibility and Contribution Limits

I’m going to clear up the caveats I’ve been making right here.

Eligibility: You need taxable compensation in a calendar year to contribute to that year’s IRA. Employee (W-2) and self-employment income are both taxable compensation. Fellowship income, if not reported on a W-2, is not taxable compensation. If you are a graduate student or postdoc with a fellowship through an entire calendar year and no other source of income, you won’t be eligible to contribute to an IRA in that year. However, if you are married and your spouse has taxable compensation, you can contribute to a spousal IRA.

Further reading: Grad Student Tax Lie #9: If You Have an Income, You Can Contribute to an IRA

Contribution limit: The contribution limits on IRAs are pretty low, at least in comparison with workplace-based retirement accounts like 403(b)s and 401(k)s. For 2018, you can only contribute a maximum of $5,500 ($6,500 for those over age 50) or the amount of taxable compensation you had in the calendar year, whichever is lower. You do not have to contribute the entire $5,500 in a year; it’s fine to contribute $1,000 or $3,000 or whatever you can. When I say contribution room throughout this post, I mean the difference between your contribution limit, e.g., $5,500, and the amount you’ve already contributed. (In 2019, the limit has increased to $6,000 per year!)

Free Email Course: Investing for Early-Career PhDs

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Why Is Contributing to an IRA So Important?

You may be asking yourself why I’m writing about Roth IRA contributions in particular. After all, once you’re out of graduate school and actually able to save more money, don’t you have a reasonable expectation of receiving a 401(k) or similar employee benefit?

1) Yes, you probably will work somewhere that provides you with a 403(b) or 401(k) or other type of workplace-based retirement account (or you’ll be self-employed and have self-employment retirement accounts available to you). Exception: Some postdoc positions (and adjunct!) might not offer a 403(b). But you don’t know the future, so I think it’s better to be cautious and roll forward as much contribution room as you can.

2) Even if you have a workplace-based retirement account available to you, the rule of thumb for retirement contribution priority is: workplace up to the match, IRA, then workplace again. This is because you can buy just about any fund you want through any brokerage firm in your IRA, whereas your options in your workplace based account will be severely limited. It is assumed that you can find better quality (read: cheaper) investment options through your IRA, so that should be prioritized. (However, you should definitely check out your options through your workplace account before assuming this is true for you; some universities offer good, low-cost institutional investment options that might be even better than what you can buy as an individual.)

3) Your workplace might only offer a traditional retirement account, so an IRA will give you the option of using a Roth, which you could take if you think it’s the better choice for you in a given year.

Why Am I Specifying a Roth IRA?

As far as your taxes go, if you’re contributing to a Roth IRA in both calendar years, it doesn’t matter which one you choose during the overlapping period. If you were contributing to a traditional IRA instead, it would matter: Your contributions to last year’s IRA would count for a tax deduction on last year’s tax return (hence being able to contribute up until tax day). But with a Roth IRA, you aren’t taking a tax deduction, so you’ll pay your full tax on the contribution no matter in which year you make it.

Always Contribute to Last Year’s IRA First

Now we come to my suggestion to contribute as much as you can to last year’s IRA before switching to this year’s (roll forward contribution room), either because you have reached your contribution limit or because tax day has passed.

The advantage is most clearly seen in the year that you experience an increased ability to contribute to your IRA (as long as you haven’t been maxing out your contribution room). This could happen because:

You decrease your expenses so that you can save more
You start earning a side income
You finish your PhD and take a higher-paying position (postdoc or Real Job)
You finish your postdoc and get a Real Job

In these cases, you may be able and want to contribute more than $6,000 to your IRA in one calendar year, and you are only able to do that if you split the contribution between your prior year IRA and your current year IRA.

But you should practice this every year, not just in a year when you expect an increased ability to contribute because:

You don’t know what will happen throughout the whole next calendar year, and your ability to contribute to an IRA could increase unexpectedly (e.g., you receive a windfall, a side income presents itself, you decide to leave grad school/your postdoc early for a better-paying job, you get married to a higher-earning person/spouse receives a raise).
You can roll forward your contribution room into future years. For instance, if you can contribute $5,000 each calendar year to an IRA, you can carry forward some or all of your $500 excess contribution room, so that in the year that you are able to contribute more, for example, you can contribute $5,500 to your current year IRA and perhaps $1,000 to your prior year IRA.

Free Email Course: Investing for Early-Career PhDs

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An Illustration (with Numbers!)

The advantage of this strategy is more easily understood with an example.

Let’s say you’re a graduate student in 2018 and 2019, earning $27,000 per year, which is a gross monthly income of $2,250. You are a superstar saver, so you contribute 12% of your gross income to your Roth IRA every month. In 2018, your total contribution to your 2018 Roth IRA was $3,240.

In the first four months of 2019, you continue to contribute to your 2018 Roth IRA, which brings your 2018 Roth IRA contributions up to $4,320. In the eight remaining calendar months of 2019, you contribute $2,160 to your 2019 Roth IRA. Your remaining contribution room for 2019 is $3,340.

January 2020 hits and you start a Real Job! Your new yearly salary is $72,000, and you increase your savings rate to 15%. This means that you can put $900 each month into your retirement account(s).

In the first four months of 2020, you max out your 2019 Roth IRA with $3,340 and also put $260 into your 2020 Roth IRA or other retirement account options. You can use the rest of 2020 to max out your 2020 Roth IRA and contribute to your other retirement account options.

In this example, you ended up contributing $14,240 to your Roth IRA over three years ($3,240 in 2018, $6,000 in 2019, and $6,000 in 2020). Had you not rolled forward your contribution room, you would have contributed only $12,480 to your Roth IRA ($3,240 in each of 2018 and 2019 and $6,000 in 2020). (The rest of the money would go into your other retirement account options, presumably.)

The Psychology of a Ceiling

The previous illustration assumed that you would save at the same rate no matter what contribution room you had available or what account you used. However, if you are a competitive person, you might benefit even more from rolling forward your contribution room by contributing to your prior year Roth IRA first.

I’ve noticed that many people strive to max our their Roth IRAs each year, irrespective of the actual amount or percentage they might otherwise want to save. They use the contribution limit as their goal. This is not a good thing if you would otherwise contribute more than the limit, but I think many grad students and postdocs might have the opposite issue: without the limit serving as an implicit goal, they might contribute less than the limit.

By rolling forward your contribution room, you can create ever-higher savings rate goals for your Roth IRA, which might modify your behavior and help you save even more overall.

I fell victim (in a good way!) to this psychology in a similar scenario. When I started contributing to my Roth IRA, my goal was 10% ($2,400) per year. But once I found out that my now-husband maxed his Roth IRA out every year, I made keeping up with him and maxing out my goal, too. I found creative ways to gradually increase my savings rate. I didn’t quite make it to $5,500/year by the end of graduate school, but I sure got a lot closer than $2,400/year.

I think the contribution limit can create the same kind of competitiveness, and rolling forward your contribution room makes the challenge even greater.

My Personal Experience with Contributing to Prior Year Roth IRAs

A couple years before we finished our PhDs, my husband and I started following this suggestion of contributing to our prior year Roth IRAs as much as possible before switching to our current year Roth IRAs. It seemed not to matter much for a couple years until we experienced an income increase, and then having the extra contribution room was really helpful.

My husband’s Real Job offered a 401(k), but it was through a notoriously expensive full-service brokerage firm. Instead, we contributed our target amount of savings to our Roth IRAs (still maxing out the prior year first) and a self-employment retirement account (available through my business). The extra Roth IRA contribution room we created through rolling forward was particularly helpful in the transition year because 1) it took some time to figure out our 401(k) and self-employment retirement account options and 2) my contribution room in my self-employment retirement account wasn’t very high after working on the business for only a few months.

Further reading: Avoiding an Expensive 401(k) Plan through Self-Employment

How to Successfully Plan for Retirement Before and After Obtaining Your PhD

April 8, 2019 by Jewel Lipps Leave a Comment

In this episode, Emily interviews Dr. Brandon Renfro, a finance professor and financial advisor. Brandon shares the tortuous path that led him to his current faculty position at East Texas Baptist University and side business in retirement advising. They discuss the long-term financial effects of doing a PhD – both positive and negative – and how to have a successful retirement even if you can’t save (much) during your PhD training.

Links mentioned in episode

0:00 Introduction

1:05 Please Introduce Yourself

Dr. Brandon Renfro has a PhD in Finance. He is both an academic and a practitioner. He advises retirement advising for individuals. He does financial planning while being a tenure track professor.

2:02 What was your career trajectory?

Brandon says that he “walked backwards” or stumbled into his PhD. As an undergraduate, he planned to go to law school. He was advised to major in business in preparation for law school. He took an American enterprise course and saw a presentation about the time value of money in the retirement planning context. This presentation inspired him, so he majored in finance and loved it. He went to law school but says he crashed and burned. He was in the military and had GI bill benefits. He decided to use his GI bill benefits for an Master of Business Administration (MBA). He asked his MBA advisor about adjunct teaching. He had to have 18 graduate hours in the discipline to teach a course. He discovered he loved teaching. He decided he wanted to teach full time. He feels fortunate that he got a tenure track position at a liberal arts college in Louisiana, where he worked for three semesters. Now he is in his third semester at East Texas Baptist.

Emily points out that Brandon tried stuff and saw what stuck. Brandon agrees that this is important to explain to students today. He says many students set a goal and stick to it no matter what, even if the path isn’t right for them. He says there is a time when you should recognize if you don’t love what you’re doing and you should try something different. Brandon says he would tell his 18 year old self to major in finance, but at the time it didn’t occur to him.

Emily asks how Brandon handled the sunk costs of going to law school. Brandon clarifies that he didn’t meet the GPA requirements to continue law school but he wasn’t sad about it. He says he was miserable in law school. He had taken out loans to pay for the year in law school. He says it was $20,000 that he spent to learn that he didn’t want to be an attorney. He says if he looks at it like it’s money he spent to learn that he loves being a finance professor, it was worth it.

7:47 Given that a person has decided to do a PhD and maybe a postdoc, what are the effects of their financial outlook?

Emily starts by explaining that graduate students, postdocs, and early career PhDs have a lot of anxiety around saving for retirement. Most of these people are in their 20s or 30s and they know they are supposed to be investing for retirement. But planning for retirement feels overwhelming in the context of their competing financial demands, like student loan payments or saving for a house down payment, coupled with their suppressed income for an extended period of time.

Brandon says that if you put off starting a career to do a PhD, this will make saving and preparing for retirement a little more challenging. These are foregone years of savings. However, academics have the ability to work past typical retirement age. As a professor, you can work longer and save money for retirement for more years, even if you start work and start saving a little later in life. Emily clarifies that PhDs can add years on the back end, instead of on the front end, to the total years that they can work to save for retirement. PhDs can do this because their work is fairly intellectual, and hopefully they get better with time. It’s less daunting to add years at the end in these career paths than others. Brandon says it’s (physically) easier to talk about what you know than it is to work on a factory floor, and you can prolong the years you do this kind of work. Even as PhDs reach retirement age, they have options to be an instructor, lecturer, adjunct, or consultant. You can work less than a full time load, and still capitalize on your years of experience.

Brandon says even while you’re working in your 30s or 40s, you have the ability to leverage expertise outside the classroom. Even if you are working a full time tenure track position, you have a lot of knowledge that you can leverage in industry, even while you’re teaching. Emily shares that when she was an engineering PhD student at Duke University, she saw plenty of professors had consulting businesses or wrote books. In academia, there are many ways to step outside your primary role and leverage your expertise. Emily says that there are plenty of opportunities to have side hustles all through your career. She is part of a community of self employed PhDs, and many people’s self employed job is on the side of their full time job. Brandon believes there is a lot of potential for academics to be self employed. He says even if you were the lowest ranked student in the lowest ranked PhD program, you still have knowledge and you are already part of a select group. Emily says any PhD can find a market where their skills are valuable. They give examples of formatting and copy-editing and tutoring.

17:13 How can someone handle the income jump after the suppressed income period of being a trainee in a PhD or postdoc?

Brandon says in one phrase, avoid “lifestyle creep.” When you suddenly go from an undergraduate or PhD student lifestyle based on lower income to receiving a full time income, you need to be mindful to not immediately start living at the new income. He says you don’t need to be extremely frugal, but use a moderate amount of your new income to build your emergency savings, pay down consumer debt, and pay down student loans in order to be much better off in the long run.

Emily shares the standard personal finance advice to commit a large percentage of your raise to your financial goals. Either all of the raise or as much of the raise as you can, put it towards goals instead of your consumption spending. She says it applies even more when you have a large income jump. Most of it should be used to accelerate financial goals. When Emily and her husband finished their PhD programs, they applied this concept to their new “real jobs” income. They had several financial goals that they focused on and avoided lifestyle creep.

Brandon shares his story about buying a house. He was unsure where he would get his tenure track position, but he wanted to build equity without committing his family to a large mortgage payment. He bought a small rent house before they bought a house to live in. Emily brings up that some people rent their properties as they move, in contrast to how Brandon purchased the property purely as a rental property.

23:40 Grad students and some postdocs don’t pay into the social security system. What are the long term effects of missing out on these years of contributions?

Brandon explains that social security benefits are based on 35 years of covered earnings. Essentially, it’s an average of your highest 35 years of earnings. If you’re starting to contribute later, do the math. If you’re in your early 30s, you may be in your late 60s before you have 35 years of covered earnings. The issue is that your benefit will be calculated with some zeros in the 35 year average, which skews down your average. When you’re on the back end of your career, this may influence your decision to work for a few more years to replace some of the years where you contributed zero dollars to social security.

26:59 What steps can someone who’s in or recently been in PhD training do to mitigate negative effects of lower income and not contributing to retirement?

Brandon brings up the psychological benefit of being used to living on a small income. He says to continue to live like that for a couple of years so that you can build yourself a financial cushion and start saving for retirement. He says eventually the feeling goes away and you get used to the new level of income. Psychologically, it’s harder to start saving for financial goals later.

Emily says that this is classic personal finance advice. Sometimes the lifestyles of PhD students are lower than those of college students. She says it’s difficult to deflate lifestyle. You might see the higher paycheck from your first real job, then you lock yourself into higher housing costs or buy a new car. It’s difficult to take a step back, but it’s much easier to keep a similar lifestyle and put the new income to your financial goals and slowly work up your lifestyle.

30:16 If a person starts saving during graduate school, what kind of effect can that have on retirement?

Brandon explains the first presentation that he saw on the effect of compound interest. If you started when you were 18 years old and you saved just $2,000 per year in a retirement account, you would have a million dollars for retirement if you simply earned the average market return. He says the same is still true if you start at 30 or 32, but there are a few less years for compounding to take effect.

Emily says that even during graduate school, saving a couple hundred dollars a month is accessible. It’s not a thousand dollars every month that you need to save. The earlier you take these steps, the more and more impact it can make. It really does make a difference to take these steps earlier.

Brandon adds that at least, don’t make negative steps. Buying a cheaper car or cheaper clothes can go a long way. Emily says that the professional students, like law students, were living a higher lifestyle even though they were living on loans. She says the smallest amount of debt that you have to take on during training will make it easier for you in a few years.

35:50 What do you do for clients?

Brandon can help with anything within realm of retirement planning. He can help someone starting out. He can help graduate students and postdocs sort through their different options for retirement plans. He can help with decisions about how to invest within retirement plans. Brandon encourages you to take retirement very seriously and to think very hard about putting off retirement. He says it’s really hard to make a strong case against contributing to a plan with an employer match. He says employer match is essentially free money. Emily says an employer match is a 50% or 100% return on investment.

Emily clarifies that someone looking at different options can ask Brandon for help considering which option to prioritize. Brandon can help overcome “analysis paralysis.” Brandon says something is almost always better than nothing, and you need to just do something. He encourages you to envision your retirement and what your financial goal looks like.

40:03 Final Comments

Brandon’s contact information is at brandonrenfro.com. If anyone has a question about something that he hasn’t published an article about on his website, send him an email and he will write about it!

41:15 Conclusion

Can a PhD Achieve FIRE?

January 7, 2019 by Emily Leave a Comment

Would you like for paid work to become optional for the rest of your life? What would you do with your time if you didn’t have to work? When you become “financially independent,” you have enough money and passive income streams to sustain you for the rest of your life without earning any more. At that point, you have the option of retiring (whether or not you actually do). Achieving this goal in youth or middle age instead of 65 is the objective of adherents of the FIRE movement (Financial Independence / Retire Early). Typically, FIRE walkers earn high salaries and save a radically large percentage of their income. This article explores whether FIRE is a good or reasonable goal for a PhD (graduate student, postdoc, or PhD with a Real Job) to set.

Further listening: This Prof Used Geographic Arbitrage to Design Her Ideal Career and Personal Life

What Is the FIRE Movement?

The FIRE movement (or at least the current iteration of the trend) started to gain traction within the last decade. Two of the fathers of the movement who documented their FIRE journeys on popular blogs are Jacob Lund Fisker (Early Retirement Extreme) and Pete Adeney (Mr. Money Mustache). They both advocate establishing a very frugal lifestyle to 1) save a high percentage of your income while working and 2) minimize the size of the nest egg needed to retire from paid work.

Now that the FIRE movement has gained popularity, it has diversified (it’s not just for young, single, male tech workers!) and splintered. One of the useful delineations is among ‘lean FIRE,’ ‘FIRE,’ and ‘fat FIRE.’ Roughly speaking, lean FIRE adherents seek to achieve FIRE primarily through expense minimization (and a high salary as well) while fat FIRE adherents seek to achieve FIRE primarily through vastly out-earning their spending (and keeping a lid on expenses as well), with regular FIRE falling somewhere in the middle.

Why Would a PhD Want to FIRE?

A person who completes a PhD has passion for her work (as well as incredible perseverance). I find it hard to imagine that such a person would want to retire early from her chosen field – especially those pursuing a life of the mind in academia.

But people who complete PhDs are also people. They end up in all types of jobs with all levels of job satisfaction. Even those with high job satisfaction might want to escape the demands of full-time work.

Even if retiring early is not attractive, becoming financially independent may be. Once you are financially independent, even if you keep working, you don’t have to be concerned about losing your job or put up with a job that’s no longer a good fit. Even during the journey to FIRE, you will have a much, much greater degree of financial security than most Americans, which brings peace of mind.

How Do You FIRE?

While difficult and rare to achieve, the mechanism of becoming FIRE is easy to understand.

To become financially independent (from active work), you need to have investments and/or passive income streams that will pay for your expenses in perpetuity. I’ll focus this discussion on the investments needed rather than the passive income streams.

Basically, to achieve FIRE, you need a nest egg of investments that is large enough that you can withdraw what you need to live on each year without eating into the principal. The higher your living expenses, the larger the nest egg you need to support them in perpetuity.

FIRE adherents usually follow the “4% Rule,” also called the Safe Withdrawal Rate (SWR), or perhaps a more conservative 3% or 3.5% Rule. The 4% Rule means that withdrawing 4% of your portfolio balance each year gives you a very good chance of your portfolio not running out of money prior to your death; it is based on historical market returns. (Early retirees may adjust this rule to be more conservative due to their post-FIRE life expectancy being longer than a typical retirement.)

The 4% Rule shows you the two vital factors to FIRE: size of your nest egg and yearly living expenses. Therefore, to achieve FIRE you must save (invest) a lot of money and keep your living expenses in check. For example, for a household with $50,000 in yearly living expenses, a portfolio of $1,250,000 is needed.

A person pursuing LeanFIRE will primarily focus on minimizing living expenses. The rough definition of LeanFIRE is living expenses of under $40,000/year or a portfolio of $1,000,000. A person pursuing FatFIRE will primarily focus on building a large portfolio. The rough definition of FatFIRE is a portfolio of over $2,500,000 or living expenses of at least $100,000/year.

There is a delightful synergy between the necessarily high savings rate and necessarily low expenses. Given a static income, the less you spend on living expenses, the higher your savings rate can become, enabling you to achieve FIRE even faster. Mr. Money Mustache published in “The Shockingly Simple Math Behind Early Retirement” a set of ratios that illustrates the relationship between savings rate and years of saving needed until the SWR could be achieved. For example, with a savings rate of 10%, you need 51 years to save before you can retire, but that drops to 22 years with a savings rate of 40% and 8.5 years with a savings rate of 70%.

Because the key to achieving FIRE is an unusually (to say the least) high savings rate, it is almost exclusively pursued by high income earners. There is a floor on how low you can drop your living expenses (although that varies person to person), so if your income doesn’t exceed your expenses by much, achieving the “E” in FIRE becomes a remote possibility.

Can PhDs FIRE?

PhDs can FIRE if they commit to the process, but they have challenges that are not shared by their peers from college who went immediately into high-paying careers. (It has been done; Jacob Lund Fisker has a PhD and retired at age 33.)

The ideal path for someone pursuing FIRE is to obtain a high-paying job immediately upon completion of their education at 18 or 22, commit to a low-cost lifestyle, set up a radically high savings rate into investments, and keep the pedal to the metal until FIRE is achieved, for instance by age 30 or 35.

A PhD becomes derailed from this ideal path upon entering graduate school. Unless he previously set up massive passive income streams, a grad student’s income is nowhere near large enough to achieve a high savings rate (even if you live in a van like Ken Ilgunas did at Duke). This means that pursuing FIRE with a high savings rate will have to wait until landing a post-PhD Real Job.

However, the graduate school experience offers a unique advantage to FIRE: A necessarily low lifestyle. The $40,000/year maximum living expense for the definition of LeanFIRE is much higher than what virtually every graduate student takes home after paying income tax. Even a couple living the graduate student lifestyle can usually spend less than that amount.

Further reading: What Grad Students Can Learn from the FIRE Movement

A PhD also confers the possibility of a high income. While PhDs are not needed in currently high-paying careers such as finance, medicine (some specialties), computer science, and engineering, a person with a PhD does on average earn much more in a lifetime than the average person with less education, and people with PhDs can absolutely land well-paying jobs.

Therefore, a PhD maintaining her grad school lifestyle (more or less) while earning a high salary post-PhD is a recipe for FIRE, albeit starting in earnest closer to age 30 than age 20. A LeanFIRE early retirement can still be achieved within a short period, and of course she could opt for FatFIRE if her income is generous enough.

However, a graduate student (or postdoc) who commits to FIRE can go further than this default:

Instead of living at 100% of net income during graduate school, save (invest) as much as possible. This will have the dual effect of further lowering living expenses and getting a head start on building your nest egg.
Experiment with frugality to discover whether you want to ultimately pursue LeanFIRE, FIRE, or FatFIRE. You may decide that living below a graduate student’s means is not what you want long-term.
Finish your training as quickly as possible to increase your income as early as possible. Prepare yourself to land a high-paying job through professional development and networking.

Further reading: Whether You Save During Grad School Can Have a $1,000,000 Effect on Your Retirement

What Is Your Reason to FIRE?

Ultimately, it’s vital to have clarity on why you want to pursue FIRE. It’s easy to become consumed by the numbers and the process and lose track of your motivation along the way. Sometimes it’s possible to achieve aspects of the FIRE lifestyle without actually being FIRE, and I think that’s particularly true for PhDs who have a lot of transferrable skills and potential for autonomy. Remember the parable of the fisherman and the businessman. Just like you shouldn’t put your “Real Life” on hold during graduate school, you shouldn’t put your Real Life on hold while building up to FIRE.

If you are a PhD (-in-training) and seriously pursuing FIRE, I’d love to interview you on my podcast! Please fill out this form to volunteer.

Investing Strategies to Grow Your Wealth During Your PhD Training

August 6, 2018 by Emily Leave a Comment

The most important investment you make during graduate school or your postdoc is in your career. But alongside that primary objective, many PhDs also invest money during their training. By far the top challenge or impediment to investing during graduate school or a postdoc is the low pay, and only a fraction of trainees are financially able and ready to invest. However, investing even a small amount of money on a regular basis throughout graduate school and a postdoc can have an enormous impact on lifetime wealth. The even better news is that the process of investing itself is simpler and easier than you probably think.

Many investors, both novice and experienced, fall into the trap of thinking that to maximize their investment outcomes, they should focus on choosing the best investments. In fact, there is no reliable way to pick winning investments. There are only three aspects of your investments that affect your investment outcome that you can control: your savings rate, your investment asset allocation, and the cost of your investments.

This article outlines how to grow your wealth during graduate school by optimizing those three factors and implementing a few other key strategies.

A version of this post was originally published on GradHacker.

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Choose Passive Investments

Empirical studies have borne out time after time that passive investing is a more successful strategy than active investing after costs are factored in. Basically, what that means is that buying a set of investments that is representative of a market sector overall (e.g., the entire stock market) is more successful in the long term than trying to pick winners from that same sector. In trying to beat the market, both professional investors and individual investors consistently fail to even match it.

Passive investing is a far simpler strategy than active investing and much less time-consuming to initiate and maintain because there are plenty of high-quality passive investment products available. To enact a passive investing strategy, buy an index fund or an indexed exchange traded fund (ETF). For example, there are index funds and ETFs that reflect the entire stock market or the S&P 500, among numerous others.

The great bonus here is that passive investing is far more time-efficient than active investing. You don’t have to research individual investments to death; just buy them all!

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Maximize Your Savings Rate

Instead of putting your time and energy into agonizing over your investment choices and trying to optimize them, direct it toward increasing your savings rate into your investments. You can free up more cash flow for your investments by decreasing your expenses or increasing your income.

As simple as that sounds, every grad student knows that both time and money are very tight during this phase of life. If you pursue increasing your income or decreasing your expenses, you must be very selective about how you do so. The following posts discuss both of these strategies in much more detail.

Decreasing your expenses:

Increasing your income:

Increase Your Income

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Pick an Asset Allocation and Stick with It

Your asset allocation is the percentage of your investment that is in each asset class or sub-asset class. The three main asset classes are stocks, bonds, and cash. Your asset allocation should be chosen with respect to your investing goal. For a very long-term goal, such as retirement for someone in her 20s or 30s, a very aggressive asset allocation is appropriate, such as 80-100% stocks. If you are a DIY investor, your brokerage firm can help guide you to an appropriate asset allocation.

Your asset allocation should change as the timeline on your goal grows shorter, but not quickly or dramatically. A common pitfall that investors fall into is trying to time the market by changing their asset allocation, i.e., they pull money from stocks into bonds or cash when they anticipate a stock market drop and then try to find the right time to push it back in. While the theory of selling high and buying low is fine, it’s almost impossible to successfully time the market consistently, even for professionals. Instead, maintain your appropriate asset allocation and ride the market down and up.

Minimize Investing Costs

All investments have costs associated with owning and transacting them. You can think of those costs as directly coming out of your investment returns. Over the course of several decades of investing, these costs can reduce your balance in retirement by hundreds of thousands of dollars!

In fact, costs are one of the big reasons that active investment strategies fail to perform as well as passive investment strategies. While active strategies sometimes do generate higher top-line returns than passive strategies, their higher cost almost always knocks the real return experienced by the investor below than that of passive strategies.

With mutual funds, index funds, and ETFs, the cost of owning the investment is expressed very clearly in its expense ratio (a percentage). A low-cost ETF or index fund will have an expense ratio of a couple tenths of one percent or lower, while a high-cost, actively managed mutual fund will have an expense ratio of one percent or higher. For a passive strategy, look for funds with very low expense ratios.

Watch out as well for fees tacked on top of the expense ratio of the fund you purchased itself; these are often charged by the person or institution managing the account, such as a 401(k) administrator, a financial advisor, or a roboadvisor. Make sure that you have a compelling reason for paying such a fee before signing up for one, because it will come directly out of your returns.

Dollar Cost Average

The strategy of dollar cost averaging (as opposed to irregular lump sum investing) is to invest a set amount of money on a regular basis. If you receive a regular stipend/salary, this translates to investing the same amount of money every pay period, ideally through an automated transfer.

One of the big advantages of dollar cost averaging is that committing to the strategy prevents you from attempting to time the market. When you use your discretion over the timing of your investment schedule, many of us will try to guess whether the market is on an upswing or downswing and shift our buying behavior accordingly. This is rarely a successful strategy, whether it is done haphazardly or very deliberately.

In fact, dollar cost averaging actually guarantees that you “buy low and sell high” in a sense, although you are not selling. Because you invest the same dollar amount every period, when the market is low you buy more shares and when it is high you buy fewer shares.

Use a Roth IRA

If your investing goal is to save for retirement – likely the first investing goal you should set as it is the longest-term – it is a great idea to use a tax-advantaged retirement account. A tax-advantaged retirement account protects your investments from taxes over the decades between your contribution and withdrawal in retirement; paying tax year after year would otherwise eat away at your returns. Therefore, using a tax-advantaged retirement account maximizes your returns, as long as you abide by the restrictions on access that it imposes.

Only very rarely do graduate students have access to a tax-advantaged retirement account through their universities; therefore, an individual retirement arrangement (IRA) is their only option if they are eligible. Some postdocs receive retirement account benefits through their universities and some do not. IRAs are set up independently and managed entirely by the investor. This may sound like a big responsibility, but this freedom of choice means you can pick the optimal investments for you.

IRAs come in two varieties: traditional and Roth. Roth IRAs are generally recommended for current lower-earners with great income growth potential, so they are an excellent fit for graduate students and some postdocs!

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Get Started ASAP

Probably the biggest investing mistake you can make is to procrastinate getting started. On average, the stock market ends two out of every three years higher than it started; if you’re ready to start investing but put it off, more times than not you miss out on earnings that could have gone into your coffer. I frequently speak with PhDs-in-training who stay stuck in investing analysis paralysis for years on end. You can always course correct if you realize you made a poor choice with your investments initially, but you can never recover lost time. So even if you aren’t confident you’re making the perfect investment, just get started!

My Experience with Investing During Graduate School

Investing is one of my favorite subjects on which to teach, write, and coach, and my enthusiasm for the subject is due to the thrilling experience I had with investing during my seven years of PhD training. Starting at $0 in 2007, my husband (also a grad student over the same period) and I together grew our retirement investment portfolio to approximately $75,000 by the time we defended in 2014. The success we experienced is largely attributable to our aggressive and increasing savings rate and the long bull market that started in 2009.

I had an inauspicious start with investing when I first opened and funded my Roth IRA. I didn’t actually purchase the investment I intended to when I opened my account, so my money was going into cash! The really embarrassing part of the story is that I didn’t catch my mistake for over a year. When I finally did, I moved my IRA from that first brokerage firm to one I preferred and made sure that all my money went into my investment of choice, a target date retirement fund.

Deciding that a target date retirement fund was right for me only took a couple hours of research, and as it’s a set-it-and-forget-it strategy I have spent zero time over the last decade-ish maintaining it (though I do regularly check the balance). Instead of spending my time and energy monkeying with my choice of investments, I used them to find ways to add more money to my investments.

When I first started contributing to my Roth IRA in 2007, I saved 10% of my gross income, which was $200/month. After we married and combined finances, my husband and I set a lofty goal to max out two Roth IRAs each year. We used frugal strategies to incrementally reduce our spending to free up more money for investing. (Our top five frugal strategies alone helped us reduce our yearly spending by approximately $6,000.) While we didn’t quite achieve our goal during grad school, we did end with a 17.5% retirement savings rate.

Investing is about far more than just numbers to me. Investing throughout graduate school has not only given my family financial security, but it enabled both my husband and I to pursue our post-PhD dream jobs, even though they are risky and less remunerative in the short term.

I want other early-career PhDs to experience a similar degree of financial freedom as soon as possible in their lives, which is why I am such a proponent of investing even during the incredibly financially challenging graduate and postdoc training periods. If you’d like to go even deeper into this subject matter, sign up for my free 7-day email course on investing for early-career PhDs.

Investing

Links Mentioned in the Episode

Teaser

Introduction

Will You Please Introduce Yourself Further?

Tell Us More About Your FASEB Internship

How to Land a Science Policy Internship

What is the Graduate Student Savings Act?

How Abby Got FASEB to Endorse the GSSA

Personal Impact of Flawed Tax Legislation

Commercial

Anything Else About Your Role in FASEB?

What is the SECURE Act?

How Will the Internship Help Your Future?

Final Advice for Early-Career Grad Students

Outtro

Your Three Options for Your Workplace-Based Retirement Account

Leave It Where It Is

Roll to Your New Workplace-Based Retirement Account

Roll to an IRA

Which Option Should You Choose?

Other Advice Related to Retirement Saving

Contribute Money to Your 401(k) or 403(b) While You Still Can

Keep Investing for Retirement!

Consider Traditional to Roth Conversion During Grad School

Conclusion

The IRS’s Retirement Account Contribution Window Extends until Tax Day

Download Your Tax "Cheat Sheet"

Eligibility and Contribution Limits

Free Email Course: Investing for Early-Career PhDs

Why Is Contributing to an IRA So Important?

Why Am I Specifying a Roth IRA?

Always Contribute to Last Year’s IRA First

Free Email Course: Investing for Early-Career PhDs

An Illustration (with Numbers!)

The Psychology of a Ceiling

My Personal Experience with Contributing to Prior Year Roth IRAs

Links mentioned in episode

0:00 Introduction

1:05 Please Introduce Yourself

2:02 What was your career trajectory?

7:47 Given that a person has decided to do a PhD and maybe a postdoc, what are the effects of their financial outlook?

17:13 How can someone handle the income jump after the suppressed income period of being a trainee in a PhD or postdoc?

23:40 Grad students and some postdocs don’t pay into the social security system. What are the long term effects of missing out on these years of contributions?

26:59 What steps can someone who’s in or recently been in PhD training do to mitigate negative effects of lower income and not contributing to retirement?

30:16 If a person starts saving during graduate school, what kind of effect can that have on retirement?

35:50 What do you do for clients?

40:03 Final Comments

41:15 Conclusion

What Is the FIRE Movement?

Why Would a PhD Want to FIRE?

How Do You FIRE?

Can PhDs FIRE?

What Is Your Reason to FIRE?

Free 10,000+ Word Email Course on Investing for Early-Career PhDs

Choose Passive Investments

Maximize Your Savings Rate

Increase Your Income

Pick an Asset Allocation and Stick with It

Minimize Investing Costs

Dollar Cost Average

Use a Roth IRA

Details on Emily's Roth IRA

Get Started ASAP

My Experience with Investing During Graduate School

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