I’ve been thinking more and more about financial independence and retirement, even in my early career as a postdoc. It’s important to think about retirement while you still have time at your advantage. Time in the market beats timing the market, because of the magic of compounding. It’s even more important to take investing in your retirement in your own hands as a grad student as there are several things working against us when it comes to retirement savings and investing.
You’re not earning a lot in your “prime” working years
Most grad students enter grad school at the young age of 21. PhD programs typically take 5-6 years to finish. That means you will be graduating at 26-27. Compared to students who graduated with a bachelors or masters and started working, you will have lost 5 or more years of earning potential. Not only that, the working people will have had access to 401K and employer matching for a couple of years, while you have yet to start investing for retirement.
Let’s look at someone who graduates at 21 with their bachelors and starts investing right away into an IRA. By contributing $6000 each year into the account, at 7%, and investing all the way until the person is 65, their total net worth will be 1.7 million. Compare that to someone who graduates at 26 with their PhD, and only then starts to invest. They will only have 1.2 million at the age of 65. They’ve lost $500,000 of compound earnings just because they started investing 5 years later. Now compare that to someone who is doing a postdoc for 3 years and didn’t start investing until they started their actual full-time job at 29. That person would end up with only $956,000 at 65. That’s the power of compounding.
I was 26 when I entered my PhD program. I was a late bloomer, because one, I just finished a bachelor’s and master’s program which took me 7 years. Two, I wasn’t sure I wanted to get my PhD until the last year 6 of my program. It took me 4 years to earn my PhD degree and that’s because I entered with a masters program.
I started investing in a Roth IRA at 24. I contributed small amounts to it since I wasn’t earning much from my on-campus job. During my masters, I did an internship at a local utilities company, and they offered a retirement savings program with a small match. I rolled that over into a traditional IRA when I left, and converted it into a Roth since the amount was so tiny that it had negligible effect on taxes.
After that, I kept contributing small amounts to my Roth IRA throughout my PhD program. I reinvested all the dividends back into the same fund. Twice, I was able to max out the contribution because we were frugal through gradschool. Had I not started invested in my Roth IRA during my masters, my net worth would have been a big fat 0 at the end of my PhD. Instead, my Roth IRA account had about $19,000 in it by the time I started my postdoc. Sure, I might have missed out on earning more during my 20s, but I’m happy that I had the foresight to start investing in our future.
You may not be paying into Social Security
To qualify for Social Security benefits, you need to earn 40 credits. In order to earn these credits, you need to pay into Social Security through taxes. You can check on ssa.gov to see how many credits you’ve earned. Each year, you can earn 4 credits depending on how much you’ve earned, which means you need to work at least 10 years to qualify for Social Security benefits.
When I checked my SSA records, it seems I only paid into Social Security in 2016 and 2017. In 2016, my earnings weren’t even enough to qualify for 1 credit. In 2017, I got 4 credits. I had 0 credits in 2018 and 2019, because my stipends were exempt from FICA. At the end of my PhD, I had only earned 11 credits.
Had I started working at 26 at a full-time job, I would have had 23 credits by the time I graduated with my PhD. I would need to work 5 more years to qualify for SS. Now with just 15 credits at the end of 2021, I need to earn 25 more credits or work 7 more years to qualify for the benefits. And it’s not like I didn’t work at all. I started working in the US since 2010 on campus. I just didn’t pay into Social Security.
What I’m trying to say is that you are delaying paying into Social Security during gradschool, and that is delaying the age you would be to have earned the total 40 credits needed to be eligible for Social Security when you retire.
And it doesn’t just affect your retirement benefits, but also your disability benefits. The number of credits you need for disability benefits is typically dependent on your age. Let’s say, god forbid, I become disabled next year. I would be 32, and to qualify for disability benefits, I need at least 20 credits int he last 10 years. Basically, I wouldn’t qualify.
You may not have any retirement savings benefits as a postdoc
If you’re planning on doing a postdoc after grad school, please look into this issue. A lot of postdocs at academic institutions don’t qualify for any retirement benefits such as employer matching. You can contribute to a 403b, but your employer doesn’t have to match you. Compared to your industry colleagues, you’re basically missing out on this amazing benefit.
This is another reason why you have to take your retirement investing in your own hands. Start that IRA and max it out. Contribute to the 403b as much as you can, even if you don’t get any match. And invest the money in these accounts. By the time you get the full time position, whether that is a tenure track position, or you’re going to work at a national lab or industry, years might have past and you would lose out on the most important thing in investing: TIME.
Please, if you take anything away from this post, start investing in your retirement as a grad student. Start by budgeting and tracking your expenses. Then, save for a month’s worth of emergency fund to get out of the paycheck to paycheck cycle. After that, it’s important to start contributing to an IRA account and start investing in your future. Do not delay this step, as time in the market beats timing the market.