Recently, Michael from Heard conducted a poll on X (formerly known as Twitter), asking therapists whether or not they save for retirement.

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Out of the 270 respondents, nearly two-thirds said that they do in fact save.

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Believe it or not, that result (based on a small population, of course) puts therapists ahead of the rest of America when it comes to prioritizing saving for retirement.

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In 2022, the Federal Reserve conducted a wide-ranging survey of Americans, finding that only 54% of respondents owned a retirement account. 

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But what the poll results don’t show is whether therapists are saving enough for retirement or have a significant backlog of savings that will support their lifestyle in the future.

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And it’s also likely that many people reading this article need to increase their savings–they just don’t know how. 

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Why do I say that? Because almost any legitimate survey in the financial space finds that most Americans struggle to save or save significant amounts of funds for retirement, while also managing the concerns of day-to-day expenses. 

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In a recent Bankrate survey, 56% of respondents said that they felt “behind” when it comes to saving for retirement, while 37% stated that they were “significantly behind.” That’s common.

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But the reality could be starker in the therapy space because of the other pull–the high rate of burnout. The American Psychological Association found that in 2022, 45% of therapists reported symptoms of burnout. This threatens the livelihood of therapists who experience this as they age. Luckily, the APA also recently found that the threat of burnout reduces as therapists enter senior and late career stages.  

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As you gain experience, you increase the ability to add more funds (and earn more income), which is key to saving enough for retirement or financial independence. If you suddenly feel burnt out and cannot take advantage of the higher earning years, then it can derail future goals. 

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Despite these gloomy figures, saving for retirement can not only create space for your practice. It can also reduce the financial stress you feel. This can encourage time away from the practice, cut the threat of burnout and increase your willingness to invest in your business. 

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How then do you begin saving for retirement? It’s a process, one that becomes more dynamic as your income and experience grows. 

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Why should therapists save for retirement?

Investing in a retirement plan is a form of saving. The purpose of investing isn’t to find the hot new stock or uncover some unknown opportunity. Why do I say that? Because if that was the case, I would not write this article suggesting you invest for the long-term. 

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You’re a therapist, not a market analyst. And most professional investors fail to beat a basic index fund over many years. In fact, only 6% surpass their index fund benchmark after 20 years. And those that do, there’s no proof they will surpass their benchmark for the next 20 years. 

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Instead, the reason we invest in the markets for financial independence or retirement has to do with inflation. If you could store $100,000 in your couch, and in 20 years be able to spend that $100,000 as if you were spending on today’s prices, then we wouldn’t need to invest. But that’s not the reality. 

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You would need about $16,400 in 20 years to have the equivalent of $10,000 today, assuming a 2.5% inflation rate. How do you grow your money to ensure it surpasses inflation? You access risk. That’s why, when I speak to therapists about saving for retirement, what we’re really discussing is how to invest for your long-term goals. 

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But there are different types of risk. Putting money into bonds offers a different level of risk than investing in, say, bitcoin. One will come with far more volatility, but higher potential for growing more than expected long-term. 

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With a proper understanding of how the investments work, you can begin to develop a strategy for your own investments.

A breakdown of investing options for therapists

For someone new to investing, I like to break down the different choices you must make by likening it to the brain.

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First, you have the skull protecting everything. This is the tool you choose to invest within, whether it’s a 401(k), a Roth IRA, a SEP IRA, taxable account, or other vehicle. This determines how your investments will be taxed, when they’re taxed and when you can access the funds without penalty.

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Then you have the brain itself, which sits inside the skull–or the tool. These are the index funds, mutual funds, exchange traded funds, and other products that you can invest through. Depending on what you choose will determine the fee you can expect for investing.

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Finally, you have the assets, which serve as the neurons of the brain, determining the results from all your investment efforts. These are the stocks, bonds, and other assets that make up the index or mutual fund that you have selected. This determines how much risk you take on, and what you can expect from a growth rate and volatility moving forward. 

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Let’s go deeper into each section of investing, to help guide some of your research.

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The skull: your retirement plan

The retirement plan or tool you use to invest determines when and how you’re taxed on the investments. The reason we use retirement plans, even when you’re seeking financial independence and never plan to retire, is to take advantage of some of the tax aspects of the tools. 

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The first decision you’ll have is when you want the tax advantage to take place. When saving in a Roth account, for instance, money that you’re putting into the account has been taxed. In other words, you get no tax advantage at the beginning. But then when you use the funds later in life, they’re not taxed. And if you’re over 59 ½ when you begin removing funds, then any gains earned in that timespan aren't taxed either.

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But maybe you would prefer a tax advantage now to reduce your taxes today. That’s when you should invest in a traditional 401(k), Solo 401(k), SEP IRA, or other plan. In these accounts, you’re taxed when you use the money later in life. Then it’s taxed as regular income, and only based on how much you pull out of the account in any given year.

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We want a few different tools to pull from later in life. That allows for different tax combinations, reducing your overall tax exposure. But that’s for when your finances become more complex. For now, determine whether you want a tax break now or in the future, then take a step to find the tool that matches that decision.

The brain: your product options

When investing, your fees become so important to your future returns. While investing over the long-term, you’re benefiting from compound interest. Your investments grow, earn gains, and then those gains earn gains, and so on and so forth, until you can have a fairly large number in 20 or 30 years. But the same dynamic works with fees. 

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And your product choice determines the fees you’ll face. For instance, Investopedia recently pointed out that $80,000 invested with a 0.5% fee and a 7% growth rate will result in $380,000 in 25 years. The same investment, with a 2% fee would only reach $260,000 in 25 years. Essentially, that 1.5 percentage point fee difference resulted in the loss of $120,000.

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Due to the lack of market overperformance by professional investors and the impact of fees (since professional investors often require higher fees), we’re often guiding clients towards low-fee, broad based index funds and exchange traded funds (ETF). This allows us ways to access risk without having to face significant expenses in the process. 

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The more you narrow your investments or seek a human hand in the investment, then the more you will likely face in fees. 

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The neurons: your assets

Whether you invest using index funds, active funds, ETFs or even in individual stocks, these products are made up of assets. And it’s the combination of these assets that determines how much risk you’re taking.

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If you have a portfolio with 100% bitcoin, that will have a far different risk (and volatility) experience, than a portfolio with investments in 100% stocks that are globally diversified, versus another portfolio with a mix of 60% stocks and 40% bonds. Even further down the risk ladder would be portfolios that are 100% bonds. 

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Determining your asset mix will depend on multiple factors. First, we would measure your risk tolerance – or how much you notice volatility in your portfolio and how likely you would shift your plan if the market struggles. When developing a plan, we want you to stick with it for years. If you’re pulling your funds out at a moment’s notice, then you have a portfolio that doesn’t match your risk tolerance.

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We would also evaluate your risk capacity – or how much capability you have to take on risk. A person with a $1 million in their portfolio and 20 years to invest can take on a little more risk than say someone who wants to retire in 2 years and has $500,000 in the portfolio. It’s an important wrinkle in your portfolio design. 

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Finally, we’re also looking at your time horizon – or when you need to use the funds. Those with many years to go can take on far more risk than those who need the money soon. 

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This dynamic changes throughout your life. And matching your portfolio structure with your plans and age will help ensure you can sleep at night while investing. In truth, that’s a big goal for clients: ensuring they can sleep well while their money grows long-term.

How much should therapists save for retirement?

When determining how much to invest, it’s important to start with where you want to go from an investing front. 

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Let’s say you want to have a million dollars in your 401(k) in 30 years. Assuming a 7% return rate, and you will need to invest between $850 to $875 each month. That will help you reach your goal. 

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Now, let’s say you only have 20 years to invest. Well then, you’ll have to increase that savings rate to about $2,000 per month.

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The longer you wait, the more you will have to save. But if you have waited, it doesn’t mean you’re not able to catch up. In fact, many people come to me in their 50s with very little in savings. 

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What does it mean? They will likely have to make savings a priority for the 10 to 15 years that they have left to work. But it’s possible because their skills and expertise allow them to demand higher rates, giving them the room to save.  

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The beauty of this when running a private practice is as your savings grow, so does your wealth. This results in more confidence for you and your business. In the end, it can lead to ways you can invest in the business, since you feel confident in your personal security.

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Overtime, that can even turn your practice into an asset that can be used for retirement planning as well. 

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Confused about the difference between a traditional, Roth, and SEP IRA? Read our article on how to choose a retirement plan for your therapy practice.

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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult their own attorney, business advisor, or tax advisor with respect to matters referenced in this post.

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Ryan Derousseau, CFP®, is a fee-only financial advisor at United Financial Planning Group, where he specializes in working with therapists, private and group practitioners, and the self-employed, enabling them to thrive financially so they can focus on clients. You can read his free ebook, Turning Income Into Wealth: Strategies to create security within your private practice on his website www.ThinkingCapFinancial.com. 

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