As nurses, we are lucky to be in a profession which is both personally rewarding and relatively insulated from the poor economic times causing havoc for many of our neighbors and family members outside of health care.
Just the other day I overheard a coworker in the nurse’s lounge say, “Well, I’ll never be a millionaire, but I’ll always have a job.”
I’ve been considering that statement for the past few days, and to be honest, I don’t see any reason why most nurses can’t retire with that million dollars most seem to think is so elusive. I’m going to spoil the story and tell the ending first and then give you the details so you can consider your own situation.
I expect my hospital is fairly average when it comes to retirement benefits, so I’ll assume yours is similar. Take a 30 year old nurse at my hospital earning $35 per hour and working three 12 hours shifts per week, and take $126 per pay check out for retirement, by age 60 this will likely grow to over $1,000,000.
$126 out of your paycheck and you end up a millionaire.
This next part is for those of you not interested in the details and simply wanting to take the 15 minutes to put the plan in to action and never think about personal finance or investing again. Nothing fancy here and no worries, and it doesn’t involve sending me money.
My hospital has a 401a as well as a 403b plan for retirement. The hospital automatically puts 1% of an employees pay into the 401a account and will then match employee contributions up to 3%. So I give 3% to the 401a and the hospital gives me 4% for a total of 7% of my salary going to retirement. So step 1, find out if your employer offers a matching plan for retirement, this is free money and no matter what your situation you should take advantage of this. Contribute as much as possible to get the matching funds. Step 2, the magic number is 10% of salary for a nurse as described above. So you need to put another 3% into the retirement account. In the case of my hospital this can go into the 403b account, the government will not take taxes out of the paycheck for this amount. Because the hospital chips in the matching funds to the 401a and the government gives a tax break with the 403b, each paycheck is only reduced by $126 dollars, but $252 dollars is contributed to the retirement account. And when started young enough to give 30 years for it to grow, the opportunity to become a millionaire is very real.
That’s the magic formula, 10% of a nurse’s paycheck goes to retirement equals retire a millionaire. But it’s important to understand, time is not you your side. The most important piece of this is the nurse has 30 years to see the money grow. If you wait, the amount of money needed to contribute starts rising quickly. A nurse age 35 will need to contribute 16% or $227 out of each paycheck to reach that million at age 60. And Starting at age 40 will require 27% or $413 per check.
An now for those of you who like the fine print and would like to see just how we arrived at our nurse retiring on a tropical island. Actually it is pretty straight forward.
1. Pay rate of $35 per hour working 36 hours per week. Higher pay or working overtime gets you to a million quicker.
2. 10% of pay goes to retirement until you get to a million. So as salary goes up, the percentage remains the same but a few more dollars are invested.
3. We assume an average 3% pay raise per year.
4. We assume an inflation rate of 3%, this is the historic average.
5. We assume an average annual rate of return of 8% after fees and expenses from the retirement plan. This is the most common number used for projecting long term stock market returns, and this is the area we have the least assurance of. Changing this number up or down changes our chances for reaching a million the most.
6. We assume the 401a contribution is after taxes and the 403b is before taxes, and a federal tax rate of 25% and state tax rate of 8%. Along with the hospital match, this is why each paycheck $252 dollars goes to retirement but your paycheck is only reduced by $126 dollars. A different hospital match or different tax rate will change the difference between what comes out of your check and what goes into your investment account.