Ask the Grumpies: How to save for retirement with no earned income?

Steph asks:

Assuming I get my dream post-doc next year, I will be making 2x my grad salary…and none of it will be eligible for retirement savings because it will be a stipend instead of wages. That will be my life for at least 3 years, though hopefully not much more than that. I want to start saving for retirement in earnest – how would you do that in my situation?

This won’t matter too much until 2018, because in 2017 I’ll have earned income as a grad student that will let me max out my Roth, at least.

Grad student finances, by evolvingpf is really the appropriate person for this question.  Here’s her answer from 2012 on her original website.  Her answers are what I first thought as well–

  1. Get married to someone with earned income
  2. Get some earned income (addendum to her recommendations:  if you do any consulting or freelance you can save that in a self-employed plan such as a SIMPLE IRA)
  3. Don’t save for retirement (do other saving money things instead).  Then start saving more than you would otherwise for retirement once you get earned income and a savings vehicle to use.

In graduate school I was married so if at least one of us had earned income for half the year we were ok for IRA/Roth IRA, especially since the contribution limit was much lower at the time ($3K).

In case evolvingpf’s post disappears, good recommendations for non-retirement savings include:

  1.  If you’re in the 15% income bracket (or lower) now is a good time to use taxable stocks, especially dividend heavy ones because of the preferential treatment of capital gains.  Put that money to work for you.  (Note though, it is unclear what will happen to taxes over the next few years.)
  2. Pay off all debt starting with high interest (I bet you’ve already done this)
  3. Bulk up your emergency fund
  4. Save for your next car or a house so you can pay in cash for the car and get beneficial interest rates (and no PMI) for a house

Grumpy Nation– what suggestions do you have for someone without earned income who wants to save?

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34 Responses to “Ask the Grumpies: How to save for retirement with no earned income?”

  1. Katherine Says:

    I would probably save for house/car/etc, or just save a bunch in cash or CDs and use it to max out your 401k/403b for the first year or two of your next job.

  2. Norwegian Forest Cat Says:

    Ugh, what a ridiculous part of postdoc-hood. My current fellowship stipulates that I cannot have another side job to actually get some earned income. I am fine with paying taxes, just not happy that I can’t do other things with that stipend, especially since that thing entails being financially responsible! Also, I’m super annoyed that I can’t be appropriately compensated for doing things that are very career-oriented (consulting, teaching, etc.). I could rant for days about this.

    I’m on the tail end of my postdoc and married someone who also earns a stipend (yay!). We’ve been paying off some debt and saving in the stock market (woo index funds!!!). Once our debt is wiped out (except student loans, those currently have a super low interest rate), that $$$ will go to our new car fund/emergency fund. Once I move over to that elusive New Job Land (which, fingers crossed, should pay better), I suspect we’ll keep our same standard of living and save a whole lot more in much more efficient ways. I. Can’t. Wait. :)

    • Steph Says:

      Yeah, fellowships in my field have the same stipulation. In theory it’s supposed to protect us so that departments can’t also make you adjunct while you’re supposed to be on full-time research, which is needed in some departments, but it’s also frustrating.

      Good luck with the end of your postdoc, and paying down the debt! :)

  3. chacha1 Says:

    There’s a lot to be said for being able to pay cash for a residence. If you can do that, you have the kind of mobility that most Americans only dream of.

  4. Kingston Says:

    If you can choose a health plan with a Health Savings Account and then pay your health costs out of pocket, not touching the HSA, that money grows tax-free in a very similar way to a traditional IRA. Anyone can do this, even without earned income, as long as they have a high-deductible plan that qualifies. I believe an individual can put in $3,400 in 2017. I save receipts for medical expenses (psychotherapy qualifies! So does dental care, acupuncture, chiropractic, etc.) so that I can eventually liberate that money sooner if necessary, though I believe (not certain; you should check on this) that after retirement age the money can just be taken out as with an IRA. My HSA is with the administrator recommended by Vanguard, called Health Savings Administrators, and my HSA money is invested in Vanguard funds.

    • nicoleandmaggie Says:

      Good point! If you have access to an HSA (the health savings account, not the health spending account that is actually an FSA and has to be spent at the end of the year), this would be a backdoor way of saving for retirement.

      Great idea, and thanks!

      (I haven’t actually had access to one of these yet, so it wasn’t on my radar.)

      • Kingston Says:

        Yes, exactly, HSA is different from FSA. My high-deductible Obamacare health plan lets me have an HSA, and I’ve been maxing it. I also don’t have earned income some years and this is the only way I know of to put at least a few tax-advantaged dollars aside if you’re in that boat.

      • nicoleandmaggie Says:

        My FSA is called an HSA, but it’s not. :(

        Real HSAs are such a great deal.

    • Steph Says:

      I hadn’t known about this at all – I’ll keep HSAs in mind! Especially since I also don’t know what my health insurance will be like (some national fellowships don’t come with any, though they’re starting to give you money to cover some of the costs).

      • Norwegian Forest Cat Says:

        Some universities have a weird way of making up for that with national fellowships, and some funding agencies (I think the NIH is one of them) let you include fringe in your budget so you don’t have to pay your actual insurance costs totally out of pocket. My university tends to be a little ahead of the curve with respect to treating postdocs like actual humans, so they basically pay me extra each month to cover the difference between what employees and non-employees pay into their health plan. I end up paying the same amount out of pocket as an employee relative to my actual stipend, but my paycheck shows up with extra $$ that I never see. It does mean I have to pay taxes on that income too, but since my health insurance is post-tax I can write it off as a deduction if I’m itemizing. Honestly, I wish that our tax department were more helpful on this stuff – I think I would have planned a lot of things differently in grad school had I known what sorts of weird regulations I would be subject to as a PD.

        PS – wishing you lots of luck with your dream PD! Hoping that it will get you exactly where you want to be next and is fulfilling along the way. :)

  5. Leigh Says:

    People dismiss a regular investment account (e.g. at Vanguard) too easily. If you’re in a low tax bracket, you don’t pay much taxes on the dividends as the Vanguard Total Stock Market and S&P 500 index funds usually spit out entirely qualified dividends. There are no contribution limits and it can be pretty tax efficient. If your post doc was only a year and then you thought you would get a job with earned income, then I would probably just save in a “high-interest” savings account and use that to make larger than normal 403(b) contributions once you get a regular job. But with the post-doc being three years, I would invest whatever you would have contributed to retirement into a regular investment account. Vanguard is great, though you need $3,000 to get started in most of their index funds.

    J L Collins wrote a great book on this: https://www.amazon.com/Simple-Path-Wealth-financial-independence/dp/1533667926/ or you can read his Stock series on his website: http://jlcollinsnh.com/stock-series/ I also recommend the Kindle version of this book: https://www.amazon.com/Investing-Made-Simple-Index-Explained-ebook/dp/B004KA9RN2/

    I liked how Emily and Kyle of Evolving PF (that nicoleandmaggie linked to) picked a % of their gross income to save for retirement and then used the remainder of their income for other goals.

    • nicoleandmaggie Says:

      A regular investment account is a great place to save for longer term goals like a house downpayment.

    • Steph Says:

      That seems like it would be useful – I’ll check those books out, thanks!

    • Rosa Says:

      Yes! That is what I would say – you’re not going to be paying taxes on any income these first years because there won’t be enough to put you over the filing threshold with no other income. In later years most people can balance out any nonsheltered investment income by putting more of their earned income into the sheltered account. The tax effect of making $45,000 in salary and putting $15,000 into a 403b is the same as making $45,000 in salary, $3000 in interest or dividends, and putting $18,000 in the 403b, and both leave you living on $30,000.

      Of course if you were going to max out your tax sheltered investments you will lose that benefit but that’s not very likely early in your career. If you really want to convert everything to a Roth later, selling stocks after a year is taxed lower than earned income.

      The real scandal of the “this is not earned income” thing is that it doesn’t get people the EITC.

  6. Miser Mom Says:

    I don’t have any savings/investment advice, but I just wanted to say Woohoo-and-Good-Luck to Steph on getting that dream post doc! I’m rooting for you, you know.

  7. DV Says:

    In the exact same boat here-except, doing a guaranteed 8 years of postgrad education with a taxable stipend. There is some confusion over whether I’m a student or self employed, for tax purposes (so much fun, not…). I also am not allowed to take on tutoring or consulting, and if I do it under the table, I can get in a lot of Trouble. Also, I have unpredictable (and excessive) hours.

    I might be one of the only people in the world actually excited about residency training. I’ll make double what I make now, and plan on being as frugal as I am now, and I’ll have savings! Glorious savings!

    • Steph Says:

      ugh, those restrictions on outside work. We have them at my uni too, though people flout them for spending money or to stay afloat (depending on their program). I knew a couple people in my dept who tutored and doubled their income, but in other depts people took adjunct positions at other unis in the city and just kept them secret.

      Good luck with residency training, and with saving!

  8. Steph Says:

    I think the main thing I’ve picked up from this is that I need to focus more on my dating life ;-)

    I think the investing option appeals to me the most, whether with the goal of eventually converting to retirement savings or using the money as a downpayment. Thanks for all the options and advice!

  9. Jenny F. Scientist Says:

    If your postdoc should happen to be funded by HHMI (if you are in a HHMI lab and the PI is paying you rather than a separate fellowship) they have an excellent retirement plan that you can contribute to on a stipend.

    I think we went the Vanguard funds route for the years the spouse had a stipend and I was a SAHP.

    • Steph Says:

      Sadly I’m not in a field that HHMI funds, but I would like the funding agencies in my field to catch up to that plan!

  10. Debbie M Says:

    I was also going to say to save it in a regular account and then just transfer it to a tax-advantaged account when you can.

    In unrelated news, Rita of Rita’s Notebook is looking for recommendations for “adult/young adult fiction/memoir that illuminates the experience of Americans in the following categories: immigrant, refugee, Muslim, African-American, disabled, Native American, Asian, women, LGBT. I’m interested in any group targeted in the election campaign and/or vulnerable if proposed policies are implemented.

    “I’m most interested in contemporary works that depict current American lives, and I’d like a range of ages for the main characters. Please share any titles you’d recommend in the comments.”

    I think you (and some of your other readers) would have much better ideas for this than I do. Her post is here:

  11. fizzchick Says:

    Ugh, did this during grad school with a spouse who was similarly stipended much of the time. Two things let us keep contributing to our Roth IRAs: The timelines on our stipends were different, so often at least one of us had earned income that counted, and for reasons I never fully understood, summer funding (even if from the same grants) counted as wages even though school year stipends didn’t. So I guess my advice is to ask around. Maybe postdocs can teach an occasional class (they could at my grad institution, if they requested and their PI didn’t object)? Maybe you can get a wages-type stipend to run the colloquium, or coordinate the undergrad dishwashers, or something else? The other postdocs and possibly grad students at your new organization may have ideas. And yes, if all else fails, open the cheapest account one can and toss things in an index fund.

    • Steph Says:

      My first two years our pay was largely stipend-based and direct from the university, but our summer pay was also always wages. Once you get on a prof’s grant in 3rd year, you go to full wages. So I’ve been able to start a Roth IRA as a grad student.

      If I’m paid off a PI’s grant as a post-doc, I *believe* I will be paid wages, and possibly even be considered an employee with benefits. The iffy thing comes if you have a fellowship. They have higher pay, by $10-30k, but typically paid as a stipend. They also explicitly prohibit outside work (my grad school does this too, though it doesn’t stop everyone). So the direct investing is looking likely.

  12. nicoleandmaggie Says:

    We don’t know what will happen with 2018 taxes, but here are 2017 brackets http://taxfoundation.org/article/2017-tax-brackets . Here’s info on how dividends interact with brackets. https://www.wellsfargoadvisors.com/tax-center/dividend-income-tax.htm

  13. Emily @ evolvingPF Says:

    Thanks for linking to my sites!

    Steph, I made a video for people in exactly your situation: How Fellowship Recipients Can Save for Retirement https://youtu.be/O-2asIQlkak

    If you can’t find any way of generating taxable compensation, just save for retirement in a taxable account. If you use index funds, you won’t have to pay much in tax. When you’re eligible, you can shift the funds into tax-advantaged accounts.

    Basically, don’t sweat it! Save anyway.

    • Steph Says:

      I’m sorry I missed this a few weeks ago – thanks so much for the link! I’ll definitely check out the video :)

  14. Steph Says:

    Just dropping back in to say…despite my newly acquired challenges around saving $$ and acquiring healthcare, I am really excited because I GOT THE DREAM POST-DOC!


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