# Scientists: Bringing Home the Benjamins, part 2

by on June 9, 2010

Last week, we talked about personal finance for underpaid junior scientists.  We discussed how the astronomy career path dramatically under-pays junior astronomers during the first 10–12 years (graduate school + postdoc) of their career.  That they are often ineligible for retirement accounts during the grad school and postdoc years (or at least do not vest), which puts them a decade behind in the goal of saving for retirement—a decade of lost compounded interest.  (As scientists we understand the power of compounded interest—to quote my calculus prof Dr. Passmore, “Never underestimate exponential growth.”)  We got a discussion going about the financial realities of a profession that over-produces PhDs, gives million-buck Cosmology prizes to its most successful few, and pays most of its practitioners only $25k/yr. And we started brainstorming institutional solutions. I’d like to continue that discussion in that thread, while here switching focus to the steps each junior astronomer can take to manage her own finances, so that she can get out of debt and afford the non-work things she really wants (a house; a kid; a Harley.) Last week, Ben reiterated a standard piece of financial advice: you need to start saving for retirement before your mid-30s. Exponential growth. I’ll add that many need to start assembling a 10–20% mortgage down payment. Kurtis pointed out that it’s hard to save this much, especially given that 30±5 is when lots of people start trying to have kids, and eying houses for sale. I agree that it’s hard, but I believe it’s possible. I’d like to recommend a book, “Smart and Simple Financial Strategies for Busy People“, by Jane Bryant Quinn. This short, highly readable book is extremely helpful to a person following the the junior scientist career path—it can help you pay off your debts, establish a Roth IRA retirement account and set up automatic monthly investment, get renters’ insurance, set up auto billpay, and save up for a house down payment. For 30 years, Ms. Quinn was a personal finance columnist for Newsweek. She is a skeptic and a pragmatist, who mistrusts complicated schemes, trusting compound interest, diversification, and investing in the entire stock market (index investing). She writes very clearly, and understands that her reader is a smart person who has specialized in something other than finance. For me, Quinn’s most useful suggestion was to “put my finances on auto-pilot.” I followed her advice by starting a Roth IRA with Vanguard, investing in an indexed “target date fund”, which is a fund that starts out heavily in stocks (higher risk, higher growth potential), and will gradually evolve toward a higher bond fraction (safe, but slower growth) as I near retirement. Two days after my monthly stipend check arrives, my account automatically moves 15% to my retirement fund. (Much better than contributing yearly, when I remember, but only if I feel flush.) Quinn argues that if you never see the money, you won’t miss it. For me, the auto-investment forces a financial discipline that I needed. Quinn also suggests that you set up auto-pay for all bills. (The electric company is surprisingly unsympathetic when you explain that you meant to pay the electric bill, but there was a bug in the cluster-finding algorithm which took you weeks to find, and then there were all the simulations to re-analyze, so of course your mail has piled up and you didn’t see the final notice of disconnection.) And that you make a spreadsheet to keep track of financial goals (“Harley-Davidson Forty-Eight in Vivid Black with 1200cc Engine”), your small (but growing) savings toward those goals, and how far you’ve come toward reaching those goals. My situation has been easier because my fellowship salary is on the high end of the astro-postdoc range. However, I also live in one of the most expensive cities in the US, and my spouse took several months to find a job after we relocated. We’ve had some financial hard times. Still, on my postdoc salary, I’ve managed to save half of a mortgage down payment, while investing for retirement at the level Quinn recommends. My wife (we keep separate finances) has paid off her student loans, belatedly started a retirement account, and also saved for a house. My final advice echoes Ben: when you get your PhD and the concomitant postdoc salary bump, try not to notice. Rent a crummy little house. I’m not kidding. The single best financial decision we made in LA was to rent a tiny 1.5 bed, 1 bath bungalow. It’s smaller than the 3 bedroom we had in grad school, but we are saving toward our long-term goals. We don’t live completely like grad students—our ramen intake is down, and I’ve developed a taste for beer made by monks. To recap: buy Quinn’s Book, follow her advice, and keep living like a grad student once you’re a postdoc. If you do that, I hope you can compensate for the crummy pay in graduate school, catch up on saving for retirement, and meet your long-term financial goals. PS – I like Quinn’s longer book too, “Making the Most of Your Money Now”. It shares the same philosophy as “Smart and Simple”, but covers more topics, and is more of a reference book than a how-to manual. Disclosure: If you buy either of Quinn’s books, or make any purchase from Amazon by following our links, we get a small kickback. See the title of this post. { 11 comments… read them below or add one } 1 Kelle June 9, 2010 at 9:33 am Great advice! Thanks Jane. For beginning savers, if you’re not ready with full-on investments, it is highly recommended that you start working on building up an “emergency fund”…a savings account or money market with 3-6 mos worth of expenses. I also use mine as my slush fund/buffer for fronting travel costs. Just like everything I learned about cars, I learned from Car Talk, I highly recommend Marketplace Money. It’s a weekly radio show…it airs on the weekends but I get the podcast Friday night and listen at my leisure while doing chores. In particular, the “Getting Personal” segments are great because people call in with real-life situations and the show’s hosts discuss the pros and cons of various solutions. One thing to be sure you pay attention to when choosing funds are the expense ratios. I chose not to go with the Target Date funds with TIAA-CREF because the expense ratios were on the high side (0.7%). I decided to go with a couple cheaper index funds (0.3%) instead. Vanguard is known for low fees and it looks like their Target Date funds are way down at 0.2%! This issue was addressed in a Getting Personal column. Reply 2 mihos June 9, 2010 at 9:51 am This may be very unpopular/unwelcome advice but here’s my advice: stop buying so much stuff. Seriously, I see so many people running around w/ fancy personal electronics, going on big vacations, eating out a lot, going to lots of concerts/shows, etc, etc. All that is fine, but don’t do all that and then claim you can’t save enough or don’t earn enough. And yes, I realize not everyone is doing this, but a lot are. You save money by doing two things: increasing your earnings, and reducing your spending. And I agree wholeheartedly w/ Jane’s comment about not overpaying for housing. Our house isn’t the fanciest, and it’s not in a toney neighborhood, but it doesn’t stretch our budget. Reply 3 Marcos June 9, 2010 at 10:10 am As you can see in the Vanguard target 2010 fund, they tend not to shift their portfolio properly; it dropped 20% in 2008, 2 years before one is supposed to retire? That’s crazy, an index fund would have done about the same thing. So I don’t quite the point of them if they can’t handle a downturn 2 years before retirement. Plus they (usually) have higher expense fees. Index funds are a good choice, and shifting away from stock index funds toward more boring things like bonds the closer you get to actually retire. And for heaven’s sake don’t buy a house thinking it’s an investment. It’s a very bad way to build wealth even if you’ll live there 30 years, and really a crapshoot if you’re going to move out quickly. Grad students / postdocs who buy homes/condos I think are making a very questionable choice. Reply 4 Jay June 9, 2010 at 2:04 pm Jane, won’t putting 15% of your stipend into a Roth exceed the max yearly limit (5K)? I can put only slightly more than 10% post-tax in. I don’t know how much Carnegie Fellows are paid these days but it isn’t way below Hubbles, is it? Reply 5 Jane Rigby June 9, 2010 at 3:36 pm Jay, good catch of my over-simplification. What I should have said is, I maximize my Roth IRA contribution ($5K in 2010; Vanguard has a button that automatically maximizes your contribution), and then put additional money into a regular (non-IRA) account to get 15% total. (Yes, Carnegie fellowships are set at the Hubble rate, more or less. )

6 Jane Rigby June 9, 2010 at 3:41 pm

Here are two examples of how lifecycle funds evolve. One is Marcos’ example (retiring in 2010), and the other assumes a retirement age of 2040.

Marcos, you are forgetting that people do not expect to die shortly after they retire. As a result, all lifecycle retirement funds maintain a healthy fraction of stock at retirement. The bond fraction pays a fixed income to live on, while the stock fraction continues to (hopefully) generate growth for the next 20+ years of life after retirement. Yes, that is riskier than 100% bonds. But unless you are extremely wealthy, you need to continue growing your retirement in early retirement, or you will run out of money. That, by definition, requires you to assume some risk.

7 John Feldmeier June 9, 2010 at 8:23 pm

One thing I think that really cripples people in general, and young scientists in particular, is the
use of credit cards. I once heard of credit cards as the “cement life raft,” and in my experience that is the truth. Interest can work for you, or against you.

A related post on finances went up on the Tenured Radical website:

8 anon June 10, 2010 at 7:09 pm

I like the advice about not drastically changing one’s lifestyle upon a salary increase, but it’s taken to a silly extent in this post. “Rent a crummy little house.” This is bad advice. Yes, by all means, live modestly, but one of the single biggest factors in my comfort and happiness is my living conditions. This is true for many people. If you live in a crappy house/apartment, with landlords who couldn’t care less, perhaps in an unsafe neighborhood… you will be unhappy and stressed, if you’re like most people.

So by all means live modestly. I’m keeping my rent <20% of my gross income as a move to a postdoc. But I'm paying ~$100/month more than I have to so that I can live in a nice place, with a great kitchen, quiet neighbors, and reliable staff. Don't forget: you're saving up so that you won't be miserable in your old age, but it would be silly to be miserable now instead. Reply 9 Ben June 11, 2010 at 2:31 am It’s all relative. I don’t think a postdoc needs to live like a grad student either, but it depends where you are, a grad student living in Tucson is closer to a postdoc in LA than the other way around. It also depends on how naturally saving up comes to you. Academia has never promised to be very financially rewarding, so figuring out a constructive and simple way to deal with it is better than resenting the fact that you can’t keep up with your friend who went into the tech biz. Reply 10 DifferentAnon June 11, 2010 at 5:12 am I’ll riff a bit off Anon’s post. The biggest impact on your retirement isn’t whatever money you save during your grad student and(lol, ok) postdoc years. It’s the permanent job where you ultimately land. Few of us get more than a couple of offers, and if you end up at #2 on somebody’s shortlist instead of #1, you could easily end up sliding another$5k, $10k, or more down the starting payscale. It seems to me that the best financial strategy for a grad student or postdoc should mitigate the real-life problems that distract them from maximizing their scientific productivity, and thus their employment prospects. As Kelle says, a 3-6 month emergency fund is critical. You can easily lose a lot of time and productivity if you have to worry about juggling finances and getting bills paid, especially since financial crises are usually triggered by other events (like medical or family emergencies) that are also stressful. However, in most cases your spending choices are probably more important than your saving choices. If noisy neighbors keep you up and ruin your productivity during the day, then head for the quieter, more expensive parts of town. Conversely, if you need nightlife to decompress, spend a little extra and get a quality place near downtown. Don’t add an extra 30 minutes onto your commute just to save$100/month – it almost certainly isn’t worth the lost time and additional stress (unless you get your motivation from right-wing talk radio or a daily hour of Gaga).

I guess it all comes down to a different idea of investment: Invest in yourself, as you are the primary means of generating income for the next 30-40 years. In academia, a handful of critical steps (undergrad, PhD, postdoc, faculty, tenure) determine all of your future earnings. Invest wisely to maximize your odds at those steps.

Of course, I can’t overstate the short-term hedonistic benefits of this strategy either…