What is Qualified Term?
Qualified Term indicates the number of years you could live on your current qualified assets. “Qualified assets” refers to money in retirement accounts. This includes pre-tax accounts like Traditional 401(k)s and IRAs, and tax-free accounts like Roth 401(k)s and IRAs.
Retirement Assets / Annual Living Expenses = Qualified Term
Example: If you have a Roth IRA with $50,000 and 401(k) with $600,000, and you spend $100,000 per year, your Qualified Term is 6.5. $650K retirement assets / $100K spending = 6.5.
Qualified Term (Qt) is one of four Elements that make up your Total Term.
Why is Qualified Term Important?
Contributing to retirement accounts lowers your tax bill, both now and in retirement. This is a strong motivator to increase your Savings Rate. A high Savings Rate propels you toward financial independence, and lets you drop shifts sooner along the way.
Also, retirement accounts are clearly earmarked for long-term objectives. This often results in better investment behavior:
- Not bailing out when the stock market goes down and things seem scary.
- Not withdrawing for shorter-term wants (vacation home, Tesla).
On the other hand, you must find balance between retirement accounts (Qualified Term) and other money you can access more easily (Liquid Term). A healthy mix means you’re saving for the future, and can access money now, for unexpected expenses or that Tesla.
Improving Your Qualified Term
One way to improve your Qualified Term is to increase your Savings Rate. Sometimes ER docs have retirement account options they’re unaware of. For example:
- If you do locums work, you can set up a self-employed retirement plan and contribute at least 20% of your net locums income.
- If you’re in a private group, the group may offer a cash balance plan with a large max contribution. Note: Many ER docs contribute less than the max to a cash balance plan. It’s a multiyear commitment and you can’t stop partway if you run into cash flow trouble.
- If you work for an academic or nonprofit hospital, they may offer a 457 plan. The max is $20,500, or $27K if age 50+ (2022).
If you don’t want to change your Savings Rate, but still want a higher Qt, change where your current savings go. For example, save less in a nonretirement investment account and more in your 401(k).
The last way to improve your Qt is to reduce your spending (or Burn Rate). Annual living expenses is the denominator in the Qualified Term calculation. Even a small reduction in spending has a big impact.
- Retirement Assets = $650K
- Annual Living Expenses = $120K
- Qualified Term = 5.4 ($650K/$120K)
- Retirement Assets = $650K
- Annual Living Expenses = $100K
- Qualified Term = 6.5 ($650K/$100K)
Do you know your Qualified Term? Do you have a healthy balance between retirement assets and liquid assets? That’s where we come in. Schedule a FREE Financial Pulse Assessment™. This is a 3-step process to get clarity on your finances and “test drive” our services.