Being married to a physician has allowed me to obtain a unique understanding of the costs and benefits to achieving a medical degree. In this post, we will discuss several practices that can help physicians and other healthcare professionals achieve financial prosperity.
What sets physicians apart from other professions?
Doctors begin their careers and start earning an income much later than the average person. If a physician is accepted to medical school immediately following completion of an undergraduate degree, she will be in her mid-20s when she graduates medical school. After medical school, physicians must continue clinical training in their chosen specialty. The residency training period ranges from 3 to 7 years depending on the specialty. During this time, new doctors make a modest salary, work long hours and cover overnight on call shifts in exchange for clinical training.
Once launching their career, doctors receive above average compensation and have almost zero risk of unemployment. These privileges, however, come with some serious caveats.
As of 2015, graduating physicians start their career with an average student loan of $183,000. This is equal to $1,897 of monthly payments over ten years or $927 over thirty years, at 4.5% interest. If I remove the lowest 20% of the medical students that come out of school with zero or small loan amount, the average debt figure jumps to $230,000. This is a total of $286,000 due on principal and interest on a 10-year loan and 420,000 on a 30-year loan. Student loans become repayable after medical school graduation.
1. Start saving for retirement early.
Doctors have a shorter working life than the average person. They start their careers ten years after most people. During these ten years, doctors don’t earn a significant salary and accumulate a large amount of education-related debt.
It is critical that young doctors start saving for retirement while they are in residency. During residency, the new doctors receive a salary between $40,000 and $60,000. A lot of employers offer both tax-deferred 401k and after-tax Roth accounts. Depending on their financial situation physicians should consider maximizing both plans with priority on their After Tax Roth contributions first before adding money to their 401k account. As of 2016, Roth IRA contributions are limited to $5,500 per year at $117,000 of income. The amount phases out as the income reaches $132,000. Almost certainly this option won’t be available once they start their career and move to higher income levels.
2. Maximize your retirement contributions.
Doctors have to maximize their retirement contributions in order to catch up for the extra ten years of school and residency.
Physicians working in hospitals and large healthcare systems will very likely have the option to open a tax-deferred 401k plan. As of 2016, these programs allow their participants to contribute up to $18,000 a year. Many employers offer matching contributions for up to a certain amount.
Some health systems offer pension plans, which guarantee a pension after certain years of service. These plans are a great addition to your retirement savings if you are willing to commit to your employer for 10 or 20 years.
Doctors who are self-employed, own a corporation or run a private practice should consider investing in solo 401k plans. These plans allow for up to $53,000 of pretax contributions, $18,000 as an employee and $35,000 as profit sharing by an employer.
In addition to contributing to employee-sponsored retirement plans, doctors should consider setting aside a portion of their earnings to taxable (brokerage or saving) accounts. The contributions to these accounts are made on after taxes basis. Taxes are due on all dividends, interest, and capital gains. The biggest benefit of these funds will be their liquidity and flexibility with no income restrictions.
3. Manage your taxes.
High earning doctors need to consider managing their tax bill as one of their top priorities. Tax implication can vary depending on income level, family size, and property ownership. Hiring a CPA, a tax attorney or a financial planner may help you reduce or optimize some of your tax dues.
A successful tax planning strategy will include a combination of retirement savings, asset allocation, tax deductions, and estate planning.
Feel free to check some of my previous postings about tax optimized financial planning.
4. Balance your budget.
After ten years of vigorous study, sleepless nights and no personal life, doctors are thrown back in the normal life where they can enjoy the perks of freedom and money. As much you are excited about your new life, do not start it with buying a Lamborghini or an expensive condo on South Beach. In other words, do not over spend. Even if you got a great job with excellent salary and benefits, you need to remain disciplined in your spending habits. Stay focused on your long-term financial goals. Leave enough money aside for retirement savings, rent or mortgage payments, loan payments, living expenses, college savings for your children and an emergency fund.
5. Manage your student loans.
How to best manage your student debt depends on a combination of factors including your credit score, federal or private loan, loan maturity, interest rates, monthly payments and current income. Stay on top of your student debt. Do not lose track of due dates and interest rates.
For those looking for help reducing their debt, here are some options:
- Loan repayment options from employers. Many private, federal, state and city health care organizations offer loan repayment options as an incentive to retain their doctors. Those options are frequently dependent on years of service and commitment to work for a certain number of years. These programs vary from employer to employer.
- Loan forgiveness. Under the Public service loan forgiveness program (PSLF) launched in 2007, full-time employees at federal, state or local government agencies, as well as nonprofit workers at an organization with a 501(c)(3) designation, are eligible for loan forgiveness after paying 120 monthly payments. The first applicants will be able to benefit from this program in 2017.
- Working in underserved areas. Some states offer loans forgiveness for doctors working in underserved areas. The conditions and benefits vary state by state but in essence, works similar to the PLSF program.
- Loan consolidation and refinancing. If you have two or more private student loans, you may want to consider loan consolidation. If you pay high interest on your current loans, think about refinancing it at a lower rate. Your new loan availability depends on your credit history, income, and general macroeconomic factors.
Under the current tax law, all forgiven loans are subject to taxes as ordinary income. Take it into consideration when applying for loan forgiveness
6. Watch your credit score.
Physicians need to monitor and understand their credit score. Known also as the FICO score, it is a measure that goes between 300 and 850 points. Higher scores indicate lower credit risk. Each of the three national credit bureaus, Equifax, Experian and TransUnion, has a proprietary database, methodology, and scoring system. it is not uncommon to find small or even substantial differences in credit scores issued by three three agencies. Many times, creditors will use the average of the three value to assess your credit worthiness.
Your FICO score is a sum of 64 different measurements. And each agency calculates it slightly differently. As a general rule, your FICO score depends mostly on the actual dollar amount of your debt, the debt to credit ratio and your payment history. Being late on or missing your loan payments and maximizing your credit limits can negatively impact your credit score.
You can get your score for free from each one of the bureaus once a year. Additionally, many credit cards provide it for free. Keep in mind that their FICO score will come from one of these three agencies. Don’t be surprised if your second credit card shows a different value. Your other bank is probably using a different credit agency.
7. Take calculated risks.
Doctors are notorious for their high-risk tolerance and attitude to investing in very uncertain endeavors. While this is not always a bad thing, make sure that your investments fit into your overall long-term financial plan. Do not bet all your savings on one risky venture. Use your best judgment in evaluating any risky investments presented to you. High returns always come with high risk for a loss.
8. Get insurance.
Having insurance should be your top priority in order to take care of yourself and your family in case of unforeseen events. There is an extensive list of risks and insurances you have to plan for – health, disability, life, unemployment, personal umbrella and malpractice insurance.
Fortunately, some of them might be covered by your employer. A lot of organizations offer a basic package at no cost and premium package at added subsidized price. Take advantage of these insurance packages in order to buy yourself protection in times of emergency.
For instance, if you are a surgeon or dentist and get a hand injury, you may not be able to work for a long time. Having a disability insurance can help you have an additional income while you recover.
If you run your practice, having malpractice insurance will help cover the cost if you get sued by your patients.
Nobody wants to plan for these events but they unfortunately sometimes they happen, and it’s better to be prepared
About the Author: Stoyan Panayotov, CFA is a fee-only financial advisor based in Walnut Creek, CA. His firm Babylon Wealth Management offers fiduciary investment management and financial planning services to individuals and families.