Residency is a time to finally learn medicine. You work grueling hours, still have to study, and every day make medical decisions that can make a difference in a person’s life. Where in the world is there time to worry about money? Well, that was my thought at least. Until my own financial awakening occurred late in residency and I realized that somewhere in my minimal free time I should have done more to educate myself financially. Now you can learn from my mistakes – here were my five worst!
1) Not funding retirement accounts
Residency was the first job I’d had that payed enough money to really care about. Every job I’d ever had before that was simply spending money. Money to blow on the weekends. Dinner and date money. When residency started, I couldn’t believe my first paycheck – nearly $2000 – JUST for the two weeks of ORIENTATION! WOW! The organization I worked for of course offered retirement packages, a 401k with automatic withdrawals starting at 4% per monthly paycheck. There was no employer match and with the excitement of the new job/paycheck 4% was enough for me to want to get my hands on, while rationalizing it was too little to actually build a retirement on.
While I still think it was probably fine to avoid the company 401k during residency (though despite its high associated fees even that 4% would likely be nearly $10,000 today given the continued bull market), what I really SHOULD have done is make sure I was at least investing in a Roth IRA. I like the Roth IRA in residency for several reasons. These are simple to setup (I recently set one up on Vanguard, and I had investments in market within just a few days) and use your after tax money to fund the accounts. You will likely never again be in a lower tax bracket than when in residency. They then grow in a tax free manner, indefinitely, with no mandated withdrawal periods. In a pinch, you can withdrawl the contributions youv’e made (but not their growth) penalty free. And since residency is a temporary employment position, you won’t be rolling over a traditional employer 401k multiple times from job to job as you go through an intern year, residency, and fellowship in some cases. If you have a little extra money in medical school, you could even open a Roth IRA then.
As of 2016, you can invest $5500 each year in these accounts and one of my biggest regrets is only starting to do this in my last year of residency. Currently, I have a Roth IRA set up for myself and my wife. As an attending we will continue to add to these, through what’s called a “Backdoor” Roth IRA transfer. If you aren’t familiar with the Roth IRA and the advantages especially as a resident and still while an attending, I strongly suggest looking into it. No matter what, please make sure you start in residency adding to some retirement account. Start the mindset to “pay yourself first” with retirement savings. Even if the amount ends up being relatively small – it’s the MINDSET to establish now that will serve you well later. Note: Most financial experts would in general recommend maxing out the 401k first (definitely if there’s a match), then contributing to a Roth IRA. I think as an attending or regular joe, this is good advice, but specifically as a resident the simplicity as well as flexibility of the Roth IRA wins out.
2) Rolling over one whole life policy onto another whole life policy
If you are considering a whole life policy, just please don’t. If you need a course on why to absolutely, positively, no excuses, no matter the sales pitch, not to go down the whole life route, read the series on the White Coat Investor blog. It’s very convincing and I couldn’t even begin to match his passion of debunking whole life in this post.
I, of course, didn’t know all of those things. All i knew what I had some form of life insurance my parents had bought when I was a child. It was a whole life policy, $100,000 lifetime coverage for $425/yr, now with a cash value of approaching $14000. Considering I’m 30 and they bought this when I was two, that means their input has been roughly $12,000 and their value is now $14,000. Not exactly a great return on investment if you look at it that way. Even worse if you consider $425/yr invested for 28 years with only 6% returns would be now $30,500.
So what do I do, I take that $14,000 cash value and roll it over into a new “universal” life insurance policy which even further mixes investing and insurance – but I did get a great sales pitch on. My policy is now worth a $350,000 guaranteed death benefit and I pay about ($68/month) $800 dollars a year. The “cash value” is invested and thus is subject to the market. Each dollar I add is subject to a 10% fee for the first 5 years, then eventually nothing after about 12 years.
Meanwhile the 1 million dollar term life policy I just added to that is roughly $32/month. If i would have just taken that $14,000 and invested it, and added a term policy for what I need in insurance, I would have been much better off. Probably in the range of $100,000 better off in 20 years.
It was a huge mistake. But I didn’t know better and am living with it. Why am I living with it? Because the cash value of that $14,000 rollover is now only worth $2000 due to the high penalties associated with quitting a whole life policy. And even worse, I still needed to add a term policy to even be adequately covered. I wasted a lot of money and had a huge opportunity cost from that money, for a policy that didn’t even adequately cover me.
Which brings me to my next financial mistake…
3) Being under insured…
You go to undergrad, medical school, and residency.. Including high-school it is now grade “Twenty” or more when you are finally done. That time is worth a lot. The good news is that suffering through that time, eventually pays pretty well. The average physician is now making $220,000 + per year. That’s a lot of potential income down their road. And while my decent amount ($220k and rising) government issued student loans are forgivable in my death, not all private refinance companies will be. I never should have been considering whether I need a $300k or $350k llife insurance policy like my wife and I debated, but how many MILLION policy. It didn’t really occur to me until after my daughter was born and my wife stopped working how insignificant that $350k policy (that essentially cost $14k to plus $800 a year to get) would be if something happened to me. Now I have another 1 million term policy and plan to add another 2-3 million term policy next spring before I’m an attending. I should have started with at least a million from the very beginning.
Now each person’s situation is a little different. If you don’t have a family/child or other people depending on your income, you probably need a lot less. If you are a two physician family and you could be fine on one of your salary, you may consider having less each. However, a commonly quoted rule of thumb is 10x your salary. As a resident, if you have those people depending on you, I would say 5x your ATTENDING salary is a good start. For me that would have been about 1.5 million, which is probably a pretty good amount that could pay off our home and my loans, keep my wife at home to raise our daughter, fund the wife’s retirement accounts, and send our daughter to college. I finally have nearly that coverage, but I waited a dangerously long time to do so. I plan to have 3-4 million in term coverage before my first day as an attending next July.
With disability insurance I did a little better and have had own occupation specific coverage the entire time I’ve been a resident. I started with $2000 of monthly coverage as a medical student, added another $2000 last summer and will add another $3000 this winter to finish out residency. I have two policies and have maxed them both for what the companies will allow at this stage of my career. As an attending I will then again take the max my salary will allow, which is somewhere in the $15000 per month of coverage range. Again, because of your maximal time investment in medicine, I would strongly consider getting close to the maximum allowed for your salary on this in the case of a permanent injury or disability. When I have the full coverage allowed it will be about $550/month – not cheap by any means but certainly worthwhile to protect the years invested in medicine.
4) Not having my attending contract for after residency professionally examined
I’m pretty sure I have a good contract for next year. It’s a small group, the contract is short, and even I could understand it. It’s more money than I ever imagined. It’s in the exact location I wanted to work/live. I beat out two other guys from my residency who were also interested. Then they even agreed to give me a signing bonus! What could be wrong about that? Well, now that it’s been a few months since I signed it, I’ve heard a lot of horror stories from other people/residents/attendings about how their “perfect” contract turned out to be anything but. Will mine be ok? I hope so. It’s a salary position with great pay, but it’s weak on specifics on how much I’ll have to work to earn that – “work and call load equally divided” among the group. Well what if the group size changes? I could end up working a lot more without any additional compensation. Looking back, I really wish I would have had it professionally examined. At least then I would have a second opinion and maybe would have gotten some negotiation pointers to strengthen those areas. If I end up signing another contract someday, or have this one re-done for any reason, I’ll be spending the minor few hundred dollars to have it looked at.
5) Not knowing any or all of this early in residency or even medical school
Let’s face it – med schools across the country are terrible at giving you any kind of business or financial advice. And what happens when you start practicing? You constantly are making big time business and financial decisions, without any education on how to do so. The mistakes I’ve made in residency have literally already cost me tens of thousands of dollars, if not more, in my lifetime. And had I had an injury, disability, or death in the time periods I’ve been underinsured – it would have cost my family and I a lot more. I wish I’d known anything about finances prior to residency. I’ve learned a lot since then, but it’s all been on my own time and largely through internet/twitter blogs and websites. My favorite for physician financial help is a website and book called “The White Coat Investor.” I have no financial relationship with The WCI – but I can tell you the information I’ve learned from that site has been worth so much more than money. I’ve spent hours reading the information on that book/website to get to where I feel more confident about my financial picture. However, if you don’t have the drive, interest, or time to do that on your own – I highly suggest getting a good financial advisor. While not always cheap, they certainly are more cost efficient than if you aren’t well educated and make repeated financial or insurance related mistakes. The #LifeofaMedStudent is sponsored by Lawrence Keller of Physician Financial Services and he specializes in many of the areas for physicians that I’ve talked about today. He would be happy to help you with these concerns. Contact them at http://www.physicianfinancialservices.com.
Honorable Mention Mistake: Buying a house during residency
But wait? Charlie, you had a post a little while back about how you chose to buy a home in residency and don’t overall regret it. – True! However, it is still a dangerous financial mistake. I’m just a small dip in the market away from losing considerably more than I will ever manage to gain ahead of renting. And with the end of residency and the start of my attending job a set date, I have no flexibility to wait out a market or wait for the perfect buyer. My fingers are crossed, and if I sold today I’d probably win the gamble against renting, but who knows how things will be when I actually sell in 8-10 months. For a full explanation with all my personal expenses and number crunching on the old rent vs buy dilemma – check out this blog post: Buy vs Rent – Why I bought a Home during Residency
Let’s hear your input! What mistakes have you made? Any other advice for residents from a financial perspective? Give us your comments and thoughts below!
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