You’ve been through undergrad, the long days as a medical student, the grueling hours of residency, and finally wake up one day a new attending with paychecks coming in amounting to $250,000 a year – finally living the dream right?! Or wrong?!
Sadly, the opposite of the financial dream is true in so many cases. Many attendings start our their careers in near financial ruin. Little finance is taught in medical school and less in residency, while simultaneously students are racking up student loan debt that is averaging now well over $200,000 with ridiculous interest rates in the 6.5-7.5% range!
Recently a thread on Student Doctor Network forums caught my attention showing a real life example of this. One unlucky family medicine graduate never paid much attention to financial matters throughout his training. He then started that first attending job with a salary of $248k/year and a student loan burden of 382k – all with interest rates averaging over 7%. Suddenly, he realizes he doesn’t qualify for any loan forgiveness programs and lives in a high cost of living area. He’s wondering will he ever pay those loans off, save for retirement, get adequate life/disability insurance, continue to live in his new $2000/mo condo, and take his wife on the dream honeymoon they put off during residency. He makes a couple incorrect assumptions in his post, but overall displays about the same knowledge of financial planning as most med-students through new attendings. He knows he has some options regarding loan repayment but isn’t really sure what those are. He knows he should get disability/life insurance but clearly hasn’t even started that process. He knows he needs to find a way to budget his new growing income but has woken up to the realization that even though his income makes him “rich” – his financial picture is actually pretty bleak without some solid planning.
I’m admittedly no financial advisor, but here is how I would start breaking things down if I were this family medicine doc…
$250k/year. He’s in California, married without kids. A quick estimate by smartasset.com suggests the following estimated breakdown in taxes:
We’ll keep it simple and assume $170,000 income after taxes.
My personal goal would be to pay the student loans off in 5 years. He should refinance them through a private company since his new job doesn’t qualify for PSLF. Assuming he gets a rate at about 4.5% – his total amount paid after 5 years would be about $425,000. Divided by 5 = 85k/year toward student loans (Calculated via nerd wallet loan calculator).
Thinking ahead for retirement he should minimally fill up all his tax advantaged space by saving $18,000/yr in a 401k/403b + $11,000/yr in a his&hers Backdoor Roth IRA since he’s married. That’s a total of $29,000 and represents a net retirement savings rate of about 15% which is a little better than the minimum recommended 10% for the average person (though for doctors most quote a minimum more around 20%). Technically the 401K will come out pre-tax and lower his taxable income, but for simplicity we will ignore that.
That leaves $56,000/year to live off of, basically a continuation of a resident’s salary. He still needs to get term life insurance and a disability insurance policy, but those shouldn’t break his budget (yes, he’ll need a budget too). A $2million/2oyear term life insurance policy for a 30yo male in good health in California will be about $120/month (State Farm quick online quote). $10,000/month of disability coverage for the same male would be about $350/mo. Combined these would total about $6,000 a year.
Now we are down to $50,000/yr to live off of. Which incidentally is about average pretax/gross household income in the United States. The end result, in order to pay his loans off in 5 years, is he must continue to live like a resident – which is actually better than the average American household considering his $50,000 has already accounted for taxes, retirement savings, and life/disability insurance. But his lifestyle won’t be anywhere near what one would think of as a $250,000 per year physician.
It won’t be a bad living for this new attending, but he’ll have to make some tough choices regarding that $2000/month condo and his desire for a big honeymoon vacation. His path has already been made and now he simply has to face the reality of his financial situation. In some ways my own story is similar, as I had my own financial awakening mid-residency. But luckily I managed to escape with about half his loan burden and a specialty (anesthesia) which pays considerably more.
What different choices could this physician have made prior to this point? It’s hard to tell given the limited information provided by that post. The big eye opener is his large student loan debt. Here are a couple takeaways I made from this real life situation:
It’s never to early to learn about finances, and the sooner you do the better off you’ll be.
I owe a lot of the credit for what I’ve learned through various physician financial blogs on the internet. My favorites would be The White Coat Investor, Physician on Fire, FutureProofMD, and PassiveIncomeMD. I’ve also read now approaching a dozen finance books . There are a lot of good ones out there, though I’m finding most of them are just more detailed versions of the same information you can find in the above blogs (with the blogs actually being even more specific to physicians). Try to learn from others wisdom and mistakes – such as the Top Financial Mistakes I made during Residency. If I’d known what I know now, the difference would likely be in the tens of thousands of dollars in benefit to my finances. That’d be a pretty darn good return on investment for reading a few blogs and a handful of books.
The financial choices you make in medical school are much bigger than you realize at the time.
In medical school the student loans seems limitless, the money doesn’t feel real, and the prospect of big attending salaries provides expectations of having plenty later on. It’s easy to say “what’s another $1000” every time there is a Cancun vacation to enjoy or a new TV to purchase (both things I did as a nieve med student). Let me tell you, at 6.5% interest – every dollar you take out in loans grows each year and it becomes suddenly very real. And those attending salaries – well as this doc found out – won’t give you a lifestyle nearly what you’d expect. I’ve already posted about 5 Financial Tips for Medical Students – which is a great start to financial success.
If you know you are going to have high student loan debt, strongly consider a higher paying specialty.
I always get critism when I say this – but I truly believe it. When the prospect of major student loan debt is in front of you, I think expected salary should play a factor in your specialty choice, maybe a major one. There are a lot of great ways to help people practicing medicine and many rewarding specialties. And there are a lot of physicians burnt out from crushing debt in lower paying specialties. If you are faced with debt, consider choosing a future practice that allows you to pay off those debts and live a reasonable lifestyle. The alternative solution is to enlist in a program that pays those debts for you, however these often come with potentially lengthy time repayments or strict geographical constraints.
Residency is the time to line up your attending financial decisions.
The referenced post above was in August and it sounds like the new attending likely had already been in practice for a month or two before he realized how big of a financial hole he was in. He hasn’t started applying for life or disability insurance yet, hasn’t started looking into refinancing his loans, and is likely upgrading his lifestyle with the expensive condo. He’s already in a hole and has started digging it deeper. Insurance and loan refinancing takes weeks if not sometimes several months to lock down – all the while his future income is unprotected and his debt growing at an alarming rate. Most of those issues can be taken care of towards the end of residency. I already have about $5000/mo of disability insurance and have $1.3 million in insurance. To increase the disability insurance to my goal of $15,000 basically all I have to is make a phone call once I start as an attending next summer. I’ll have to go through the life insurance process again to bring my coverage up to the full 3-4 million I want, but at least I have a decent amount of coverage in case something happened to me between now and then. I have a working budget set for next year and plans for aggressive retirement savings as well as loan repayment. I know how much I can afford to pay for housing and accomplish my financial goals. In short, I have an excellent grasp of my financial picture as an attending, even though it is still over a half a year away.
What do you think? What could this doc have done differently? Any other ideas for how to get him out of trouble at this point? Did I miss any big points?
Lawrence B. Keller, CFP at Physician Financial Services:
Lawrence B. Keller, CFP®, CLU®, ChFC®, RHU®, LUTCF has been in the insurance and financial services industry since 1990. Unlike medicine, which has a standardized path that physicians must take to gain the education, training and experience requirements necessary to obtain board certification, the insurance and financial services industry does not. Working with an agent that is familiar with the underwriting of both disability and life insurance policies for physicians can all but guarantee a smooth underwriting process in which the desired outcome is likely. While he might not be a doctor’s first phone call regarding their insurance needs, he is often their last. www.physicianfinancialservices.com
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