New Attending Financial Steps
The first 6 months of your new attending life may be the most important financially of all. The financial steps you set here likely will determine how you view and spend money going forward. The rise in income from residency income to attending can be breath-taking, yet with a higher tax rate and suddenly having to deal with student loan debt, your bottom line may seem smaller than you might expect. In today’s post, we are going to focus on a few of the most important financial steps as your transition into an attending salary. I’ll also take a look at how well I’ve done so far in these categories.
To me, this might actually be the most important step, and why I’ve listed it first. You’ve now suffered through medical school and residency, and many of us did so on growing amounts of student loans. Doing so, however, has nearly guaranteed you a long career with a high salary. And despite high student loans, even “lower paying” specialties can retire millionaires… if nothing happens to you. That’s why insurance is so important – protect the income you’ve worked so long to achieve.
- Disability Insurance
Of all the insurance protects, I felt this was most important to do right away. You are much more likely to be disabled at some point in your career than die young. Your student loans, especially if not all Federal, may not be forgiven in case of a permanent disability. While it can be complicated, and definitely expensive, getting adequate disability coverage from an independent agent is extremely important in protecting your future.
Personally, I have two disability products. One from MetLife which I’ve had since a medical student, making it relatively cheaper. And a second from Principle I added in my last year of residency. Since residency graduation, I’ve increased these policies to a combined $18000/month of coverage. How much you need may vary, but I personally took the maximum. Because I have two policies, I was able to extend the benefit higher than my salary would usually via a single policy. If I’m ever disabled, I want to make sure it is enough for my family to comfortably live on, save for retirement, and if not forgiven, pay off my student loan debt. I pay about $500/month for this coverage.
Umbrella insurance is a “cover-all” for a possible above your policy limit claim for home or auto. It’s cheap and bought by the millions. Being a doctor can make you a target, either from a simple car accident or neighbor/kid injury at your home.
I currently have a 2 million dollar umbrella insurance policy that costs just a couple hundred dollars a year.
This one depends on your family situation. If no one else is depending on your income, you likely don’t need a life insurance policy. If you are the sole income provider for a family, you may want a pretty large policy. Or if you are a two-physician family and could live off of just one of your salaries, then you may just need somewhere in the middle. A rule of thumb I’ve heard is 8-10x your salary, but I think this is better solved by common sense. What would it take to pay off all your debts and give your family a similar lifestyle while also saving for college/retirement? Student loan debt is typically forgiven in the case of death, even by many of the private refinancing companies.
I currently have 1.3 million in life insurance coverage. This would pay off our mortgage ($350k), send our daughter to college ($250k), and leave about $700k leftover. Because my wife doesn’t work, I feel this is not adequate. As such, I plan to add another $2 million/20-30 year term policy. However, this is one aspect of my financial plan that I have so far failed to accomplish in my first 6 months but is high on my to-do list for first of 2018.
Set up and Max out Retirement Accounts:
The government gives you a great tax break with retirement accounts and because the contributions are limited by year, they truly are a “use it or lose it” situation. As such, planning how you will max these out in the first 6 months (and every year after) of your attending career is a great way to start off on a solid financial footing. There are a few important accounts to consider.
The limit for a 401k (2018) is $18,500. Traditional 401ks put pre-tax dollars in, grow tax-free, and are taxed when withdrawn in retirement. A Roth 401k is funded with after-tax money, grows tax-free, and then can be taken out tax-free in retirement. Generally, during peak income years for high earners, the traditional 401k is best as you get your tax break at your highest income bracket and then pay the taxes in a lower bracket in retirement. A Roth 401k is likely better during lower tax bracket years, such as residency. If there is any “match” from your employer, this account should be an absolute priority as that is “free money” you should take advantage of.
I was able to max out my traditional 401k in 6 months which should give me an additional match of about $8000. Once I max it out for 2018 (a whole year of salary) my match will go up to about $16000 – pretty impressive benefit for saving like you should be anyway!
The Health Savings Account is the only “triple tax advantage” account in that you put in the money tax-free, it grows tax-free, and if used for healthcare expenses, it comes out of the account tax-free. After age 65, the money can come out for any use without penalty and is then taxed based on your income at that time At that point making it very similar to a traditional ira/401k. Because of this, some call this a “stealth ira” that can act as another retirement account. The catch is it must be paired with a high deductible health care plan. Whether you choose to use it for medical expenses right away or save for retirement later, this is another great option for attendings to take a tax advantage on. The limits for 2018 are $6900 for family, $3450 for an individual.
I had access to a HSA starting in July, and in my first 6 months was able to max this out at the family level. My plan is to pay for medical expenses in cash and treat this account like another retirement account. I used HSA Bank as my administrator, and the process was very easy. I’ve kept $5000 in cash which is their level for removing monthly account fees and invested the rest in a target date account with TD Ameritrade.
- Roth IRA
I’ve written about Roth IRAs before as a great account for residents. You place after-tax money in the account, it grows tax-free and can be taken out at retirement tax-free. The limits are $5500/year – which can be also be done for a spouse (regardless if he/she works) – giving you up to $11,000 of space for a married couple. At high incomes (over ~$200k), you can no longer contribute directly to a Roth IRA directly and have to do a “backdoor Roth IRA.” This is accomplished by first contributing to a traditional IRA and then rolling this over to a Roth IRA. The rollover aspect does not have an income limit, making the backdoor possible/legal.
Because I went into a high paying specialty (anesthesia) and live in a low-cost of living/higher paying location (Indiana), I am lucky that even 6 months of attending work puts me over the limit of a direct Roth IRA. As such, I completed backdoor Roth IRAs for myself and my wife – saving another $11,000 for retirement in our first 6 months.
In total, I was able to save for 2017 – $18000 in 401k with ~$8000 match, $6750 in the HSA, and $11,000 in the Backdoor Roth IRA. That’s $43,750 saved for retirement in the first 6 months of being an attending. As those numbers and my salary are spread out over a year in 2018, I’ll also be contributing to an old fashion taxable account with a goal of saving 20% of my gross income for retirement.
Pay off debt:
Next up will be starting to tackle the debt you may have. The biggest component of this for many is student loan burden, and a good plan for dealing with these loans needs to be in place. It isn’t terribly complicated though, the options basically end up being going for Public Service Loan Forgiveness (PSLF) or refinancing your loans. If you work for a non-profit but are worried about the future of PSLF, consider starting a side account to save for the loan in the case the program goes away. For the rest of us, it’s time to refinance our student loans down to the lowest rate and pay them off as quick as possible. For most physicians, this should be a 5-7 year plan.
In addition to student loans, have a plan in place for tackling other forms of debt – whether car loans, credit card debt, etc. Mathematically, you should pay off those with the highest interest rate first. Others choose to use the “debt snowball” tactic, where you pay the smallest balances first, moving on to the biggest later. The idea is that gives you motivation and success to propel you to the next debt along the way.
I actually went against math for debt and did my own version of the debt snowball. I essentially ignored my student loans for a few months, capitalizing on my residency PAYE based payments of only $400/month and putting the money toward other debt. In our case, this was about $20,000 in credit card debt from moving and having lost my moonlighting job (it was at 0% for another 12 months but I wanted it gone ASAP). Next, I moved on to our car loan at ~4.5%, with about $20,000 left. After paying that off, I refinanced my student loans – all $230,000 – to a 5-year plan via Laurel Road. That’ll be $4100/month going forward starting in Jan 2018. Currently, our only forms of debt are our mortgage and my student loans.
To recap, in 6-months I managed to save ~$43,000 for retirement, pay off $20,000 in credit card debt, and pay off $20,000 in an auto loan. My net worth went from approximately -155,000 in July 2017, to <-80,000 at the end of 2017. At a similar rate, I should hit a positive net worth in the second half of 2018, maybe earlier as I really start tackling the student loans! It’ll be so great to get back to ZERO!
Having a Plan
How do I recommend planning so that you can reach similar goals as a new attending? A higher paying specialty and a budget! … Well kinda. I don’t actually budget, and you don’t necessarily need a high paying specialty (though I won’t pretend it doesn’t help tremendously). BUT in regards to the budget, I do track all of our spending in a general sense. 99% of our day-to-day spending is on a credit card that’s paid at the end of each month and I keep track of that amount. All fixed monthly payments such as utilities, cell phone, insurance, mortgage, etc are on auto-pay from a separate checking account. We have no set limits on any particular categories, only a general idea of how much we spend per month in a broad sense. The separate accounts give us a pretty clear look at where our dollars are going. We can easily see which expenses are variable vs. fixed, even if we don’t have classic “food, gas, entertainment” categories. It also allows us to make and reach financial goals on a hopefully predictable schedule.
Did we live on ramen noodles and keep our spending at our residency levels this 6 months? Hell no. Twice we went out to very high-end restaurants, and probably a half-dozen times “nice” but not outrageous restaurants. I bought a fancy new hunting rifle I’ve been wanting, and my wife got a furniture set and light fixture she’d had her eye on (And goodbye to what she called my “frat-house” couch).
Another surprise, the “free” and “working” hot-tub that came with our new house ended up needed several thousand dollars of work to be actually functional – which I went ahead and went with. But, we still met all the financial goals I had in mind before we started the attending life!
I think that is the true key to all of this, having goals and having a plan to reach them. That way you know how much you can increase spending after residency, when you can treat yourself, and if you can afford any bumps (hot tubs) along the way. In my own journey, I’ll continue to share my own financial goals and experiences. This will hopefully help bring a little financial knowledge and maybe inspiration to #LifeofaMedStudent readers.
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