Welcome back to part 2 of our discussion on Personal Finance for Physicians.
5 Tips for Financial Success
We’ll start with tips I learned from reading the White Coat Investor and speaking to attending physicians.
- Live like a resident for 2-5 years after graduation.
Let’s say that you come out of residency at age 35 and make a salary of $250k/yr. You, like 53% of medical school graduates, have a student loan debt of AT LEAST $200k.1 (I’m with you brother). Uncle Sam will take around $50-75k. If you live on $80k a year, a significant rise from resident salary of $60k, you can contribute:
- $18k to your employee match 401k
- $11k in “Backdoor” Roth IRAs for yourself and your spouse
- $6000 in an Health Savings Account (HSA)
Together, this equals $35k placed toward retirement. Solid job. Afterwards you will have $60-85k to pay down your high-interest loans, save for a down payment on your house, and buy that beautiful Seiko watch you’ve been eyeing. (You’re so practical.)
- Pay yourself first.
If you can watch a cat video on YouTube, you can automate your savings to pull directly from your paycheck into your 401k and HSA. If you do not see the money, you will not miss it.
You likely will need a 3-5k minimum to open a Roth IRA and an annual income less than $117k (single or $184k married). Save up until you have the minimum to put the money into an account then automate it until you reach the maximum contribution. More to come on Roth IRAs in future blog posts.
- Don’t get divorced.
Divorce is expensive personally and financially.
Some good news first: According to a BMJ article from 2015, physicians are less likely to get divorced than other health care professionals and the general population.2
Now the bad news.
Very few things can take half or your assets, garner future earnings, and weigh heavily on your psychosocial wellbeing. Work on maintaining your relationship, open communication, and if necessary, seek expert advice.
- Protect your assets.
You should buy disability insurance as a resident. This way, you ensure that, if you are injured, you can regain ~100% of your income. This happens because your disability insurance as an attending will likely cover 2/3 of your income. You can then use your residency policy to supplement the remaining 1/3 of your income.
It is essential to purchase specialty-specific, non-cancelable/guaranteed renewable disability insurance. You should purchase insurance from an independent agent working with multiple different companies. Inquire about discounts from your professional organizations (ACEP, EMRA, AMA, etc).
Do you have kids or (human) dependents? If so, buy Term-Life insurance. Check out www.term4sale.com (I don’t make any money from this link) and purchase the least expensive policy from a company with an A+ ranking.
Depending on your living costs, dependents, and financial situation you likely need a policy covering 10x your salary.
Do not buy whole life insurance.
- Get rich slowly.
Compound interest is a beautiful thing.
Check out this graph from JP Morgan Asset Management. It documents three different people as they invest their money, assuming a 7% return on investment.
- Susan invests $5k/yr between the ages of 25-35 for a total of $50k. That’s it. She ends up with $602,070 at age 65.
- Bill invests $5k/yr between the ages of 35-65. He’s a little late to the party but invests a total of $150k. He ends with $540,741. That’s right, he ends up with LESS MONEY than Susan because he did not start investing until age 35.
- Chris is a boss. He invests $5k/yr between the ages of 25-65. In total he invests $200k and ends with $1.1M. Strong work Chris.
Bottom line: Invest as much as possible, as early as possible. That extra money you put into a Roth IRA during residency can go a long way towards a comfortable retirement.
- Ly Dan P, Seabury Seth A, Jena Anupam B. Divorce among physicians and other healthcare professionals in the United States: analysis of census survey data. BMJ 2015; 350 :h706