Financial Planning Focus: Physicians - Part II: The First Five
Most doctors don’t start earning a living wage until their 30s. Four years of undergrad, four years of medical school, three-to-five years of residency — that’s more than a decade of higher education before their first real job. Not to mention the tuition costs. On the other hand, doctors rank among the top earners of all professionals. As a result, financial planning for physicians is a unique practice. Managing debt, starting a family, buying a home, saving for retirement and the cost of malpractice insurance are just a few of the considerations that impact a doctor’s financial journey.
For purposes of examination, let’s look at a doctor’s financial lifecycle as three stages: Residency, The First Five, and The Prime Time. Following is the second in our series, examining four key issues that govern stage two.
1. Student Loan Game Plan
According to Forbes Magazine, the average lowest starting salary for certain types of doctors is $189,000. Although low on the doctor totem pole, this would suffice as a comfortable wage for most, and one that can accomplish a lot in terms of wealth building. The first step in building wealth and living a stress free financial life (in my opinion), is getting your debt under control. Aside from being in the PSLF (Public Service Loan Forgiveness) program, which currently forgives student loans after 10 years of service, I would recommend coming up with a game plan to pay off your student loans within 5 years.
Since residents are paid a modest salary, it shouldn’t be too hard to continue living that lifestyle for another few years in order to pay off your student loans. If you can manage to do this, it will free up your monthly cash flow and decrease your overall debt which can now go towards expanding your lifestyle. If you can hold off on keeping up with the Jones’ for 3-5 years after residency, you will certainly surpass the Jones’ as time goes on. For example, if your student loan amount is $200,000 and you have a six percent interest rate, your monthly payment would be $3,866.56 per month if you were going to pay it off in five years. If you upped your payment to a flat $5,000 per month, you would be debt free in three years and eight months. With average starting salaries around $200k, after taxes, retirement contributions and other various deductions, you should be looking at a take home pay of $10,000 per month. If you are able to maintain a fairly modest lifestyle during this time frame, the student loan payments won’t interfere too much.
2. Increase Retirement Contributions
If your goal in life is to build and sustain wealth, then it is important to make significant contributions to your retirement. After your student loans are paid off, it would be ideal to increase your 401k contributions up to the max (currently $18,500 per year). If you are a saver and have excess money sitting in your savings account, then it would be wise to make IRA contributions as well. Now because your earnings most likely put you over the IRA contribution limits, there is a certain way to make these contributions that I will elaborate on below.
3. Back Door IRA
Typically for high earners, there are restrictions when it comes to contributing to an individual retirement account (IRA/Roth IRA), mainly because the government wants to tax you at your high rate (upwards of 37%). However, there is a way to be able to take advantage of IRA accounts that the other 99% of Americans have access to. Due to contribution income limits on Traditional and Roth IRAs, high earners must make “non-deductible” contributions to a Traditional IRA (limit of $5,500 per year). This can then be converted to a Roth IRA with no tax consequences (assuming you do not have any other pre-tax IRA accounts).
The benefits of a Roth IRA are significant because the earnings in the account grow tax free and all withdrawals from the account during retirement are also tax free. Additionally, if you do not need the money during retirement, there are no Required Minimum Distributions (RMDs), which are government mandated withdrawals that reduce your tax shelter every year after you reach age 70 ½ (401(k)s and Traditional IRAs have these).
4. Disability/Life Insurance
Depending on your new income and debt levels, it would be wise to have an insurance evaluation done in order to re-assess how much life and/or disability insurance is adequate for your needs.
The first five years after residency might be the most important in terms of the overall wealth building stage. Eliminating debt and getting into a savings routine will yield the greatest results if you are trying to build and sustain wealth. In any profession, getting rich quick doesn’t apply unless you hit the lottery. It takes time, requires a plan, and the discipline to execute it. Next, we will look at some topics to consider after you have built your financial foundation and what other hurdles one might encounter. Click here to read Part III: The Prime Time.
The topics discussed above are generic in nature and are provided for educational purposes only. This paper does not consider or address any individual’s actual facts and, as such, it is not individual advice. You must always consider and apply your unique set of circumstances within these broader topics. All-Pro Advisors is not an accounting or law firm, and does not provide accounting, tax, or legal advice. If you need accounting, tax, or legal advice, please contact a qualified accountant or lawyer.
