With the median annual primary care physician salary reportedly at $202,392, and the median salary for physicians in medical specialties at $356,885, according to the most recent Medical Group Management Association’s Physician Compensation and Production Survey, it would be easy to assume that physicians leave their money woes behind following medical school and residency.
Once those high salaries kick in, it might appear that doctors immediately become wealthy. In fact, it may take some time to get past onerous student loans and onto easy street. The good news is that it will happen—just not as quickly as most physicians hope.
Certainly, the salary jump from resident to full-time physician provides significant added income. But that additional money is already spoken for, to a large degree, thanks to student loan debt hovering above $161,000 for the medical school class of 2011. In fact, 86 percent of graduating medical school students have student loan debt, according to the Association of American Medical Colleges, with 78 percent carrying at least $100,000 in debt and 59 percent carrying more than $150,000. It is not unusual for physicians to have monthly student loan payments of $2,000 to $3,000 or more.
That puts added pressure on younger physicians juggling work, student loan debt and higher costs of living.
The good news is that student loan debt will eventually be paid off, ultimately creating much higher levels of disposable income than many other professions. It just may take a few years. To move more quickly through the challenging early years following residency, follow the advice and examples of folks who have been there.
Take a longer-term view
The first advice William Hammer, Jr., CFP of Vanderbilt Partners in Melville, N.Y., has for young physicians about their financial situation is: “Don’t panic.” Take a longer-term view of your career and financial future to recognize that student loan payments will not go on forever. “Debt is only an impairment if you feel like it will never be gone,” he says.
Student loan payments are much like a mortgage. They are necessary and long-term, but can be paid off sooner with a few extra payments each year. The more you can put into paying down your loans early on, the faster they will be paid off. The key is accepting that you will have them for awhile, and then working around them.
To regain a sense of control over your financial life, Hammer recommends sitting down with a financial planner sooner rather than later to create a financial road map. Projecting out annual income and a loan repayment plan can help you see when it will be gone.
“You’ll be in a much better position psychologically” when you see your loan balance fall to zero and your savings grow substantially in a matter of years, says Hammer.
Karl Byrd, CFP, a wealth management advisor with Security Ballew Inc. in Jackson, Miss., likens a qualified financial planner to “a central quarterback.”
“Physicians don’t have a lot of time, and many don’t monitor their finances closely enough as a result,” Byrd says.
A financial planner can aggregate all of a doctor’s accounts—bank accounts, investment accounts, retirement accounts, student loans, insurance statements, mortgages, car payments, school tuition accounts—and provide regular statements summarizing where they are with respect to assets and liabilities.
In addition to keeping better track of how much money is coming in and going out each month, a financial planner can help create a realistic budget, or spending plan, that defines how much you need to maintain a certain lifestyle and helps keep you on track for the longer term. It is the shorter-term equivalent of a financial plan.
“Not very many physicians set up a spending plan,” says Byrd, and that makes it more likely to overspend and undersave early on in your career. “Don’t dig yourself in a hole by not paying attention to spending right out of residency.”
Another advantage of a spending plan? “It helps avoid impulsive decisions,” he says.
The key to future wealth is aligning your objectives with your existing wealth base and discretionary cash flow. By setting financial goals and preparing a plan that shows how to achieve them, you’re much less likely to overspend early on.
Between ages 35 and 50, your focus should be on loan repayment and saving, says Hammer. Physician income is “very back-end loaded,” he explains, meaning that income rises with age. Putting down on paper your current income and expenses, and setting goals for shorter-term milestones like buying a house or a new car, can help you see when such purchases can be comfortably made. And the earlier you begin saving for retirement, the easier it will be to catch up on building a sizeable nest egg.
Avoid expensive indulgences
Hammer also advises not to over-reward yourself for completing residency and getting a job. Although it is very common for physicians to mark the completion of their medical education with a celebratory luxury vacation or expensive car or massive house purchase, it can be a problem, he says. “While getting through medical school and your training is a huge accomplishment that should not be ignored, going out and buying a brand new BMW might end up making life more difficult [in the long run]. Reward yourself…but don’t go overboard.”
After forgoing so much during med school and residency, it is perfectly natural to want to splurge, says Byrd.
But spending heavily right off the bat only compounds the issue of high debt by adding to it.
Byrd says that he would rather see physicians reward themselves with smaller expenses, such as a car, which has lower monthly payments than a house.
“Stay away from high housing costs,” echoes Hammer.
“Overspending early on really hamstrings what you can do later,” Byrd says, making it more difficult to buy into a practice, buy a larger house or save for your children’s college education.
Invest in insurance
Most doctors have already purchased life and disability insurance to protect their finances and family in the case of an injury or death, but if you do not already have adequate insurance, investigate it. “There is no excuse for not getting a life insurance policy. It is cheap and easy to get multimillion dollar policies when you are young and healthy,” Hammer says.
Insurance provides protection for money you’ve already earned, as well as replacing future income you would have earned if you have an accident or die.
“Your ability to earn is a function of your ability to be a doctor,” says Byrd. Insurance can make the difference between living comfortably and scraping by if something unexpected happens to limit your career options.
Dawnmarie Risley, D.O., graduated from the University of Medicine and Dentistry, New Jersey School of Osteopathic Medicine, in 1996. She did a brief stint as a resident in Oregon before transferring to a psychiatry residency in Loma Linda, Calif., where she stayed for three years, followed by another 18 months of residency in the Bronx, N.Y.
In all, Risley took nine years to complete her residency, all the while watching her student loan debt balloon from $147,000 to $255,000.
She was offered a $120,000-a-year job, “but after taxes, loans and mortgage payments, it was a struggle,” she says. “I realized I would never get out of debt by being an employee.”
So Risley decided to become an independent contractor instead.
“I can make three times the money, have numerous tax deductions, get to travel, and have no call on weekends. I’m not tied down to a fixed income, so I can put more toward my debt,” she says.
Risley currently works in the prison system in Fresno, Calif., as an independent contractor on four- to 18-month-long assignments.
Another tactic Risley took was to reduce her student loan debt through biweekly payments. “I pay just slightly over the total monthly payment [of $1,450], split the payments in two and pay biweekly directly from my bank account,” she says. Paying biweekly results in one or two extra payments each year, which alone will allow her to pay off her student loans seven years early.
Risley also bought two houses—one of which she lived in for awhile, and both of which she now rents out. Right now, the rental income nearly covers the mortgages and maintenance expenses, and in 10 to 15 years, she hopes to sell them to help pay for college for her children.
Maximize retirement savings
Once you begin working, try to maximize the amount you set aside pre-tax from each paycheck. You can have it automatically deducted and deposited into a retirement account, such as a 401(k), which is often matched by your employer. This is one of the best ways to begin saving for retirement even while paying down student loan debt.
When Houtan Chaboki, M.D., graduated from the University of Illinois College of Medicine and headed to New York City’s Mount Sinai Hospital, he brought with him more than $100,000 in student loan debt. Now, Chaboki has paid off his loans and is in the process of buying a house. His secret? “We lived within our means,” he says.
After residency, even as his income increased dramatically, Chaboki and his wife continued to live the life of a resident for the first year or so, remaining in the same apartment, driving the same car, eating Ramen noodles, and putting off vacations and fancy electronics. “We didn’t want debt,” he says, and his priorities clearly reflected that.
Today, Chaboki and his wife have no student loan debt, auto loans, or even credit card debt. “I’m very financially conservative, and I married someone who’s in finance,” he says.
Chaboki began voluntary withdrawals from his paycheck for deposit into a 403(b) retirement program during residency. Now he contributes the maximum to his 401(k) account at The GW Medical Faculty Associates, where he is a facial plastic surgeon. Each month, he and his wife make a deposit into an interest-bearing savings account.
Look at the big picture when buying into a practice
If buying into an existing medical practice is your goal, Byrd advises looking more at the buy-in specifics than the benefits package.
Yes, the salary offered and productivity bonuses are important, but your future obligations to your partners may have an even larger impact on your short- and long-term cash flow. For example, in addition to buying into the practice, will you have to buy into the building? How will your buy-in be structured? Will the practice cover your expenses during the first few months, or are you on your own? If new equipment is needed, will you be expected to split the cost? What happens if you decide to leave the practice?
Find out what your financial obligations will be for the first few years as a new partner to see how it impacts your personal financial and lifestyle goals.
Beware of lifestyle inflation
As physicians approach their highest earning years, another phenomenon to be careful of is lifestyle inflation, says Hammer. This occurs when you consistently receive 10 percent raises, for example, but increase your annual spending by more than that, resulting in higher expenses and less saving. It may come in the form of a summer home, an expensive car, or European family vacations, all of which serve to reduce available money for savings.
Instead of pre-spending those annual increases, Hammer recommends saving the difference year-to-year, or at least holding spending down and paying off debt.
The future looks bright
Despite the fact that your student loan payments may be larger than your mortgage or rent right now, this is a temporary situation. In a matter of years, the money you are currently paying for your debt will become available to invest in other areas.
Kelly Clark, M.D., assistant professor in the Department of Family Medicine at Michigan State University in Traverse City, Mich., anticipates it will take her 20 to 30 years “to get a better handle on my educational debt and have more flexibility with investments in other areas,” but does not feel she is struggling financially right now either.
Clark recently finished her family medicine residency at Munson Medical Center in Traverse City, Mich., and is on a 30-year plan to pay off her $200,000+ in student loan debt. That does not mean she is not able to afford anything else, however. She is in the process of buying a home and has no auto loans or retail debt.
Clark’s 20- to 30-year timeframe for becoming financially secure fits with what most doctors should expect, according to Hammer.
Twenty-five years after finishing residency, most physicians will have paid off their medical school loans, have a decent retirement fund, own a home, and be near the top of their earning potential.
The important step to take now is to plan where you want your money to go. Deciding now, while you are in your 20s and 30s, how much to set aside for your obligations and future plans will give you many more options. But the decisions you make today will drastically shape what your future looks like 15 and 25 years down the road. “You will become a wealthy person over time,” says Hammer, by establishing good saving and spending habits now.
Marcia Layton Turner is a frequent contributor to PracticeLink Magazine.