The transition from residency to becoming a fully licensed physician is an exciting one that typically includes a significant financial increase. Invest the time now in managing your new financial situation, and you’ll likely reap rewards both in the short- and long-term.
So what are some of the basic issues that newly-graduated residents should be contemplating? I asked Jerret Sykes, CFP, a Northwestern Mutual financial advisor who has been counseling new physicians for years.
Claudio: What is the most important first step physicians should take following graduation from their residency program?
Sykes: The first step, which is perhaps the most important, is preparing a financial plan.
You’ve been living like a pauper for the last several years, working your fingers to the bone and not getting compensated adequately for it. You’ve no doubt seen all your non-resident friends from high school and college buying homes and taking bucket-list vacations. Your income is about to increase significantly, and the temptation is to try and catch up with them as quickly as possible.
This instinct, while understandable, can lead you to make a string of poor financial decisions. The solution is, instead, to work with a trusted financial adviser to develop a proper financial plan.
Claudio: One of the biggest issues new physicians have to contend with is student loan debt. What’s your advice for dealing with student loans?
Sykes: You’re likely entering your career with six figures of student loan debt. There are multiple options that you can look into in order to efficiently pay these down or have them forgiven altogether.
One of the best things to do now is to look into whether it makes sense to refinance your loans to get a more favorable interest rate. If you’ll be working for a 501(c)3 (and still have federal loans), you’ll want to understand how to qualify for PSLF (Public Service Loan Forgiveness).
Claudio: What’s another building block of financial security that physicians should consider?
Sykes: Risk management is the foundation of your financial future. You’ve worked tirelessly to get to this point, where your income is going to finally match your efforts. Protecting your future unearned income is essential.
Risk management includes:
- 3 to 6 months of cash (emergency fund)
- Maximum disability policy to help protect your income
- Life insurance that totals 12 to 16 years worth of salary
Most physicians will probably earn more than $10 million over the course of their careers. What could derail this earning potential is premature death or a disability that prevents you from practicing medicine. To mitigate these risks, consider purchasing a strong life and disability insurance program.
Claudio: Should retirement planning be a consideration at this point?
Sykes: Absolutely. What we typically see with physicians reaching the end of their residency or fellowship and who are experiencing a big jump in income is that they immediately start putting a massive amount toward their student loan and/or credit card debt and spend the remainder on the “fun stuff” that they’ve been deprived of for so many years.
While being debt-free is a great objective, it’s also important to understand the power of compound interest. Money doubles every 10 years if you average 7.2 percent returns on your investments. Your college friends have been funding their retirement accounts for eight to 10 years already; they have a big head start on you. The runway for you to be financially secure by age 60, 65 or even 70 is much shorter than most professionals. However, the good news is that catching up is still a definite possibility.
In order to catch up, you should probably be maxing out your qualified retirement accounts, such as a 401(k) or 403(b). Begin maxing those out on day one if you can.
The challenge for physicians with these retirement accounts is that there’s only so many pretax dollars you are allowed to contribute on an annual basis. This will require you to look outside into the “non-qualified” arena to find good places for long-term dollars such as investments, annuities, and cash value life insurance.
Creating a financial plan, developing risk management strategies, maxing out pre-tax retirement contributions, and paying down debt should be the very first steps graduating residents consider in order to create a path to financial security.
Christian Claudio is a Regional Director of Physician Recruiting with Envision Physician Services. Jerret Sykes, CFP, is a certified financial planner at Northwestern Mutual in Dallas.