Physicians offer a unique set of issues when beginning financial planning. While the income potential is high, most doctors begin their careers in debt. In fact the debt often rivals the cost of a mortgage for an entire house, as much as $200,000.
The mean income for physicians is $235,000 per year. Compare that to the average US income of $51,000 and doctors are clearly ahead. While they are doing quite well by most standards that will not get them into the top 1%, the average income there is $717,000 per year.
High income potential but a delay on a start to retirement and a high debt load to begin a career … what’s a doctor to do? Here are some pointers for financial planning for physicians:
Start an Emergency Fund
Physicians are in demand, but conventional wisdom suggests that you save three to six months salary in case you lose your job. Determine what a comfortable number is for you and start saving up immediately. That way you’ll have peace of mind if anything happens.
Once you’ve topped off an emergency fund, put the extra cash towards debt reduction or retirement depending on your goals.
Live like a Resident, Initially
When you first come into your physician salary you’ll be transferring from a residency lifestyle. Keep that lifestyle for a year or two and focus on paying down your student debt. A typical 10-year repayment schedule can be as high as $2,000 per month.
Some changes are coming, the Affordable Care Act has provisions for physicians coming out of medical school to pay a reduced percentage of their income. Formerly 15% the ACA has dropped down to 10%. These changes go into effect July 1, 2014 so will be more applicable for students graduating this year. But check with a loan officer to see if there are any benefits that you can tap.
Start Saving Immediately
If you’re working with a practice or a hospital they should have a 401K or similar plan in place, often with a matching contribution. At a bare minimum, sign up for the matching contribution (it’s literally free money).
After that, work with your family budget to see what makes the most sense to you. The more aggressively you save, the sooner you can retire or purchase property. Think about what your life long goals are and plan accordingly.
You’ll need malpractice insurance, life insurance, disability and property coverage. Make sure you have all those things in place so a catastrophe doesn’t leave you or your family stranded. They are all relatively inexpensive, especially if you get them when you’re young, and they will go a long way to ensuring a happy future.
Purchasing a Home
If we use the mean salary of $235,000, add in a bit of debt from student loans, and a 6% mortgage, the average physician can afford a mortgage of about $675,000 not including other family income. For most areas of the country that is a very nice home. The average U.S. house sells for about $254,000 (pdf).
Keep in mind that a large home will include higher cost of upkeep and higher taxes. So even if you can afford a mansion in your part of the country, you might not want to deal with all that entails. Think about the lifestyle you truly want to live and find the “right-sized” home for you.
Given the complexities of investing and the amount of revenue you’ll be able to squirrel away, it really does make sense to work with a financial advisor. Look for successful physicians in your area and ask them for referrals.
There are even firms geared specifically towards physicians that you might want to check out. Just make sure whoever you’re working with is reputable.
Also consider working with a good CPA. They can go a long way to help you minimize taxes and maximize savings. Especially if you own your own practice you’ll want to have an accountant that you can go to regularly for advice and assistance.
What are some steps you’ve taken as you plan your financial future? How would you like to retire? If you’re an M.D. or a D.O. you can join the discussion inside Sermo.