[Editor's Note: I was invited to submit a guest post on the Sermo blog. So many of the posts on Sermo seem so pessimistic to me sometimes. They are full of whining, complaining, fretting, and venting etc. I don't know if that's the nature of docs, the nature of anonymous internet forums, or whether people are just blowing off steam, but I thought I'd write a post that might help offset some of that pessimism.]
I have a noticed a persistent and pervasive pessimism among physicians when they are talking amongst themselves, whether in a doctor’s lounge or on a virtual forum such as Sermo. One of the best antidotes I have found to feeling pessimistic about the future is the optimization of a doctor’s personal financial situation. When doctors feel their financial lives are under control, it is much easier for them to cut back on their hours or even walk away from a job they don’t like for whatever reason. In short, doctors who work because they want to, not because they have to, are happier, both at work and at home. No study supports this yet, but I suspect financially secure doctors render higher quality, more compassionate care to their patients. There are four ways to optimize the financial lives of physicians:
# 1 Retire Student Loans
I have found physicians who still owe money for their educations to be particularly unhappy about their financial situation. Although many of these physicians are young, a surprising number of those who still have a substantial student loan burden are ten or even twenty years out of residency. There are two basic strategies for eliminating student loans—obtain forgiveness or pay them off. There are a number of programs that will pay off your student loans under certain conditions. The three main programs are run by the federal government. The most significant, Public Service Loan Forgiveness, allows for tax-free forgiveness after ten years of payments for physicians working for a 501(c)3 organization. Two other programs not only help to lower your payments, but also allow for taxable forgiveness after either twenty (Pay As You Earn) or twenty-five (Income Based Repayment) years. Payments made during residency and fellowship count toward these totals.
If you are unable to obtain forgiveness for your loans, it is best to pay them off before you get used to your attending level income. “Live Like A Resident!” is the best advice I can give to a doctor who still has student loans. Keep living expenses low, so a large percentage of your newly acquired high income can be directed toward your student loans. Using this plan, and despite ever-increasing student loan burdens and high-interest rates, most physicians should still be able to pay off their loans within 2-5 years of finishing training. It is now possible to refinance student loans with several private lenders, and these lower interest rates can assist you in paying off those loans even faster.
# 2 Have a Definitive Plan for Retirement
It is important for physicians to have a spending plan (aka budget), an insurance plan, an estate plan, an asset protection plan, and an investing plan. When it comes to making physicians happier, nothing compares to have a realistic plan laid out for retirement. Some physicians have the knowledge, desire, and temperament required to do this themselves, but most will need to enlist the assistance of a competent, low-cost advisor to complete this task. A retirement plan will show you how much you will need each year in retirement, how much you need to save each year until then, and about when you will be able to retire. A good retirement plan will also lay out which investments and retirement accounts you should use. Using the best available options will increase the likelihood of success and decrease the amount of time required to reach financial independence.
# 3 Reduce Financial Costs
In my experience, the typical physician is paying too much in insurance premiums, too much in taxes, too much in mortgage-related costs and too much in financial advisory costs. The sum of these often totals tens of thousands of dollars per year. By redirecting this wasted money toward a retirement portfolio, financial independence can be reached years earlier. For example, consider the difference between a physician paying 0.5% of his portfolio in financial advisory fees each year versus one paying 1.5 percent. If he saves $50,000 per year, the portfolio makes 5 percent after inflation but before advisory fees, and he needs $3 Million to retire, the physician with the lower fees will be able to retire in 29 years. The physician paying higher fees, however, will need to work more than three years longer. Other examples of wasted money include physicians paying Private Mortgage Insurance (PMI) and doctors mistakenly investing in a taxable account instead of funding a backdoor Roth IRA. Special “doctor mortgage loans” essentially eliminate PMI, even for physicians who put down less than 20% on their homes. The Backdoor Roth IRA is a little-known loophole that allows doctors to still contribute to a Roth IRA each year, despite their high income.
# 4 Spend Your Money on What Makes You Happy
We each value different things in our lives. One doctor may value early financial independence while others may value flashy cars, nice clothing, eating out frequently, or expensive vacations. Each time you consider a purchase, evaluate it in terms of how much happiness it brings you. If you are like most, you may realize you are spending a considerable percentage of your income for goods and services that are not increasing your happiness. Be generally frugal in most things, but selectively extravagant in those areas that bring you the most happiness. If you don’t enjoy a $100 meal twice as much as a $50 meal, quit buying it. Be aware that the psychology literature shows that purchasing experiences, especially those shared with friends and family, seems to bring far more happiness to most people than purchasing consumer items.
By optimizing your personal finances, you can increase the enjoyment of your career, reduce stress at home, and feel more optimistic about the future. The first step is obtaining the financial education you never received in medical school or residency. While this does require some time and effort (though far less than it takes to practice your specialty), it can be obtained very inexpensively online or by reading a handful of high yield books available at low cost or even free through your local library. This “Continuing Financial Education” may end up paying you more in the long run than your medical education.
What do you think? Are doctors too pessimistic? Do you think they would be less pessimistic if they were financially independent? Comment below!