Low-Income Doctor in a High-Cost-of-Living Area (HCOL)

Readers have asked for more advice tailored to low-earning doctors in high-cost-of-living (HCOL) areas. I gave some general advice (and ranted a bit) a few years ago in a post titled Financial Advice for Low-Income Doctors. I thought it would be useful to expand on that subject a bit.

You Can Have Anything You Want, But Not Everything

I often tell groups of docs that they can have anything they want, but not everything—and not right now. For a highly paid doctor, you probably can have everything (within reason) that you want eventually. But for a low-earning doctor in an HCOL area, that simply isn't true. You've got to recognize that up front. Your decisions are going to be comparing what you want a lot with what you want most. Don't even bother thinking about stuff you only want a little.

Move!

I probably ought to get this out there early in the post. The best financial decision a doctor in a low-paying specialty in an HCOL area can make is to move. Well, maybe marry a back surgeon. And then move. While I recognize this is not a great option for many, it should be seriously considered by all (the moving, not the marrying for money).

I'm continually astonished that there are any pediatricians or preventive medicine doctors in the Bay Area or Manhattan. By moving, you are likely to get a higher salary, a lower cost of living, and a lower tax burden. There better be something you really like about that area if you're going to trade all that for your HCOL location. The best part about having low-paid doctors leave an area? Those who are left behind can now demand better compensation! It works even better for highly paid doctors, as evidenced by an episode a few years ago on the WCI Podcast about the urologist with a seven-figure income.

More information here:

The Moderate-Income Physician

Here’s How Much We Make, Save, and Spend as ‘Moderate Earners’

Should Medicine Be Your Hobby?

Here's another radical thought that should at least cross your mind—maybe medicine shouldn't be the primary provider of your income. The lower your income, the easier it is to learn how to do something else that will pay you more.

This was a serious issue for me as I built WCI. Not only was I in a relatively high-paying field (at least on an hourly basis), but I was in a solid partnership where I was making more than the average doc in my field. Every time I looked at what I could make doing something else, it never made much sense to do it. That was part of the reason I kept working full-time while building WCI full-time + on the side. I couldn't justify to myself (or my family) that, despite WCI's potential, I should leave a pretty good income on the table to pursue it. These days, medicine is a well-paid hobby for me.

If you're a pediatrician making $200,000 a year, maybe pediatrics should be a well-paid hobby for you. Maybe you should get into real estate or dry cleaning or plumbing or consulting or whatever. Don't kid yourself that all doctors make more than all (insert whatever career field you wish here). It just isn't true. I canyoneer with a gentleman who describes himself as a janitor. But it takes spending a few days with him before you realize this “janitor” has 200 employees. Maybe you should make your money as a janitor and see kids in clinic on the side. Or maybe you should send your spouse to work as an engineer or a software developer or whatever, and YOU should be the one working part-time or doing the stay-at-home parent thing.

You're Not a ‘Rich Doctor' and Never Will Be

One of the biggest obstacles for many physicians is overcoming the expectations of their friends, family, spouse, and even themselves with regard to their lifestyle. Society assumes that because you're a doctor, you have a high income and that you are wealthy. Many people assume those two things go together, but regular readers of this blog know that is far from being true.

When you are making less than $200,000 and living in an expensive city, you cannot pretend you're a 1%er because you aren't. You might not even be a 10%er. If you're in the Bay Area, you're competing with tech multi-millionaires for housing in good school districts. In Manhattan, it might be people working in financial services driving up the prices. Even in places with booming economies and a somewhat more moderate cost of living (Denver, Salt Lake City, Austin, etc.), this effect is true, although not as extreme.

While there are a few doctors in my neighborhood, there are plenty of C-suite executives, private equity folks, successful salespeople, and various entrepreneurs. But when you combine a low physician income with an HCOL area and the ever-increasing cost of medical education, you've got a recipe for a middle-class life. You need to either accept this mathematical fact or make adjustments that actually change the math.

The Math Living in HCOL City

In case you aren't familiar with the math, this is the way it looks on a per-year basis.

• Gross Income: $200,000
• Taxes: $50,000 (there's a huge variability here, of course, but this is a reasonable estimate)
• Student loan payments: $43,000 ($300,000 at 6% on a 10-year plan)
• Mortgage: $72,000 ($1 million 30-year mortgage at 6%)

That leaves $35,000 to live on, or about $2,917 a month. Note that there isn't any money allocated to retirement or college savings in that budget. Looks pretty desperate, huh?

More information here:

10 Ways That Even Physicians Can Save Money on Groceries

Real Life Examples of Physician Budgets — From the Frugal to the Extravagant

How to Make a High COLA Work

OK, we've forgotten about getting rich. Now, we're just trying to have a reasonable middle-class life and a dignified retirement. But even to do that, we've got to change the math. We've already mentioned three ways to change the math. The first was to move. The second was to marry someone who makes more than you do. The third one was to get a new career so you can still afford to practice medicine. But there are more.

#1 Boost Your Income

I often hear doctors lament the fact that the average surgeon makes twice as much as the average family doc. What I never hear anyone lament, however, is that there are family doctors who make three times more than other family doctors. The intra-specialty variation in pay is far more impressive and fascinating to me than the inter-specialty variation. The New Jersey family doc who posted one of the comments that caused me to write this post noted how he had finally gotten his pay up to $190,000. Well, there are family docs out there who start at a level of pay above that. Why do some get paid more? Plenty of reasons (and methods for increasing it).

• Be a hospitalist
• Do urgent care
• Own the practice
• Hire advanced practice providers
• Hire employee physicians
• Take more call
• Cover a nursing home on the side
• Improve your payor mix
• Add a particularly well-reimbursing procedure—sigmoidoscopy, laceration repairs, I&Ds, vasectomy, OB, culposcopy, joint injections, botox
• Add evening or weekend hours to the clinic
• Shop around for a higher-paying job every year or two (if nothing else, it allows you to negotiate a raise)

#2 Cut Your Taxes

If my discretionary income was $2,917 a month, you better believe I'd be an expert in the tax code and that I wouldn't be paying a bloody red cent more than I must. I'm always amazed how many doctors have no idea what the difference is between a deduction and a credit, Schedule A and Schedule C, an allowance and an exemption, etc. If I were paying more than 20% in taxes on $200,000 in income, I'd be looking all over the place for that low-hanging fruit. (In this hypothetical case, it's likely itemizing, so that I could deduct all that mortgage interest and state income taxes.)

#3 Get Rid of the Student Loans

This hypothetical doc is paying something like 22% of their gross income in student loan payments. Getting rid of that debt frees up a ton of income that can be spent or saved. How do you get rid of student loans? Ideally, you get them forgiven or have someone else pay them. If your salary is only $200,000, $300,000 in forgiveness is like two years of net income. Are you SURE you can't find a job you can stand for a few years that qualifies for PSLF? If you're only making $150,000 anyway, the military, VA, or Indian Health Service may start to look more and more appealing.

But even if you're resigned to paying off your loans yourself, refinancing them to a five-year variable loan and living like a medical student (not just a resident) until they're gone seems appropriate, given the dramatic impact it will have on your financial life.

If you're thinking about refinancing your student loans, there's no better place to do it than through one of our partners.

I favor the “scorched earth, gazelle intensity” approach instead of the “20-30 year payment plan” approach. The interest rate you get on the lengthy payment plan is so high that the payments aren't all that much lower anyway. Plus, even if you get IDR forgiveness after 20-25 years of payments, that forgiveness is taxable at your marginal tax rate. So, unless you've got some cash on the side, you're still going to be in debt even after getting that forgiveness. And don't think it's going away just because you retired. They garnish Social Security to make your payments.

#4 Get Housing Under Control

Perhaps the hardest thing about an HCOL area is that you feel like you need to buy a house ASAP because housing in that area has always appreciated at a good rate. But you can't buy anything and be anywhere near the rules of thumb that financial bloggers throw out (like my own, “Keep your mortgage to less than 2X your gross income”). You're not going to get much of a house in the Bay Area for $400,000. You might get an old 1,000 square foot rancher in a bad part of town for twice that. But you've got to figure out something. It might be renting. It might be buying a duplex and renting out the other side. It might be living in a crummy part of town or having a long commute.

You could stretch my rule of thumb a bit (perhaps to 3-4X gross income), but realize that decision comes with a longer working career and fewer luxuries (cars, vacations, etc.) along the way. There is a very real cost of spending that much of your income on housing.

Things You Cannot Do in a VHCOL City

There are a few things that you simply cannot do if you are making <$200,000 in a high-cost-of-living area.

1. You cannot send your kids to private K-12 schools. You just can't. The math doesn't work. You need to live in a school district where the schools are at least OK. That might mean renting. So what? Do it.
2. You cannot buy a $2 million house, even if the bank says it will loan you the money and you have a down payment.
3. You cannot save nothing for retirement. Even if you have to start at only 5% of your income and try to “save the raises” over the years, you cannot just neglect this. Maybe you can put it off for five years while you pay off the student loans, but that's it. No longer than that.
4. You cannot drive a fancy car. The difference between a fancy car and a reliable seven- or 10-year-old economy car is about $6,000 per year. That $6,000 per year, invested at 8% over 35 years, grows to a million dollars. For a low-earning doc in an HCOL area, that's the difference between retiring with nothing and retiring a millionaire.
5. You cannot vacation big. You can vacation frequently, but you cannot do it expensively. No heli-skiing. No European trips. Renting a motorhome for a week is a big splurge you can't do every year. There are still road trips to Aunt Sally's and camping.
6. You cannot pay for your children's college. You can probably help a little, but they need to understand that college is going to be primarily on them. They need guidance to choose an inexpensive school, maximize available scholarships, and work their way through their undergraduate educations.
7. You cannot provide support for lots of extended family members. I once had a family practice colleague who had five or six other adults in the house (and several children), but she was the only one working. That doesn't work with the math above. You're not even going to get back to broke until you're 35 or 40; how can you support five other adults?
8. You cannot skimp on budgeting. Things are going to be tight, and they're going to stay that way for a long time. A real budget, whether done on paper or using one of the handy budgeting apps, is a necessity.

More information here:

How to Build Wealth on $150,000 Per Year

How to Double Your Income as a Primary Care Physician

4 Tips to Increase Your Primary Care Physician Income

A Suggested Plan

Everyone's situation is a little different, but here's an example of a plan that could be followed by a low-income doc in an HCOL area.

Step 1 – Take a Higher-Than-Average Paying Job 

Instead of $200,000, maybe you now make $275,000. At those income levels, even a little extra income makes a huge difference in reaching your financial goals.

Step 2 – Get a 5-Year Student Loan Payoff Plan

You've got to get that monkey off your back. You really aren't done with med school until you've paid for it. The only exception is if you did a three-year residency, and you are going to get the loans forgiven via PSLF. Then, you can have a seven-year plan. Otherwise, five years max. If you literally cannot afford to do that (and with some student loan burdens I've seen, that is a possibility), then you need to either move or change employers to one that you will qualify for PSLF.

Let's say our $200,000 earning doctor has $300,000 in student loans. What does the five-year plan look like? It looks like driving a Mazda 3 on two vacations a year and staying with family on both of them. It looks like a lot of spaghetti instead of eating out. It looks like only $10,000 going to retirement instead of $40,000. Of course, you'll want to refinance the debt (probably into a five-year variable loan). Perhaps you can get it down to 3%-4%. At 3.5%, those payments are $70,000 a year, or $5,854 a month. That's a big payment, when your take-home might only be $155,000, or $13,000 a month. But it's only five years. After that, that extra $70,000 a year can go somewhere else, including $30,000 of it being redirected to retirement savings (which will further lower your taxes) before you can spend the rest on a much-needed lifestyle upgrade.

Step 3 – No Buying a Home Until the Student Loans Are Gone

That Mazda 3 is going to look pretty stupid in front of a fancy house anyway. But when it comes to buying a home five years out of training, you're going to need to get a good deal on it. Take your time with this. Even small percentages of a large amount of money are significant sums. Getting $40,000 off the price of your house is like an extra year of retirement savings. Will you have to stretch beyond a mortgage of 2X gross income? Probably. But hopefully, you can keep it to 3X. If you save up a $100,000 down payment and get a 3X $250,000 mortgage, that gets you a $800,000 house.

Is it your fancy dream house in the best school district? Assuredly not. But guess what? You chose to live in an expensive area over having a dream house. This is one of the consequences.

Step 4 – Maximize Career Longevity

After five years of living (and maybe even working) like a resident, you now need to focus on longevity. You are going to need a full career, 35-40ish years. You probably had to use a 30-year mortgage to pay for the house. You will also need more retirement savings than your peers in a less costly location. You need to pace yourself and avoid burnout. Let your money do as much of the heavy lifting as possible by giving it time.

Forget about retiring at 50 or even 55-60. It's not going to happen. Don't believe me? Run the numbers. Remember that you not only got the usual doctor later start, but your start was five years later than that because you had to direct such a large percentage of your income at those loans for five years after training. Let's say you get out of training at 32 and pay off the loans at 37. At that point, maybe you have $60,000 for retirement. If your “number” is $3 million, and you'll only be saving $40,000 a year toward it (at a 5% real return), you'll be working and saving until age 67.

Having an income of “only” $150,000-$250,000 is hardly a death sentence. While you may not experience the “good life” of having money coming out of your ears like a higher-paid doc in a lower-cost-of-living area who gets their finances under control early in their career, you're still going to be much better off than the average family, even in your expensive city.

But becoming financially secure is going to require avoiding costly mistakes, making trade-offs with real consequences, and exercising more discipline than many of your med school classmates had to exercise.

What do you think? How can a low-income doc in a high-cost-of-living area still reach financial success? Do you agree with these recommendations? Why or why not? 

[This updated post was originally published in 2017.]