[Editor’s Note: This article was originally published in the ACEP Young Physicians Section Newsletter a few months ago. There isn’t an electronic copy of the newsletter to link to, so I’ve decided to republish the entire article here so regular readers can read it. It is written specifically for emergency physicians, but the lessons outlined apply to most physicians, and in fact, even most non-physicians.]
The likelihood of a physician becoming financially successful depends a great deal on the decisions she makes during the most important year of her financial life- the first year out of residency. If a new residency grad can get just a few things right that first year, the habits established will carry her through to financial independence.
Live Like A Resident
According to the most recent Daniel Sterns survey, the average emergency physician makes about $326,000 a year. An academic doc or a new graduate on a partnership track may make significantly less, perhaps around $200,000. But compared to the $45,000 she made in her last year of residency, she might as well be Scrooge McDuck, swimming around in a room filled with $100 bills and gold coins. A typical emergency doc will make 4-6 times as much money in her first year out of training as during her last year of training. Although a good chunk of that will go to the tax man, perhaps 15-30%, that still leaves enough money to dramatically increase the physician’s standard of living.
This leaves the physician with a dilemma that she may not even recognize- how much should she increase her standard of living? If the new graduate could live within her means at 200% of residency salary, she will soon become financially independent without feeling financially constrained. The best piece of financial advice I ever received was “Live like a resident.” You don’t have to be quite that extreme, but if you can live off $80-100,000, that leaves another $100,000 or so of net income that can go toward paying down student loans, saving up for a down payment on a house, or catching up to the retirement funds of your college roommates who haven’t spent the last 7 years making little to nothing. You don’t have to drive a new car or live in a huge house just because you are now an attending. Don’t grow into your income all at once. In fact, if you never grow into it you’ll be a lot better off. You don’t want to be that guy working eighteen night shifts at age 65 because you have to.
As a resident, disability insurance companies won’t sell you as much insurance as you need, and you can’t afford it anyway. As soon as you get out (or just before) buy some more. Everyone has different needs, but I recommend at least a $10,000 monthly benefit. Buying a new policy rather than exercising a future purchase option from your old policy will allow you to preserve the option to use later in case your health deteriorates or you pick up some dangerous hobbies. You don’t usually want to replace the policy you bought as a resident, as that is likely the cheapest policy you’ll ever be offered. Buying your policy in your last few months of residency once the contract for your first attending job is in place can often allow for a significant discount and more options. Procedurally oriented physicians like emergency docs usually opt for specialty-specific coverage. Be sure to buy from an independent agent who can sell you a policy from any company.
This is also a great time to top off your life insurance. Residents usually can’t afford as much life insurance as they need either. If you have a spouse or children depending on your income, you should probably buy $2-3 Million in a 20-30 year level-premium term life insurance policy. It’s pretty cheap, so if you’re unsure how much you need, err on the side of buying a few hundred thousand more. Avoid any cash value life insurance products like whole life, universal life, or variable life. These products mix investing and insurance, and usually not to your benefit. A very small percentage of people may benefit from one of these policies, but very few of them are emergency physicians. There are simply too many better options for retirement savings for someone in your income range.
You should also increase your personal liability insurance. Your state likely only requires $50-100,000 in liability insurance on your car and doesn’t require liability insurance on the home you live in. As you well know, an injured person can burn through $50,000 in medical bills in less than 24 hours. Increase the liability coverage on your auto and homeowner’s (or renter’s) policies to $300,000, and add an umbrella policy for $1-5 Million on top of that. These policies are usually available from your home or auto insurer. Your patients aren’t the only ones who see you as having “big pockets.”
Develop A Plan For Paying Back Student Loans
Most residents find themselves using the IBR (or its new, improved version ICR-A) to minimize their required loan payments. Upon taking your first real job, you can now make an assessment of your ability to use the Public Service Loan Forgiveness (PSLF) program. If you were employed by a 501(c)3 as a resident, a fellow, and an attending, this may be an option worth pursuing. If not, it’s time to get busy paying back those loans. Although recent graduates may have loans with interest rates low enough that it makes sense to invest in tax-advantaged retirement accounts instead of paying them off, those in medical school and residency now are likely to have student loans with rates of 6.8% or more. A guaranteed investment return of 6.8% is very attractive in these low-yield times. It would be foolish to drag out high interest rate student loans for 10-20 years unless you expect a large chunk of them to be forgiven. If you are lucky enough to have significant home equity, you may be able to convert your high-rate, non-deductible, non-forgiveable, student loan interest into low-rate, deductible, forgiveable mortgage interest.
Buy A House
New attendings, like new residents, often have an overwhelming impulse to buy a house. While I usually recommend residents rent, most attendings in stable jobs should probably buy a house. It may be worthwhile renting for a few months to a year to ensure a good fit with your group and your new town prior to purchasing, since many new graduates change jobs after just 1-2 years. This will also give you the advantage of building up an emergency fund or a down-payment fund prior to purchasing. Buying in the Winter may also give you a pricing advantage since builders may be cash-poor and desperate, and even the seller of a previously owned home has far fewer buyers looking at their house. It’s also far easier to avoid overpaying when your purchase decision isn’t rushed. Many banks offer “doctor’s loans” that will accept your contract as income verification, don’t require a down payment or mortgage insurance, and won’t use your student loans when calculating your ratios. Realize that these loans are not a gift from the bank. They come with higher fees and interest rates than a conventional loan with a 20% down payment. It’s okay to use them, but better if you don’t have to.
Try to limit your mortgage to 2 times your gross income and your monthly housing costs (mortgage, taxes, insurance, and utilities) to less than 20% of your gross income to help you avoid being “house-poor.” You may have to stretch those guidelines in high cost of living areas such as the Bay Area and Manhattan, but realize that any dollars spent on housing cannot go toward vacations, automobiles, student loans, or building wealth. A house will be your single largest consumer item. Don’t consider it an investment. Consume too much at your financial peril.
Develop an investment plan
If you haven’t already started saving for retirement as a resident, it’s now time to get serious about it. I recommend that physicians put 20% of their gross income toward retirement. Your retirement savings should be put into tax-protected accounts like 401Ks, profit-sharing plans, and “Backdoor” Roth IRAs as much as possible, not only to save on taxes, but also to better protect those assets from creditors. It is relatively easy to read a few good books on investing and put together a simple, but effective long-term investing plan using low-cost index mutual funds.
It is also reasonable to pay a fair price to a good advisor to help you with financial planning and to manage your assets. Selecting a good advisor can be very tricky, since the vast majority would be better described as commissioned salesmen. Fortunately, there are a few good advisors out there. One of the best ways to identify them is to look for a low-cost, fee-only advisor who has access to funds from Dimensional Fund Advisors (DFA.) These low-cost, index-like funds are similar to the index funds available to do-it-yourself investors through firms like mutually-owned Vanguard. The benefit to you is that DFA-authorized advisors are required to undergo significant education about the academic basis for investing. Essentially, DFA screens them so you don’t have to. There are good advisors out there who aren’t DFA-authorized advisors, and you can certainly have plenty of investment success without using DFA funds, (I don’t own any DFA funds), [I actually do own one in my 529s as of January 2014-ed] but this is a simple screen that seems to work well in practice to select a qualified asset manager. Realize that every dollar paid to your advisor comes directly out of your return. Learning to manage your investments yourself may be worth tens of thousands of dollars a year.
Your first year out of residency is a critical year for you, professionally and financially. Stabilizing your finances now will provide you professional options and personal freedom down the road. The happiest doctors I know are the ones who don’t have to work for financial reasons.
James M. Dahle, MD, FACEP is a full-time emergency physician who blogs as The White Coat Investor at https://www.whitecoatinvestor.com where he tries to give those who wear the white coat a “fair shake” on Wall Street.
Disclosure: Dr. Dahle is not an accountant, attorney, or financial advisor and recommends you consult with your advisors prior to acting on any information in this article. He has no financial relationship with DFA, but does own several Vanguard mutual funds. The White Coat Investor website is a for profit venture, but all financial conflicts of interest on the site are fully disclosed.
What do you think? What other advice should new physicians be given? Comment below!