3 cornerstones young physicians need for a strong financial foundation

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The early part of a physician’s career can be the most exciting and daunting simultaneously. The thrill of practicing medicine and serving patients is often tempered by financial stress. Since doctors begin their professional careers — and earning years — later than most, there is often immediate pressure around managing school debt and thinking about retirement.

Fortunately, there are established models to help young physicians develop a plan for long-term financial security. Although every physician’s financial situation is unique, there are three financial strategies that are generally applicable to most scenarios and can serve as the foundation for financial security.

Establish a saving habit

Michael Joyce, CFA, CFP
© CW Advisors LLC

Sarah Caine, CFP
_{© CW Advisors LLC}

The first cornerstone for building a strong financial foundation is savings. Many young doctors are unable to save during medical school, residency and fellowships. Even when you begin working, saving may seem unrealistic.

The reality is that young physicians typically don’t start saving in earnest until a few years after other professionals. That’s why starting to save as soon as possible is so critical. Many young doctors also don’t realize the amount they need to save to reach their retirement goals. Recent studies show that saving 15% of income for retirement is a good rule of thumb. Even if you can’t save that amount immediately, save what you can.

Creating a habit of consistently saving for retirement will make a huge difference later in life. There are many options to establish that habit of saving. In addition to traditional high-yield savings and money market accounts, consider a wide array of savings options. Employer tax-deferred retirement accounts, like 401(k)s and 403(b)s, are especially beneficial for high-income doctors. Health savings accounts (HSAs) are another option. Contributions to HSAs are pretax, growth is tax deferred, and distributions are tax-free if used for qualified medical expenses. Likewise, backdoor Roth Individual Retirement Accounts (IRAs) are attractive for physicians. High-income doctors often don’t qualify to make Roth IRA contributions. You can, however, make nondeductible traditional IRA contributions and then convert that to a Roth IRA. Think about saving creatively as well. If young physicians have children or are planning for children in the future, use 529 college savings accounts as another savings vehicle. Since few doctors’ dependents will qualify for financial aid, saving for college through these federally tax-exempt savings vehicles is highly recommended.

Depending on a doctor’s financial goals, utilizing multiple savings vehicles may be the best strategy. Once that savings strategy is defined, young physicians would be wise to establish a plan for automatic contributions to savings accounts, an emergency fund and retirement accounts.

Pay down debt

Many young doctors focus primarily on paying down debt early in their career. Paying off student loans is absolutely necessary and a cornerstone to long-term financial security, but it’s not the only key to your financial future. Don’t think of paying down debt and saving for retirement as conflicting. It’s not an either/or but rather a both/and. Paying down debt and saving at the same time will create a stronger financial foundation.

Given the additional education that doctors require, you want to ensure that you begin leveraging compound interest as soon as possible. To delay retirement saving in favor of only paying down debt can have a negative impact if you wait too long.

The best rule of thumb is to pay down debt as quickly and reasonably as possible while also saving for retirement.

Young physicians have lots of options to address medical school loan repayment, including consolidating loans and loan forgiveness programs. Generally, it’s best to make larger payments on loans with higher interest rates.

Build a support team

Evaluating medical school debt and identifying opportunities to manage or reduce those loans fall by the wayside for many young physicians. There’s a lot on your plate early in your career. Financial strategies for addressing debt and long-term savings might not feel like a priority. That’s why the third cornerstone for a strong financial foundation is building a team to support you.

Working with a financial adviser can allow doctors to focus on their patients, medical practices and families. Having a trusted adviser will provide peace of mind and give you confidence in your financial goals. This person can help you identify your goals and then create a financial road map to meet those goals.

If you begin building this team early in your career, that financial adviser can help you at all stages of life. As careers develop, your goals may change, and having someone who understands you can make it easier to adjust plans and realign. Furthermore, a financial adviser also can help identify tax savings and other financial benefits, especially as physicians progress in their careers.

For doctors just beginning their busy careers, taking a holistic approach to financial planning will pay dividends throughout their lives.

Focus on these three financial cornerstones — save, pay down debt and build a team — early so you have a strong foundation and are on a pathway to achieving your financial and life goals.

Michael Joyce, CFA, CFP, is the executive managing director, mid-Atlantic leader for CW Advisors, LLC, a registered investment adviser under the SEC Investment Advisers Act of 1940, as amended (“RIA”), which is headquartered in Boston. Registration does not imply a certain level of skill or training. He can be contacted at michael.joyce@cwadvisorsgroup.com. Sarah Caine, CFP, is a wealth manager at CW Advisors and can be contacted at sarah.caine@cwadvisorsgroup.com. They both have extensive experience working with doctors on financial planning and investment management strategies. For additional information, visit http://www.cwadvisorsgroup.com or visit the Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov by searching with CWA’s CRD #310873.