I'm Getting a Paycheck! Now What?!

One doesn’t often hear sympathy for physicians and their finances. They represent the epitome of education and hard-earned prosperity. People think doctors can work wherever they’d like and afford virtually anything they’d like. While their salaries are among the top in all professions, the truth is that in their early careers these young physicians face problems unique to their profession.

Data released last year by the American Association of Medical Colleges shows that in 81% of medical school graduates have education debt, and the median indebtedness is approximately $183,000. Even when there is no forbearance of this debt during residency and the “Pay As You Earn” (or PAYE) strategy is employed, a young doctor is looking at a total interest cost of $227,000, resulting in a total debt repayment of $407,000 over 20 years. These are staggering numbers.

Just as young physicians’ incomes begin in earnest they become inundated with outstretched hands and future responsibilities. Figuring out who to pay first as the checkbook comes out can be a daunting and stressful task. They know they must begin investing for the future. Those with young children know better than most the depth of the financial obligation to send each to college. And what about retirement savings? These future obligations are all the more daunting knowing there is a sizeable debt that needs to be dealt with.

While the perfect answer might be to simultaneously work toward both repaying the debt and begin saving this may not always be feasible. Is it better to focus on paying this debt down as quickly as possible, paying minimum amounts and investing heavily, or some combination of the two?

As with much in life, compromise may be the most appropriate solution. There isn’t a “right” or “wrong” approach. There are emotional as well as financial considerations. Determining one’s personal approach to the situation is critical. While the mathematics of carefully utilizing debt as part of one’s financial picture are compelling, investors who abhor owing money might correctly say they have seen the math but they know themselves and wish to take care of the debt first. That is certainly an appropriate option—especially for investors who are uncomfortable owing money.

It is not the only approach, however, and there is no “right” answer. By solely focusing on tackling the debt, future needs such as college savings or retirement savings are neglected or delayed for that entire period. This issue gets compounded by the fact physicians begin contributing much later than their non-medical peers.

Current student loans can easily have interest rates in the 6% range which warrants focusing more attention toward reducing this debt in today’s low interest rate environment. The AAMC lists the average salary for a graduate at $183,000 per year. This salary results in a monthly after-tax take-home pay of roughly $10,000 per month. Referring back to the typical graduate’s debt scenario, a young physician with a focus on eliminating debt could reasonably double the monthly debt service payment to $3,862 per month, which would result in the debt being completely repaid in just over 4½ years. Tackling the debt is just one of several overall priorities though.

Saving for his or her children’s future college expenses may be the last thing a young physician just out of school wants to consider, but if children are currently in the picture or not-so-distant future, the present may be the best time to start. The reason is simple. College has a relatively finite timetable. The vast majority of children start when they are 18. That leaves 18 years or less to save for an investment whose costs have been growing at a rate nearly three times that of inflation. Let’s look at the difference between starting a savings plan with a newborn versus an 8-yr old child.

The average cost of an education at an in-state public university, including room and board, is $18,943 per year. We’ll use tuition inflation of 6% and assume investment results of 8% per year in a tax-free college 529 plan. To reach these goals for one newborn child requires monthly savings of $423 per month. If savings don’t begin until that child is 8 years old, the required contribution jumps nearly 50% to $622 per month. For the average private school, those numbers inflate to $915 per month and $1,347 per month, respectively. After determining what is available to the family each month after living and lifestyle expenses are accounted for, the proportionate amount to each of the lifelong goals can be determined.

We’ve placed emphasis on eliminating the student loan debt on an accelerated basis if possible. After eliminating that student loan debt in perhaps as little as four or five years, the average physician’s age could well be approaching 40 years old. While the majority of the working world will have had roughly 15 years to reap the benefits of saving, investing, and compounding dividends and interest (though evidence shows most don’t!), the young physician is just getting started. Let’s see what a $15,250 per year initial pre-tax savings rate looks like. Here’s how we came to this number. Many qualified plans offer a 60% match on retirement savings, up to 5% of the participants’ salary. Five percent of $183,000 is $9,150. One would have to contribute $15,250 per year to get the full employer match. Those annual savings over the next 25 years and an 8% average return could amount to roughly $1.2 million dollars saved for retirement. How do all these numbers work within the concept of cash flow?

From a cash flow perspective, these numbers work well within the $183,000 average salary suggested, with plenty left over for house, cars, etc. Remember that these include paying $3,862 per month toward student loan debt as well. After five years, that debt can be eliminated, which opens up a substantial amount of monthly cash flow. The point of these illustrations is to highlight the need to proactively plan for them.

Doctors beginning their careers have just spent the last several years in a grueling and competitive environment. They have toiled and suffered to reach their educational status, all the while leaving a void in their saving and investing life. Their educational responsibilities don’t end there, however. Their career will require constant continuing education. They value time with friends and family and perhaps love golf or some other relaxing activity when time allows. Financial planning is important. Perhaps this is the time to lean on the resources and expertise of other professionals to assist in the financial aspects of their lives.

A financial advisor can help lay out a detailed plan incorporating the necessary tools and structure needed to accomplish one’s goals. After helping to identify goals—including allowing for personal lifestyle wants and needs—the Advisor can further serve as an accountability partner to help ensure the necessary savings are occurring and can help keep the family on track as well.

Just as the doctor’s education has been a long-term task of discipline and hard work, so too is finding success through investing. Relatively short-term sacrifices now will lead to long-term financial stability and peace of mind later.

Geoffrey M. Tomes and Bruce Wayne Gaylord are Wealth Advisors with Noyes Group, LLC. They are members of Conti Wealth Management Group based out of Indianapolis, IN. Their four-person team has over 100 years of combined financial planning and investing experience.