Congratulations to all the doctors who are completing their training and starting new jobs. It can be an exciting month with those starting salaries. For many, a pay rise can feel like monopoly money. It may seem like enough money to satisfy every desire.
But many doctors who have come before you have one note of caution: that money may not go as far as you imagine.
Importantly, a miscalculation could distract you from the financial course for decades. Honestly, you could find yourself in financial stress, and instead of going to work as a doctor, you could find yourself at work to earn enough money to maintain your lifestyle.
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You want to correct this right from the gate. Months of waiting – after the house is bought, the children are in private schools and the new Tesla X is coming out of the driveway – means spending decisions and savings are rooted in emotional commitments.
Where do people go wrong? Well, many do not understand, for example, how income taxation works in a system of marginal tax brackets. Payments from home of $ 60,000 to $ 500,000 are not linear. Taxes of $ 60,000 might seem like only 15% -20%, but would be closer to 30% -35% at higher income levels. Then add the repayment of the student loan and the hefty payment of the mortgage, it is easy to imagine how some new doctors find themselves in a situation from salary to salary or in a spiral of debt, even after the jump in income.
And no, that’s not a euphemism for something else. The same goes for executives, engineers, lawyers, bankers and other professionals who earn $ 250,000 a year or more at an early age.
There is a simple solution: pay yourself first. This is absolutely my best advice I can offer.
There are three simple steps to achieving this advice. If you follow them, you will be able to retire at a reasonable age and you will be able to repay student loans. You could go ahead and make a lifestyle budget for home, school, car and other big cards, and this could help avoid a lot of financial stress. Today, let’s focus on the steps to pay yourself first.
Step 1: Have some whiskey (optional). Determine how much you need to save each year.
At the very least, your savings rate should be around 20%. Maybe it should be even more, especially if you have a hefty student loan debt and / or if you start at this income level after age 30 with no savings. To get your savings rate, I recommend you run a retirement calculator, and here’s a simple one you can start with: https://vgi.vg/2WfQ3VZ. Include the social security assumption and think about what you bring into the percentage of current income you will need in retirement.
Remember that saving is at the same time adding money to retirement and reducing your lifestyle. A reduced lifestyle stretches your pensions.
So, if you start with a calculator by choosing a savings rate of 20%, you may be able to get away with assuming that you will need 75% of your current retirement income (taking into account lower tax withdrawal taxes). With a savings rate of 25%, you may only need 70% of your current income.
Suppose in our scenario you are 30 years old and earn $ 300,000 working for a nonprofit hospital and you have $ 300,000 student loans. In my estimation, you should probably save 30% of your income, or $ 90,000 a year. (Here comes an optional shot of whiskey.)
Step 2: If you are reasonably sober, open your retirement savings accounts to store those dollars.
Pension accounts need to be prioritized in order to be tax efficient. To remind yourself why this is so, go back to section 4. Consider that your savings should fill the most important bucket before spilling over into the next one. Order is important here.
Group 1: Workplace retirement accounts. Total savings limit $ 19,500. Take advantage of what your hospital, clinic or company has to offer. For some it will be $ 19,500, but for others it could be twice as much if there is an accompanying $ 457 plan. Not only will you get a much-needed tax deduction, but you’ll probably also get savings to win. $ 90,000 – $ 19,500 = $ 70,500 left to save.
Group 2: Health Savings Account (HSA). If you have a high-deductible health care plan, you can save up to $ 7,200 for your family, invest in retirement, and never spend it. With a triple tax deduction – no income tax on the front or back and no capital gains tax – it’s a phenomenal retirement bill. The only caveat is that you must use it for retirement health expenses. Attention – your biggest retirement spending will probably be on health care. $ 70,500 – $ 7,200 = $ 63,300 left to save.
Group 3: Student loans. With student loans with an interest rate of 6% +, it absolutely makes sense to kill these suckers. If you work for a nonprofit hospital or clinic (e.g., Baptist Health, UAMS, Arkansas Children’s, or CARTI Cancer Center), then you are likely to benefit from participating in a public service loan forgiveness program, or PSLF. Depending on various factors, that payout could be approximately $ 2,000 per month or $ 24,000 per year. $ 63,300 – $ 24,000 = $ 39,300 left to save.
OR, if you go to a private practice or for-profit company or clinic, you probably want to refinance this debt for payment in 5 years (or less), resulting in a monthly payment of about $ 5,000 or $ 60,000 per year. $ 63,300-$ 60,000 = $ 3,300 left to save.
The physician in our example would obviously choose the PSLF option and would potentially be forgiven over $ 200,000 in credit assuming they were in the appropriate repayment program during the training.
Bucket 4: Backdoor Roth (BDR). Our document that qualifies for PSLF has more money to deploy to save. Although she and her spouse cannot explicitly fund Roth IRAs, they can seek support from the Roth IRA (Guide here: https://www.physicianonfire.com/backdoor/). This guide is for the Vanguard account, but can be done at Fidelity, Schwab, or most major brokerages. If both spouses achieve the maximum in 2021, that’s an additional $ 12,000. $ 39,300 – $ 12,000 = $ 27,300.
Volume 5: Taxable brokerage investment. There has never been a better time to be a doctor who opens a brokerage account, finances it monthly and invests in low fees, passive investments. Read more about it here: https://bit.ly/3zc1FIn. Opening an account with Vanguard, Fidelity or Schwab is easy. In this case with $ 27,300 remaining to invest it would be $ 2,275 per month.
Step 3: Automate all these monthly bucket savings. Your workplace retirement plan will be automated from your salary. The HSA will be automated from your salary. The student loan payment will be automatically withdrawn from your current account. For Backdoor Roth you can automate transfers – $ 1,000 per month for a pair / $ 500 if you are free – from your current account to a savings account and then make a BDR once a year. Then for a taxable brokerage account, please take an extra step and automate the transfer from your current account to the brokerage account and arrange for its automatic investment.
If you’ve been in this column this long, then my diagnosis is that you like these things, maybe it’s enough to read more about it. If so, I recommend books, blogs and podcasts by experts like white coat investors, doctors on fire, wealthy moms, Nisha Mehta and philosopher doctors. Dentists should check out the Gold Crown Podcast. Veterinarians, read the richer DVM. I also recommend the local financial educator for pharmacists, Joe Baker, and his great new book, Baker’s Dirty Dozen: Principles for Financial Independence. Lawyers and non-medical professionals also monitor many of these people because the content is non-conflicting (they don’t sell financial products), high quality, and easy to follow.
It takes work to do so, but if you take a more passive approach without this planning, you could end up saving insufficiently and are unaware of it. The money spent on the current account usually does not stay there long. He cries and whines or calls to spend it, and you will probably commit. That is why the system of first payment for a new job is your best choice for financial freedom.
Sarah Catherine Gutierrez is the founder, partner and CEO of Aptus Financial in Little Rock. She is also the author of the book “But first, save 10: One simple move of money that will change your life”, published by Et Alia Press. Contact her at [email protected].
