When it comes to personal finance, physicians are unique. On one hand, the average physician has a much higher income than the average American. On the other hand, physicians face challenges in managing their financial lives that many other groups simply don’t have to deal with. The earlier that you, as a physician, can identify and understand these obstacles, the easier it will be for you to plan around them and be intentional about leveraging your best asset: yourself. In this post, we’ll discuss some of these unique challenges and share practical solutions for overcoming them.
#1) Student Loans
The average med student who borrows to pay for their education now graduates with around $200,000 of student loans. While most Americans begin their working careers with a net worth close to $0, many physicians start in a financial hole, with a large debt burden they must get rid of before they can even begin the process of building wealth.
To overcome this, it’s important to be proactive in managing student loans. If going for public service loan forgiveness, make sure all the right boxes are being checked each year so forgiveness is ultimately received. If planning to pay back student loans, refinancing options should be evaluated to minimize the interest rate being paid on the debt. Waiting a few extra years to make lifestyle upgrades, such as a new car or a bigger house, can also be helpful if it means being able to pay off student loans over a shorter period of time.
#2) Delayed Start to Saving and Investing
By the time most physicians finish training, many of their peers in other professions have already been earning (and saving and investing) for close to a decade. Considering the traditional retirement age in the U.S. is 65, this means approximately one-fourth of physicians’ earning years have been forfeited, compared to the average American. This is a tough hurdle to overcome, especially during the early part of a doctor’s career when trying to establish a financial foundation and start building wealth.
This delayed start to saving and investing makes it even more important to make the right financial decisions early on. It’s crucial to save enough income each year (somewhere in the 15-20% range is generally recommended). A great way to sustain this savings habit is to automatically deduct a certain amount with each paycheck received. And once the right amount is being saved, the impact should be maximized by allocating it to the correct accounts. For example, contributions should be made to tax-advantaged accounts (IRAs and employer retirement plans) before being made to taxable accounts.
#3) Asset Protection
Unfortunately, lawsuits are an ever-present risk for physicians. And while the likelihood of getting sued varies depending on the specialty, this is an area where physicians face much more risk than the average person. The risk also extends beyond the professional realm into personal liability. Since there is a societal image of physicians being “rich,” doctors are often targeted for personal liability lawsuits.
Fortunately, several things can be done to mitigate this threat. On the professional side, physicians should have adequate malpractice insurance, as well as a plan for tail coverage, in the event of an employer change. On the personal side, assets should be properly titled to offer the maximal protection from lawsuits. This could involve titling assets in a non-physician spouse’s name or taking advantage of joint titling like “Tenancy by the Entirety” for the home. Physicians can also use legal structures, such as certain types of trusts, to provide additional protection. Additionally, personal liability umbrella insurance provides affordable protection, while avoiding liability-prone possessions (pools, trampolines, etc.) can reduce the likelihood of a lawsuit materializing in the first place.
#4) Busy Schedules and Physician Burnout
While finding adequate time to meet life’s many demands can be difficult for anyone, it’s even more of a challenge for physicians. With a 60-hour average work week, the typical physician works 50% more than the average American. In addition to leaving little time for managing finances, doctors’ long hours and stressful work contributes to an abnormally high burnout rate. This can lead to physicians pursuing early financial independence or retirement, which further compresses the timeline for accumulating wealth.
Although everyone has the same number of hours in a day, it’s possible to effectively “buy” more free time by delegating certain responsibilities. This applies to household tasks, such as mowing the lawn or cleaning the house, as well as to professional activities, such as hiring a CPA to prepare taxes or a financial advisor to help manage personal finances.
In order to pursue early financial independence as a way to fight physician burnout, the best solution is to simply accelerate the rate of wealth accumulation. This typically requires a combination of higher savings rates and efforts to increase earnings. Financial management is about tradeoffs, and a physician who wants to pursue early financial independence will likely have to live a more modest lifestyle than colleagues who are planning to work until the traditional retirement age.
#5) Unique Insurance Needs
The combination of a high income and a late start to saving and investing means that health-related issues can have a disproportionate impact on a physician’s overall financial well-being. This requires carrying higher amounts of insurance, especially life and disability, than the average person. The type of disability insurance required for physicians also tends to be nuanced. In many cases, employer-provided group coverage or general individual disability policies are inadequate. Therefore, it’s important for physicians to also consider an individual, own occupation, specialty-specific policy.
Above-average life insurance needs make it especially important to purchase cost-efficient coverage. For most physicians, this means buying “term” life insurance, which is relatively inexpensive and provides coverage for a fixed period of time. Unfortunately, other types of insurance, such as whole/variable life insurance, are much more profitable for the agents who sell them. As a result, physicians often feel pushed into buying unnecessary coverage. Insurance is for protection, not for investment. Permanent life insurance tends to provide expensive insurance coverage with mediocre investment returns.
The most cost-effective type of disability insurance depends on several factors, including gender and occupation. Therefore, it’s good to get price quotes from several different insurance companies. Using an independent agent who specializes in disability insurance for physicians increases the likelihood of being shown several options and ultimately paying the best price. By contrast, an agent who works for a specific insurance company naturally has an incentive to sell that company’s products, regardless of whether they are the best or cheapest in the market.
Physicians face many unique challenges in managing their personal finances. However, there are also several unique opportunities. The most powerful financial asset that physicians have working for them is a high income. It’s critical to maximize how hard that income works, by making the right financial decisions throughout their career. This requires understanding the nuances of financial life as a physician and incorporating these lessons into ongoing financial management. With the proper knowledge and proactive planning, you can overcome the financial challenges, while maximizing your opportunity to enjoy a life of financial security.
About MD Wealth Management: We are a financial planner near Ann Arbor that specializes in providing financial planning for physicians and retirees. We are CERTIFIED FINANCIAL PLANNER™ professionals and fiduciary financial advisors who operate on a fee-only basis, which means we do not sell financial products or collect commissions. We enjoy working with clients both locally and remotely.