Financial Planning for Medical Professionals

Residents, doctors and medical students are often the target of financial advisors, brokers and insurance agents because of their high earnings potential, which will most likely lead to significant investing. However, if you are in the medical profession, it's important for you to make your own informed decisions when it comes to your financial health rather than depending on a financial advisor, especially a non-fiduciary advisor, to tell you what to do with your money.

As a medical student, you probably have mountains of student loan debt, so when you actually have extra cash, you might be at a loss as to what to do with it. The following is a list of potential landing spots for your extra cash; which ones you choose depends on your personal circumstances. 

1. Emergency Savings

This one is pretty easy. It's important to have an emergency fund available to cover unexpected expenses without having to dip into your retirement plan or take on more debt. But before you can determine how much to save, you need to know how much you're spending on a monthly basis and where you can cut extra spending. Consider using a budgeting app like Mint or Mvelopes to track how much money you are spending and where it is going.

2. 401(k) or 403(b) Retirement Plan 

If you are a resident, then you very well may have a 401(k) or 403(b) plan available, but your student loan debt is waiting around the corner and it’s big. If your employer offers a contribution match of any kind, contribute enough to get the match. You can receive anywhere from a 3% to 5% pre-tax contribution from your employer, which means it grows tax deferred but is fully taxable when you take it out in retirement. Get the match, then move on.

3. High-Interest Debt

Student loan debt is scary enough. For 2017 the average medical school debt is $189,000 according to Student Loan Hero, and most residents think this  estimate is too low. If you have credit card debt or car loans on top of it, you need a game plan. The waterfall approach to paying off debt really does work. Start with the debt with the highest interest rate and pay it off first. Then add that monthly payment to the next highest interest rate and work your way down. This takes dedication and sacrifice of your wants and wishes, but the solid financial footing and peace of mind will be well worth it.

4. Health Savings Account

You’re young and healthy, and you rarely have healthcare expenses. So save money on a high deductible plan and open a health savings account (HSA). You don’t need to max out your annual contributions now, but pick a low-cost plan where you have the option of investing the money in your HSA. Your future self will thank you. When you’re around 50 years of age you’re going to want to consider a long-term care policy, and you can pay the premiums out of your HSA account and receive a current year tax deduction on your contributions. (For related reading, see: How to Use Your HSA for Retirement.)

5. Additional Retirement Savings or Payments on Lower Interest Loans

If you’re in medical school or residency, you’re probably still in a low tax bracket, so adding additional money to your 401(k) or 403(b) will not be of great benefit unless you have access to a Roth 401(k) or Roth 403(b). Paying extra on lower interest loans, like your student loans, is certainly a viable option, or consider investing in a Roth IRA.

When you are young, risk is your friend, and the prospect of tax-free compounding is too good to pass up. To qualify for a Roth IRA, you have to have earned income, and there are income limits. For 2017 taxes, if you are married filing jointly and your modified adjusted gross income (MAGI) is less than $199,000 but more than $189,000 then you can do a partial contribution. If your joint income is less than $189,000, you can each do the full $5,500 ($6,500 if over age 50). If you are single, head of household or married filing separately, the MAGI limit is $120,000, then a partial contribution is allowed up to $135,000.

If you are a resident and your spouse is not a high earner, you shouldn’t be hitting the income limits, which makes you eligible to contribute to a Roth IRA. Once you are working full-time, you likely will not be able to contribute to a Roth IRA because of your income. However, you will be able to do a backdoor Roth at that time. We'll discuss the specifics of a backdoor Roth in a later issue, but it’s important to note that you will not want to have any traditional IRAs when you do a backdoor Roth, which is another reason why the Roth IRA is recommended now instead of a traditional IRA. The last reason for the Roth IRA is you can access your contributions if you get in a pinch. Unlike a Roth conversion where you must wait at least five years before accessing your funds, in a Roth IRA you can take your contributions out at any time without penalty. (For related reading, see: The Pros and Cons of Creating a Backdoor Roth IRA.)

6. Taxable Accounts

The final bucket is a taxable account. If you have covered the last five options and still have cash left on hand, you’re doing great! Don’t mess it up. There are many, many advantages to building up a taxable investment account. If you are a participant in a 401(k) plan, you should be contributing as much as you can until you reach 15% of your income. Many young professionals are underfunding their retirement, and it will cause them a great deal of stress later in life.

If you are a well-paid physician, 15% of your income could very well be more than you are allowed to contribute annually to a 401(k) plan. In 2018, participants under age 50 can contribute $18,500 ($24,500 for those 50 and above). If you are making more than $123,000 a year, that 15% is maxing you out. This is when it becomes important to add taxable dollars to investment accounts to counter the retirement income you will be losing due to these limitations. In addition, the more income you earn, the less of an impact Social Security will have on income replacement. Low income earners use Social Security benefits to replace more than half of their income; workers earning more than $250,000 a year use Social Security benefits to replace 15% or less of their income. (For related reading, see: Not All Retirement Accounts Should Be Tax Deferred.)

You may also be tempted to start looking at private investments like hedge funds, private placements, privately held businesses, etc. There are good investments here, but there is also substantial risk.

Have a Plan and Stick to It

The most successful physician I know socked money away in his trust every year, invested it in the market through his advisor and never touched it. He will be able to retire comfortably because he kept his game plan simple and put his extra money in the right place at the right time. (For related reading, see: Saving for Retirement: The Quest for Success.)