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Some retirees say, “You have to put off being young until you can retire.” With more than a decade spent between college, medical school and residency, many physicians can relate to the concept of delaying one’s youth until later on in life.
Between residency, training for a specialty and kickstarting a career, the path to becoming a doctor is long and certainly challenging, not to mention expensive. With these considerations in mind, it’s important for physicians to think carefully about what life will throw at them as they slowly work towards a lucrative retirement. How will you save? What does your debt look like? What are the challenges you will face along the way?
The answers to these questions may vary, but, one thing remains certain – physicians face unique challenges when navigating their careers and lives as they plan for post-career life.
Budgeting & Starting Your Emergency Fund
Before anything else, I encourage clients to think carefully about their budget. This is essential for new physicians as they balance their new income with current wants and needs, while simultaneously planning for their future.
Establishing a budget will help you feel “in control” because you’re taking ownership of your personal finances and removing the mystery of where your money is being spent. This will help you determine an appropriate emergency fund, typically three to six months’ worth of living expenses, that can support your needs, should you experience job loss.
If you experience a massive jump in income, resist the urge to match your lifestyle to this new income. Focus on putting the extra money towards your future goals. Many new physicians fall into the “HENRY” category – High Earner, Not Rich Yet. With proper planning, this high earning potential can be maximized over time to a lucrative retirement.
Dealing with Debt & Digging Out
Yes, physicians are well compensated, but student loan debt can be crippling and present daunting financial challenges no matter the income.
I often speak to doctors who mention their ongoing concerns with debt. They’ve reached their thirties before even collecting their first sizeable paycheck, and by the time it hits their bank account, they have a considerable student loan payment coming due. I encourage any client in this situation to take a close look at their student loan options. Consolidation is often a favorable choice. In a historically low interest rate environment, many borrowers find relief in consolidating and refinancing student loans into one, low-interest payment. Consolidation can also help you focus on paying down your debt while eliminating the clutter that comes along with multiple due dates on the calendar.
If it’s within your means, aggressively paying down student debt can drastically change your future outlook. Pay off higher rate loans first if refinancing is not in the cards. When you refinance your student loans, it’s important to continue paying the same amount you were paying before, while enjoying the benefits of a lower interest rate. This excess cash going toward principal will help you pay down the loans much faster.
Everyone has their own comfort levels with debt repayment, but it is important that you give it the attention it needs while aligning it with your long-term retirement goals.
Celebrating Personal Milestones
Starting a family starts to cross the minds of many young physicians once they finish their residency or specialty and have secured their first high paying position. This generally creates the need for a newer, larger home.
As high earners, physicians are likely to prequalify for a very high mortgage. Many lenders offer special programs for physicians that feature low to no down payments, no private mortgage insurance, and sometimes flexibility on credit history.
It’s crucial, when buying a home, that you continue to live within your means and not be tempted by a high prequalification amount. Think back to your budget and determine where this new monthly payment will fit in.
Investing Wisely
It is always important to contribute towards retirement. Take advantage of employer sponsored retirement plans and company match. These have countless benefits, including lowering your taxable income for the given year. This is the most effective way for high earners like physicians to lower their taxable income. If your employer has temporarily stopped matching contributions during COVID-19, stay the course with your self-funded contributions.
Do not let short-term market moves or media buzz influence your decision-making. Rebalance your investments on a regular basis to ensure you are within the parameters of your investment objective. Diversify your investments. Spread risk amongst different types of assets. Know your risk tolerance and make sure your current investments align properly.
Putting Protection in Place
Personal protection is the most overlooked item in a client’s financial plan outlook. Protect your human capital, just like you work tirelessly to protect your patients.
What if something happens to you? Disability insurance, term life insurance and medical malpractice insurance are prudent ways to protect your family and your assets. It’s too easy for something unexpected to occur, completely derailing your retirement strategy.
Having your personal finances organized positions you for long term success, bringing your delayed youth into clearer focus. It can also lead to professional opportunities in the future such as becoming part of a succession plan. Physicians who take a methodical approach to their own finances are often seen as having the perfect traits to take over a practice, which can lead to an earlier and more comfortable retirement – something to think about and look forward to.
John Knisley is a financial planner with Tompkins Financial Advisors, based in the Pittsford, NY office. He works with clients to identify their wealth management and financial planning needs, while collaborating with a team of financial professionals to deliver superior client service. John graduated from Cornell University with a degree in applied economics and management.
John can be reached at jknisley@tompkinsfinancial.com or 585-419-8368. 