How to handle an increasing income as a physician

June 18, 2015

Increasing your income is great, but make a future plan for that added money rather than just spending more right away

It may sound funny, but there are problems in dealing with an increased income as a physician. Giving thought in advance and making a plan for this makes sound financial sense.

The most common scenario for dealing with a higher income is progression in a career. My first suggestion is to save most of your raise. You will still feel like you are richer as you will be able to spend more money, as well as save more. But, you won't get used to spending most of the increased income, which will make accumulating a sufficient retirement portfolio that much easier.

I see many physicians make a mistake by spending their increased income in the first years out of training. If you get used to spending most of a six-figure income it will be painful to cut back later if savings are inadequate, or if fee compression drops your income.

If instead, you spent only a smaller part of your increased income, you'd be just as happy with more income and much more secure with more savings.

Other considerations when experiencing a higher income include paying more taxes. As your income increases, you become subject to both higher marginal brackets for both state and federal income taxes, but also lose a great number of deductions. The transition from residency to practice can possibly result in a double to triple increase in your marginal tax bracket (say 15 percent to an effective 40 percent, plus). Working with your financial adviser is important to find ways to capture deductions and defer taxes, especially with pretax contributions to a retirement plan.

Related:Balancing disposable income and savings as a physician

As you and your family get used to a higher income, you have more to preserve in the case of illness or untimely death. You will want and need a higher level of both life insurance and disability insurance.

You will also need to consider how your increasing assets will be distributed after death, so financial estate planning needs to be considered carefully.

Asset protection becomes ever more important as your income and savings accumulate. You need good advice on this complex topic. As a higher-income family, you are more of a target for litigation. You should have adequate insurance for this as well, as asset protection measures for your savings.

We have worked with many young families that have been fortunate in earning a new higher income. There is a great deal of planning that will pay off well, if done carefully and is well thought-out.