Over time, a physician has the ability to certainly create higher wealth, but disciplined savings is needed and the breakeven with those making more average incomes is a lot farther down the road in life than most people think.
I often hear and read that physicians are all “rich” and I think this is the general sentiment the American public shares.
After working with hundreds of physicians, I have found that this is simply not true. Many physicians certainly have the long-term capability of accumulating a high net worth through consistent and disciplined savings…but this takes time.
But to set the record straight, here are a few key financial variables that physicians face, that the majority of our country does not:
1. A large delay for the start of their earnings. If a physician finished undergraduate in 4 years, goes straight to medical school and then does the shortest residency available (3 years), the youngest a physician can be when they go into practice would be 29 (which is not the norm)—most people take time doing something else either between undergraduate studies and medical school and/or train in a residency/fellowship program that is 4+ years. Generally speaking, I believe that most others start working at age 18 or 22 which gives them about a 7-17 year head start on savings and more importantly compound interest.
2. Student loan burden takes away from higher net income. From a report in Bloomberg Business: “The median four-year cost to attend medical school—which includes outlays like living expenses and books—for the class of 2013 is $278,455 at private schools and $207,868 at public ones, according to the Association of American Medical Colleges, a nonprofit group of U.S. schools.” To pay just the public amount off over a career of 30 years at current interest rates of 6.8% from the Department of Education, a physician’s monthly payment would be $1,355 (which means you have to make roughly $2,250 per month gross assuming a combined state and federal income tax of 40%). This takes away your top $27,000 each year to pay back your student loan debt.
3. Taxes. Higher earnings mean higher taxes and usually less take-home pay. Every June, at the end of the traditional academic year, when residents and fellows complete their training, their income changes overnight from $50,000 per year of income as a trainee to 2-10x this (usually on the lower end of that multiplier, though). Although this is great, it also pushes their top dollars into a high bracket, which if you make more than the $230,500 mark, your top dollars are taxed at the 33% threshold (assuming married filing jointly and as of 2014) and the average state income tax mark for high earners is 6.98%. So those higher amounts of income earned to play catch-up on your finances are hit a lot more aggressively by the government than those who had it spread out.
4. Insurance costs are higher. Physicians generally do not get their insurance needs covered by their employer and need to pay their supplement disability, life insurance, and sometimes malpractice insurance out of pocket, which certainly dips into the bottom line.
Over time, a physician has the ability to certainly create higher wealth, but disciplined savings is needed and the breakeven with those making more average incomes is a lot farther down the road in life than most people think. This is a good cautionary tale for both physicians to realize that they need to live within their true means and for non-physicians to be careful about the judgment made about seeing large salary numbers and quick to react policies to reduce physician reimbursements.
Jon C. Ylinen is a Financial Advisor with North Star Resource Group and offers securities and investment advisory services through CRI Securities, LLC. and Securian Financial Services, Inc., Members FINRA/SIPC. CRI Securities, LLC. is affiliated with Securian Financial Services, Inc. and North Star Resource Group. North Star Resource Group is not affiliated with Securian Financial Services, Inc. but is independently owned and operated.
Please consult a financial professional for specific advice in relation to your individual circumstances. This should not be considered as tax, specific loan repayment for an individual or legal advice. This is not a recommendation of any strategy or product in particular. 1136604/DOFU 3-2015