By Casey Robinson, CFP®
Whether you are an entrepreneur, a corporate executive or a health care professional, there are likely similar stops along the growth path of the wealth continuum. Struggle and sacrifice in the early portion of the journey, followed by earnings growth and the new challenges of financial planning, and then a period of material success and evolving estate planning as one nears the end of the continuum. But for those in the health care field, there are some challenges unique to their industry. Chief among them are the commitment of time it takes to start earning the wages people associate with being a doctor, and the significant cost of the education it takes to get there.
People who wish to become doctors are often fueled by a desire to help others. As they advance in their careers, the assistance they will require to manage their finances will likely grow as well.
When an individual embarks on a medical career (for the sake of this article let’s say a doctor), they understand that it will require a lot of education and associated student loans. What they may not realize is what accumulating debt over eight years, first as an undergraduate, then in medical school, will look like when they are done. Student loan interest rates are high – around 7% right now, so when a student graduates from medical school they will likely have $200,000+ in debt to contend with in addition to the interest. At $200,000 and 7% interest, an individual making minimum payments for the life of the loan will pay an additional $74,000+ in interest. If their credit score is high enough and they meet the other requirements of their lending institution, they may be able to refinance, to somewhere around 5.5%. This would reduce that interest by about $20,000. At the same time, the doctor will begin seeking out his or her residency program. This of course has associated costs as well, in the form of travel, accommodations, meals, new attire, cabs and airfare and can run from $1,000 – $7,500 per interview trip. At this stage of the journey the financial challenge is cash flow management, and really, survival.
During residency you do earn a salary, but it’s not what you’d think, usually in the $40-50,000 range. And given the extreme hours a typical residency requires, up to 70 or 80 hours a week, this equates to an hourly wage of less than $10/hour. When you consider your student loans, rent, car expenses, food, cell phone and internet, you are likely to have very little left over. So, while many people outside the industry may assume that you’ve made it because “You’re a doctor!”, they probably have a misconception of the lifestyle a resident physician typically maintains. But even though you are still making sacrifices, perhaps driving an older car, renting rather than buying, and forgoing most of the luxuries your peers all seem to be enjoying, there are financial planning elements that you should be considering. First and foremost is disability insurance, particularly if you are married and have children. If the unforeseen happens and you are unable to work, your loans will still accrue interest and your income will be very difficult to replace. Another consideration at the beginning of the wealth continuum is retirement savings. The earlier you can begin contributing the more dividends it will pay in the long run. Putting money aside when things feel so tight may be challenging to do, but because of the extra years doctors spend in school, the number of years they can contribute to their retirement is reduced, so getting started as early as possible is essential.
When you have completed your residency and either begin a senior residency, fellowship, or begin your official career as a medical doctor (finally!) you will enter a new phase of your earning trajectory. Bringing home a six figure salary is great, but the unique challenge for doctors is that they still have eight years of debt which they have likely not made a dent in. At this point of the wealth continuum, things will begin to get more complex. As previously mentioned, the earning window for doctors is shorter, so decisions made early on have a significant impact. Every situation is different – attending state schools and living with your parents during residency will yield vastly different student loan debts than attending private universities out of state for all eight years. But certain aspects of financial planning will require attention at this point regardless. The first aspect to carefully evaluate is cash flow management. Witnessing your peers driving new cars, buying houses and taking great vacations as you toiled away in school and during your residency often results in a serious case of lifestyle creep. The desire to make up for lost time will be strong, but prudence can yield exponential results down the road. Central to your new spending plan should be attacking the principal of your loans, evaluating your disability and umbrella insurance needs, integrating your retirement contributions with your updated situation and if you have children, determining how you want to approach saving for their education.
Worth noting at this point is that, like your workweek during your residency, your hours are likely to continue to be long during this earning period as well. For this reason, as well as the fact that you studied medicine and not financial planning, retaining the services of a trusted financial advisor will probably make sense. It’s important to note that there is a huge marketplace of investment managers, Registered Investment Advisors (RIA), estate planners and financial advisors out there who may all market themselves in a similar manner. The key for you is to work with a fiduciary advisor, who is required to provide counsel that supports your goals and to always work on your behalf, unlike an advisor who is not an RIA and operates under the murkier restrictions of suitability. Ideally, you know someone who is currently working with an RIA that they trust, and who has experience working with clients like yourself. But if that is not the case you can conduct due diligence on your own, checking to see if there have been complaints filed with the SEC or FINRA. You can also ask a potential advisor to speak with current clients in similar situations to your own; any reputable advisor will be happy to provide references.
After you have been earning a substantial salary, or perhaps earning significant revenue from your own practice for some years, you will make your way towards the end of your wealth continuum. At this point, the stakes of making the wrong decisions are higher than ever before. Even with substantial assets accumulated, many doctors struggle with the concept of slowing down, or retiring as their sizeable paycheck suddenly stops, which typically takes some time to get used to.
Once the stress of making ends meet is supplanted, the focus tends to shift to the next generation. There are many aspects of estate planning to consider, from educating your heirs about your family’s assets and your vision for the family’s wealth, to tax planning that often involves the integration of various trusts and account types. The complexities can be daunting so it’s imperative that a trusted advisor who understands your entire financial picture can quarterback your team of legal, tax and investment professionals to ensure your wishes for your wealth are carried out faithfully.
At each point along the wealth continuum there are increasingly complex decisions to make. And like the road each health care professional traveled to get there, each path is unique, with its own opportunities and challenges. Just as patients seek a doctor that they trust and whose expertise they value, each doctor should find a financial advisor with the knowledge and experience who can simplify their life and help to achieve their goals.
Casey Robinson is a Wealth Counselor at Waldron Private Wealth, a boutique wealth management firm located just outside Pittsburgh, Pa. He focuses on simplifying the complexities of wealth for a select group of individuals, families and family offices. Casey has extensive experience assisting multi-generational families to develop comprehensive estate planning strategies, integrating trusts, tax planning and risk management to support their unique long-term goals.