Residency to Retirement: A Physician’s Guide

Whether starting out or selling out, providers have lots of questions about money. The experts have answers.
AUTHORS – Melanie Kilgore-Hill
Pro athletes aside, some of the biggest paychecks in America belong to physicians. According to the U.S. Department of Labor, primary care physicians earn approximately $240,000 annually, with specialists clearing more than $400,000. While the promise of six figures has spurred on many a struggling med student, learning to manage those numbers is critical to a provider’s long-term financial success.
Student Debt
First – the ugly. Physicians often enter the workforce with student loan debts in excess of $200,000. Marry your med school sweetheart, and chances are you’re paying a half million dollars to Sallie Mae.
Matthew Harrison, vice president of medical private banking at First Tennessee Bank, said school loan terms are typically 20 to 30 years with monthly payments similar to that of a house mortgage. Fortunately, loan forgiveness grants are sometimes offered through employment at specific research institutions.
“Depending on the specialty, physicians can train as long as 15 years,” said Harrison. “And they’re watching friends that may have started at similar salaries get into the workplace and work their way up, funding 401ks and starting families and their lives much earlier than they are.”
The Protection Phase
The early years during residency and those immediately following are considered the ‘Protection Phase’ said TMA Medical Banking Division Head and INSBANK First Vice President Blake Wilson. He and Daniel Burke, president of Burke Financial Group, LLC, collaborated to create a schedule of financial priorities for providers at various life stages. They said the Protection Phase typically includes 27- to 33-year-olds with high debt and low income.
“It’s important to remember that this time in their life isn’t about paying off loans or accumulating wealth, (but) rather making sure they’re maintaining an adequate emergency fund/cash reserve and locking in appropriate insurance coverage at a young age, especially if a spouse or children are depending on them,” Burke said.
While saving during residency is unlikely, residents should avoid accumulating additional debt by living on less. Establishing a budget and not over committing to high rent, mortgages and car payments also will build good habits. For residencies less than five years, Wilson and Burke urge physicians to consider renting over buying, which might not be beneficial in the residency tax bracket. Take advantage of any employer retirement matches, and consider a Roth IRA for excess savings while you in a lower tax bracket.
The Role of Financial Advisors
As residencies end, physicians are often married with families, living paycheck to paycheck and sometimes on credit to make ends meet. Along comes that first job, six figures, and a lifestyle that no longer includes Ramen noodles and PBJs.
Harrison said the absolute first step physicians must make is to acquire a banker and financial advisor accustomed to working with providers. “A common misconception is, ‘I don’t have enough money yet to start financial planning,’” Harrison said. “They don’t really think those first years affect the planning process much, but any time you invest systematically for retirement you’ll end up with a larger amount by starting sooner than later.” While there’s no magic number for retirement savings, Harrison said retirees usually maintain a consistent lifestyle living on 60-70 percent of their salaries.
Harrison said he’s seeing an industry shift toward paying off student loans in those first years post-residency and delaying big, pricey purchases. “This age group coming up now has lived through the recession, and they saw parents with stable incomes lose jobs or have to downsize,” Harrison said. “They’ve seen friends go to school and train for a position and come out with a master’s degree and not find a job. There’s a responsibility that comes with a good income, and the mindset of physicians today has changed from years ago.”
That often means before the nice house, car, or much needed vacation, physicians are reviewing risk management and life insurance policies. Since a provider’s greatest ability is working with his hands, a good disability policy also is a must.
Mortgage Loan Programs for Doctors
For many new physicians, buying a home quickly follows suit. For some, particularly in markets where rents are astronomically high, that might mean purchasing during residency. For others, the first big job could require relocating a family to a new city. Throw in the desire to live in a safe neighborhood close to a downtown medical center, and housing costs can be staggering. Many banks today offer special finance options – including zero percent down – available only to physicians.
“Clients are relieved to learn they can move into a new chapter of their lives in purchasing a home and not have to wait for 20 percent down,” said Stephanie Arcelay, mortgage loan officer and doctor loan specialist at SunTrust Mortgage. Their physician mortgage benefit is among the oldest of its kind in the nation, offering loans with zero percent down during internship, residency and fellowship to down payments of 5 or 10 percent post-training.
In 2015 Arcelay closed loans for more than 150 area MDs, DOs, DDS and DMDs. “They often expect to pay a higher rate because there’s no private mortgage insurance, and they want to know what the catch is,” Arcelay said. “It’s an amazing product, but there’s no catch.” SunTrust’s Doctor Loan Program includes 15 and 30 year fixed loans, as well as adjustable rate mortgages (ARMs), most popular among residents temporarily moving to a new city like Nashville.
“The Nashville market is very aggressive right now and consistently among the top rated areas to live,” Arcelay said. “You’ll have to pay to live somewhere; and right now with rates where they are, it’s cheaper to buy than rent, especially in popular areas.”
The Accumulation Phase
Burke and Wilson define the ages from 35 to 55 as the ‘Accumulation Phase,’ when the shift moves from financial survival to accumulation. They encourage docs to develop a student loan repayment strategy and begin maxing out their qualified retirement plan for immediate tax deduction.
“This time period is when financial planning takes on an important role in defining a projected retirement age so they know how to accomplish their long-term goals and under what timeframe,” Burke said. “If you are a practice owner, invest in your practice. Consider utilizing debt to add staff, locations, equipment and real estate in addition to a working capital line of credit for temporary cash flow needs. With each and all of these investment decisions, try to survey each opportunity’s return on investment.”
Wilson cautions providers to not take on more debt than what allows them to comfortably sleep at night and to carefully choose a banking partner that provides accessibility and understands their business.
“If you are a practice or other business and real estate investor, be sure to make proper transition plans,” Wilson warned. Life insurance-funded buy/sell agreements should be considered, and you should have regular evaluations to assess agreements every one to three years.
“If you have developed financial and investment skills, or if your entrepreneurial spirit is not quenched by being a W2 physician, consider diversified investments in businesses and real estate,” Wilson suggested. “Have skin in the game, be active, and stress-test for margin for potential economic recessions.” He added, “Investments in medical businesses and real estate may be of particular opportunity and expertise.”
Preservation/Distribution Phase
From age 60 up, providers are in the ‘Preservation/Distribution Phase.’ Kids are out of the house, their debt load is lower or nonexistent, and investments have grown substantially.
“Providers in this phase should begin heavily weighing their appropriate risk tolerance to ensure they properly mitigate against an economic downturn that could ravage their investment balance and retirement income,” Burke said. While estate planning should be done as early as the accumulation phase, it often gets delayed until the preservation/distribution phase. “Their focus often shifts from ‘How much can I accumulate?’ to ‘What kind of legacy will I leave, and will I outlive my savings in retirement?’”
Source: Nashville Medical News

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