The punishing nature of shift work added to daunting student loan debt can make any emergency physician feel uncertain about their financial future. But with a little pre-planning, you can set yourself up for financial freedom.
I hear a lot of negative chatter among emergency physicians these days. It seems to grow worse every year. Here’s a sample:
“I have control over almost nothing in medicine”
“I’m sick of government regulations, electronic medical records, hospital committee meetings, and patient satisfaction scores”
“I constantly worry about lawsuits and paycuts”
“I’m burned out”
“I’m unfairly blamed for rising health care costs and not paying my ‘fair share’ in taxes”
“I wish I could work less or quit altogether if I had the financial means to do so”
What so many of these frustrations come down to is finances . . . specifically not making wise decisions about money. So many physicians don’t know where their financial future is heading, and don’t trust financial advisors to help them.
These frustrations – combined with large debt loads – lead many physicians to believe they just can’t get ahead financially. Are they doomed to simply work shifts into old age, cranking patients out month after month?
The answer is that by taking an honest look at your finances – and then taking control of them – you can achieve amazing financial milestones. You can pay off all of your debt. You might not have a butler, but you can live in a nice house. You can build up a decent sized retirement portfolio to sustain you for the rest of your life. You can have a good lifestyle while you are working and after you retire.
It starts with taking a good hard look at the realities of physician finances. We’ll walk through a few critical charts that explain the impact of wages and debt on long term wealth.
1. Debt Load
First let’s take a look at the total debt load and balances from your first year of residency through the end of your career (fig 1). During residency you have $200,000 in student loan debt which is deferred until you finish residency, and then as soon as you finish residency you buy a house so you’re in the hole for $700,000 in debt as you get your first real job. Not exactly a good situation and definitely puts pressure on you right from the get-go.
I believe this is one of the reasons why so many young physicians feel like they can’t get anywhere—they buy a house way too early and instead of buying a starter house they go for the 4,000 square foot behemoth.
You can only do three things with your income: pay taxes, save it, or spend it (fig 2). Assuming you save 15% of your gross annual income every year and pay 25% of your income in taxes, then here’s what you can expect to spend over your career:
Remember that your income is increasing a little bit every year.
You can spend almost $150,000 during the first year out of residency. Out of that some will go to the mortgage payment and student loans—probably about $4,000 per month or $50,000 per year—leaving you with almost $100,000 to spend on whatever you want. Remember that’s even after accounting for your retirement plan contribution of 15% of gross income. Things are looking a bit brighter now aren’t they?
3. A Better Picture
Let’s make it even better.
If you’re socking away 15% of your gross annual income—this should be easily achievable—and you get an average annual 7% rate of return, then this is what your portfolio value looks like from the day you enter residency until the day you retire (fig 3):
Notice in the first 4 years while you’re in residency you save nothing, but by saving 15% of your income annually when you start your first job, you can accumulate a whopping $5 million by the end of your career in your retirement portfolio. Now obviously $5 million thirty years from now is not worth as much as $5 million today because of inflation, but your purchasing power has almost certainly increased if inflation is less than 7% annually (the rate of return I assumed) Historically inflation has been about 3-4% annually.
4. Putting it all together
Now let’s put this all together and see what happens over your emergency medicine career. You should think of yourself almost like a company. You have assets (what you own) and you have liabilities (what you owe). The biggest assets you own are your house and your retirement portfolio. Your biggest liabilities are your student loans and your home mortgage. Building wealth means that you increase the value of your assets over time while simultaneously reducing liabilities. This is known as net worth and is a better measure of wealth accumulation than income or retirement portfolio values. For example you could make $500,000 in annual income but be mired in debt and not have much of a net worth. I know many physicians who fall into that camp.
For an emergency medicine physician, here’s how that looks over time (fig 4).
The blue line shows your net worth. It’s equity in yourself and it’s the number you should use to gauge your wealth.
You’ll notice a few interesting results:
If you went straight through college, then medical school, then residency, you have negative net worth until you are in your mid-30s. In other words you’re basically “worthless.” Many of your friends in other careers may have started making income at a younger age than you and might not have the added pressure of a six figure debt load.
Even though you start making decent income later than many people, if you’re patient and allow the compounding effects of saving, compounded returns, and debt reduction to work together, you can achieve a significant level of wealth. No, you still won’t be rich, but you won’t be eating 99 cent ramen noodles either.
While you’ve delayed gratification for a long time—around 10+ years—you can achieve a pretty good lifestyle as soon as you get out of residency as long as it’s not extreme.
The ultimate question is: Can emergency medicine physicians build wealth and have a comfortable lifestyle throughout their careers?
My vote: Yes.
Physician Case Study
- Your specific situation will differ, but this is a good starting place
- You go to a 4 year emergency residency program which started in 2011 and ends in 2015
- You made about $50,000 annual income during residency
- You graduate from residency at age 30, work full time for 30 years and retire at age 60
- You have $200,000 in student loan debt after graduating from residency at an interest rate of 7% and you start paying that off after residency over a 30 year period
- You make $250,000 in annual income right after residency and that income increases by 2% annually
- You buy a house as soon as you graduate from residency and get a home mortgage of $500,000 for 30 year term at 5% fixed rate
- The value of your home increases by 3% annually
- You save 15% of annual gross income into a pretax retirement account after residency but don’t save anything during residency
- You generate 7% annual rate of return on your retirement account
- You pay 25% of gross annual income in taxes after residency and 15% of gross annual income in taxes during residency