Financial Planning for Doctors: Navigating a Sudden Pay Increase

By Michael Torney, CFP, J.D., LL.M.

Medical doctors, especially those starting out, face unique financial challenges.

They’ve spent years studying for exams and working long hours in residency while watching their former college classmates and friends take jobs and climb the career ladder. On top of that, the average medical school debt for 2021 graduates was $203,062, according to the Association of American Medical Colleges. And nearly one in five graduates has debt exceeding $300,000.

The good news is that this situation can change in a hurry. Once a doctor’s residency is completed, their annual salary can move quickly from $50,000-$70,000 to five or ten times that amount in just a few days. After years of sacrifice, many physicians want to begin spending and make up for lost time. But this is also an opportunity to set up a long-term wealth building plan.

Catch-Up Savings

A new doctor’s wealth is relatively low compared to others entering finance, technology and other high-income positions right out of college. Because they are accumulating debt, residents often can’t afford to save a considerable amount in their 20s. They miss out on years of returns generated from compound interest and now need to save more to build the same amount of wealth.

Establish a Long-Term Saving Plan

Your new income provides an opportunity to set up an automated wealth building plan while still living well. An automated savings plan provides the benefits of compounding returns, requiring fewer savings to accomplish the same net worth toward the end of your career.  

Taxes and Other Expenses

While your income may increase five-fold, it doesn’t mean your take home pay does. Every doctor needs to plan for the following expenses:

• Make sure to check out your state’s income tax rates – some are a flat rate and other states are a progressive rate system.  Federal taxes are also different for new attending physicians – a single tax filer may have paid a top marginal rate of 22% on an $80,000 income, but the same attending physician would jump into the 35% bracket on $300,000 of income
• Disability and Life Insurance.
• Tuition and other expenses for a child’s future college education.

Determine Your Goals and Save

Many people want a special place to live, whether it’s a large home or a second vacation home. If this is one of your goals, figure out the math on how to purchase the home and hit your savings goals.

For example, it may mean aggressively paying down debt for three years, building a down payment fund for the next three years and purchasing the home the year after. Along the way, you continue to make your retirement and education savings goals.

If you have questions about buying into a medical practice and want to discuss a strategy, our team can be reached at duffteam@monetagroup.com. We offer a free consultation to help discuss how we may be able to help accomplish a smooth purchase that is incorporated into your overall financial plan.

© 2022 Moneta Group Investment Advisors, LLC. All rights reserved. The information contained herein is for informational purposes only, is not intended to be comprehensive or exclusive, and is based on materials deemed reliable, but the accuracy of which has not been verified. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. Examples contained herein are for illustrative purposes only based on generic assumptions.  These materials do not take into consideration your personal circumstances, financial or otherwise. Past performance is not indicative of future returns. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision.

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