I’ve had the opportunity to work with both new physicians and physicians later in their careers to see how they think about finances and how certain decisions have panned out.
There are many ways to be financially successful, and success can still come for physicians after the costly decisions I describe below. But the fact that these decisions happen early in your career can have large, long-term impacts.
Here are a few of the decisions that I’ve seen that can end up being costly:
1. Buying Permanent Life Insurance
Had to throw this one in there, although I’m sure you’ve been bashed over the head over and over to avoid these policies (at least I hope, TBH). I’ve had my fair share of unwinding these policies for late and early docs, all with similar growth results: bad.
If you’re an early attending physician, your first priority is paying off debt and building a financial foundation, which typically takes at least a few years.
The ‘magical’ permanent insurance policy does none of that for you, and in fact just tacks on high fees and insurance costs.
On top of that, you’re already a little late to the saving game. You have plenty of time to catch up and a high income to do so, but because of the high fees in these policies, they typically do not “break even” until at least ten years from purchase. In other words, your fees are outperforming the growth in the policy for ten years.
The biggest factor for growth of your savings / investments is time, thanks to compound interest. Why would you purchase a policy that will take another 10 years to get back to the original investment AND THEN start growing? This is only a good deal for the one getting a commission (not you).
Oftentimes, these policies are pitched as a “super Roth’ - but I once sat in on a conference the IRS had on these policies (this is false, I’m being facetious) and here is how the discussion went:
IRS person 1: “Wow, Roth IRAs are super powerful. We can’t let just anybody use these because of how effective they are; otherwise people will never pay taxes again! Let's limit it to $6k per year per person, and ONLY IF they make less than a certain amount of income.”
IRS person 2: “Good call, those things are amazing. I have a brother-in-law who told me that a permanent life insurance policy operates the same as a Roth IRA; actually even better than one! Should we be doing the same limitations with those?”
IRS person 1: “Those things are trash. He doesn’t know a thing about taxes and if you ask him, he’ll tell you he can’t give tax advice. Because of how ineffective those policies are with avoiding taxes, we do not need to put any limits on the amount of contributions or the income of the individual.”
I’m being funny here, but if the permanent policy was such a good tax avoider, the IRS would be all over it. I have plenty of specific arguments against these policies, but this sums it up pretty well.
If you get pitched one of these and want an objective review; let me know!
2. Carrying Credit Card Debt
I know that many new attending physicians are not new to debt, and your debt can sometimes feel ‘fake’ due to the large balances.
This is not the case with credit cards - these have some serious interest rates which can add up fast.
I have no judgment over having credit card debt - sometimes you need to bridge a gap from graduation to starting your position, or maybe you’re moving to a new state and don’t have the cash available - a credit card may be the best solution.
The problem is carrying the debt, even as income starts coming in. The average credit card interest rate right now is about 18%, and I’ve even seen as high as 27%+.
Imagine you have $20k on your credit card; at an 18% interest rate you’re paying $300 in just interest (not on the $20k principal balance) in the first month, which turns into $305 the next month, until the full year interest results in over $3,900.
Imagine paying $3,900 to the bank on your credit card and finding you still owe them $20k! If you’re single, you can max out your HSA with this, but instead you’re giving it directly to the bank.
The high interest on credit cards leads this to be one of the top priorities to pay off.
3. Buying a House for a Short-Term Stay
I get it, you’re tired of throwing away money at rent, especially with pretty high rental prices right now.
But, jumping right into a house may not be the best move, especially if you’re not sure if you’ll be in the location over the long term.
Without talking through all the assumptions of property taxes, insurance, mortgage, maintenance, etc. vs. rents, we’ll skip that. That is not what I’m suggesting is the downside. If you have the cash flow and plan to stay there long term, I support a home purchase.
But the transaction fees of getting in and out of a house are what really makes a short-term stay unappealing.
Let's say you buy a $500k house, no down payment thanks to that physician mortgage loan. You’ll still need to pay closing costs, which we’ll say is 3%, or $15k. The house appreciates 10% to $550k over the couple years you live in it. To get out, you need to pay 6% closing costs, or $33k.
To summarize, achieving $50k in home appreciation ended up costing $48k in transaction fees; or a $2k gain. Was this worth the added dealings of buying and selling a house vs. renting? Maybe, maybe not.
A 10% growth rate on a home may sound low in the current times, but that isn’t far off from historical growth, and there is always the risk of home prices coming down - which would result in paying more than what you got out of it.
4. Not Taking Advantage of Retirement Accounts
Back to my first “decision” of getting a late start; you have a far better excuse than many others for not starting a retirement account before your 30s, but you still have plenty of time and a high income to quickly catch up.
An easy way is through setting up automatic contributions to your 401(k) or 403(b) through payroll deductions. You can max out one of these accounts at $20,500 in 2022 no matter when you started working. Just note that this contribution amount will have to be coordinated with any retirement contributions made during the year at other positions.
There is typically a decision of pre-tax or Roth contributions, but unfortunately that is too dependent on the individual to say what is best. I will say due to only a partial year of an attending salary, there may be a strong case to do Roth for the first year and switch to pre-tax when you receive a full-year salary. But, this could be bad advice depending on your student loan paydown strategy.
But let's say you're 31 years old during your first year of attending - you contribute $20,500 and your company puts in a $10k matching contribution for you. You’ll get a nice tax deduction for your contribution (and receive the company contribution tax-free) - if you invest that money and get an 8% return, by the time you’re 60 it’ll be worth around $285k. Not bad for one year of contributions; imagine what this looks like with the same contributions every year.
The reason it gets so high is because of time - more time for your contributions to make money, which then makes money on the made money (compound interest). Time is your friend, so the earlier you can start building those funds, the better.
Tack onto this a $6k back door Roth IRA, and now we're talking $36,500 total in retirement account contributions, which would be $340k at age 60; of which $55k would be available totally tax free.
5. Not Understanding Your Tax Situation
This is a little vague and I apologize for that. But, something to note is that your tax situation is unique in the first year of attending, and it will change during a full year of attending income. As I teased in the last paragraph, each individual situation is different and taxes can get complicated.
There are a few items I like to look at for clients:
Pre-tax vs. Roth retirement contributions as mentioned above, depending on your personal situation
Considering Roth conversions of any current pre-tax retirement accounts - the same considerations apply of taking advantage of a lower tax bracket, but being mindful of the student loan paydown strategy.
Tax withholding; unfortunately, payroll companies don’t always get this right, especially with high income. Additionally, if your company paid for moving costs, this will result in some extra tax. You want to account for any potential tax that will be due in April.
Finally, utilizing your company benefits for health savings accounts, dependent care expenses, and other items can move the needle on your taxes if you’re taking advantage of them year over year.
And I suggest avoiding the massive, generic tax prep companies. I know that is weird as I’ve worked at them, and there are some great tax pros there. But also there are some not so great pros…. And spending a little extra on a good tax professional can go a long way - especially one that understands your specific needs as a physician.
If you’re confident to DIY your taxes, I support it, but if you’re going to hire somebody, spend a little extra for somebody who understands your situation, and that will not only help you file your returns, but help you understand your taxes and plan for the future.
Mo’ money mo’ problems; not always, but finances can get complicated pretty quickly once your income gets a very healthy boost.
You may be eager to make up for lost time now that all your training is completed and you start feeling those phat paychecks.
And I’m not here to rain on any parade; I am in support of having an upgraded lifestyle; but that can be a slippery slope and oftentimes the earlier you get some of this stuff in place, the bigger the impact on your future finances.
A few modest sacrifices in your first year to take advantage of annual savings limits one extra year can have some positive long-term effects that make a strong case for doing so.
And, if you need help navigating this first year and beyond, I’ve done it quite a few times and hope to do it quite a few more.