While I was on my mission trip to Ethiopia, I had some time to play around with spreadsheets. I decided I would model veterinarians’ retirement prospects if they had a bunch of student debt and assess the biggest retirement savings mistake veterinarians make (I had a lot of time on my hands).
While it’s obvious that today’s massively high cost of a DVM burdens today’s veterinarians like never before, it’s actually worse than I thought. Many vets are not saving nearly enough for retirement, and their student loans are to blame.
Why the Typical New College Grad Has Such a Head Start Over the Veterinarian
Think of a college grad who takes a job at a Fortune 500 company. They might start off between $40,000 to $60,000 per year. They might have only $30,000 of student debt, and they get a 401k match and start saving for retirement right away.
This bachelor’s degree holder, let’s call him Tom, gets to watch his investments start compounding at 22 instead of 26 or 27, when most veterinarians enter the paid working world. To add insult to injury, a veterinarian, let’s call her Marie, must then figure out how to deal with six figures of student loan debt.
What I know from working with hundreds of veterinarians with student debt is that this debt could anywhere between $50,000 to $500,000 depending on how much help you get from parents and spouses. A typical number for veterinary school debt is $250,000.
On top of starting out with a bunch of debt, the veterinarian was in school earning $0 while her counterpart in the private sector was probably earning only slightly less than what she’ll make when she graduates. That’s especially true if she works as an associate in a saturated market for veterinary services.
Most Veterinarians Have to Confront the Student Loan Tax Bomb
Another challenge young doctors of veterinary medicine face is the large tax bomb from student loan forgiveness. While it’s one of the most common strategies for managing student loan debt, it’s not the perfect solution.
After 20 years of making payments of 10% of your income on the PAYE program, your student debt can be forgiven.
Of course, then you owe taxes on the forgiven balance. That could easily result in a $200,000 to $300,000 tax liability. That’s something that Tom the corporate drone doesn’t have to worry about.
Veterinarian Retirement Planning Financial Challenges
We know that burnout is a big problem in the vet world. Mental health is also a topic that gets a lot of discussion due to the tragically high suicide rate in the veterinary profession.
I believe these issues are symptoms of the intense pressures veterinarians face. Here’s only a few of them:
- Late start making an income compared to peers
- Inability to treat patients because of limited owner willingness to spend money
- Veterinary incomes that are often only 20%-30% higher than what their non-graduate school peers earn
In this climate, you have a ton of stress. We all have habits when we’re stressed and many of them cause us to do things we would rather not.
For example, when I have latent stress in my life, I waste time playing video games. My dad eats to release stress. Maybe you shop online or order takeout.
One common thing that I’ve seen is that veterinarians, like other professionals who are forced to delay gratification, often buy big ticket items like houses and cars that are at the limit of what they can get approved for.
Perhaps this is yet another stress relief from the things veterinarians go through. I don’t know.
What I do know with veterinarian retirement planning is that unless you’re saving a significant percent of your income, your default plan is to work into your 70s.
Marie the Veterinarian Who Saves a Lot and Still Might Not Have Enough for Retirement
From our earlier example, let’s use Marie the 26-year-old recent grad as an illustration.
She makes $70,000 a year as an associate at VCA and plans to stay there for most of her career.
Let’s assume that she chooses the PAYE program since she owes $250,000 of student debt. She gets 3% raises. I’m assuming an inflation rate of 2% and an investment return of 5%. Marie saves 20% of her pay for retirement. That is a combination of her contribution and her employer match.
At year 20, she has her loans forgiven and must pay close to $200,000 in taxes since her loans have grown to almost $450,000. Her net worth takes a big leap as her debt stops weighing down her net worth.
Assuming a 40-year career, Marie would have about $2.7 million at age 66. That sounds fantastic, except that you must adjust that for inflation because the prices of what Marie wants to buy in retirement are also higher (ask your grandparents what the price of gas was when they learned to drive).
In today’s dollars, Marie would have about $1.28 million to spend in retirement. That amounts to roughly $50,000 in income that she could count on from her portfolio.
Is $50,000 a year enough to retire on? Perhaps if you have frugal tastes and a paid off house. However, it’s probably not nearly enough if Marie lived in a high cost of living area like the Northeast or the Pacific coast.
Marie Saving 10% vs 30% of Her Income
If we adjust Marie’s savings rate upwards, we see that she now has significant options for when work is optional. She now hits close to $50,000 in retirement income potential (the final column on the right) after 30 years of working. She would only be 56. That’s significantly younger than when most people retire.
If she wanted the cushy lifestyle of taking Viking River Cruises in Europe and hanging out at all-inclusive resorts, she could wait a bit and retire in her 60s.
If she saved 10% though, all bets are off if she could retire securely. This is a very common amount of money for a “responsible veterinarian” to save. Think about how many employees only contribute up to the employer match for example.
If Marie only saves 10% of her income, then she would only be able to generate about $25,000 of retirement income at age 66.
Unless she plans on moving to a mobile home park in South Florida, she’s going to have to work into her 70s at least and hope Social Security is still around.
The Awesome Synergy with Retirement and Student Loans
Veterinarians who’ve hired me for a student loan consult know that they can put $18,500 into their 401k and get a break on their student loan payments.
The math above suggests that maxing out your 401k as a veterinarian is extremely important if you want to have the financial flexibility to control your own work life.
To avoid the biggest retirement savings mistake veterinarians make, I would suggest that a veterinarian with a lot of student debt needs to target at least 25% of their pre-tax salary for 401k and taxable brokerage account savings. If you’re putting money away for the student loan tax bomb, you can always put away more in that account and pretend it’s for retirement since you’re limited in how much will fit in the 401k.
Since most veterinarians are saving way less than that, I’d suggest that veterinarians’ collectively low savings rate for retirement needs to be drastically increased. Otherwise, you’ll be depending on the big corporate vet practices for employment for much too long.