Many of the physicians planning on PSLF that I speak with tell me some version of the following: “If PSLF doesn’t end up working out, I’m gonna be screwed.” I want to replace that sentence with these words: “If PSLF ends up happening, my family will be rich compared to just financially secure.”
Society will certainly attack “wealthy doctors” like you who benefit from this government program. Therefore, it’s irrational not to take advantage of it. I’ve written in the past how PSLF for doctors and other with professional degrees is basically one of the best gambles in history if you qualify.
You probably don’t care that I’m telling you that it’s a fantastic bet mathematically. You might care about the 10% to 20% chance in my estimation that it doesn’t work out.
If you’re worried, there’s a way to hedge your risk. You have the freedom to retire in your 50s regardless of what happens with this important student loan program.
Why Most Physicians Fail to Save for Retirement During Residency
When you went through residency, you probably didn’t have time to think about retiring decades into the future. You were more concerned with learning what you needed to and surviving your crazy long work hours.
Even if you did think about your future 60-year-old self in residency, you probably did not have the money to spare for much of anything until you received your first attending paycheck.
I think it’s fair to assume that most residents and fellows save little to nothing for retirement unless they’re moonlighting. Even if you did put some money away, it was probably a maxed-out Roth IRA contribution of $5,500.
Employers are to blame for this too. Many hospitals are incredibly stingy with their matching contributions for retirement plans. My own wife’s hospital system does not chip in a dime until the doctor works there for two years, and she’s an attending.
With how competitive residency programs are these days, the hospitals certainly do not have an incentive offer much in the way of retirement benefits.
When Do Doctors Finally Start Investing?
When you finished training, you might have gotten a packet at orientation. This packet may have included all the details surrounding the hospital retirement plan. They’d match dollar for dollar up to the first 6% or something like that.
Most physicians will take advantage of this matching contribution, and you probably do too. Without an employer match, I’ve noticed a lot of doctors will just avoid putting much of anything into retirement.
That said, I still think it’s realistic that you’d finally be socking away money for the first time in your 403b or 401k (types of retirement plans) in your first couple years of attending life.
Unfortunately, the higher income that allows you to finally save also allows you to finally spend. Doctors are some of the most sought-after targets in the country.
Why Are There So Many Old Attending Doctors?
Once you finally get your first “real paycheck,” you deal with sales pitches from life insurance sales reps, realtors, car dealers, and more. You might even get pitched a student loan consult for your medical school debt. Although, that might even pay for itself unlike my other examples 😊
Here are a few of the typical sales techniques that might have been tried on you:
- Why buy a house that’s two times your income when you could buy your forever home in a great school district that you’ll live in forever?
- Why drive your beater from residency when you could afford a Lexus?
- Why not reward your family with the vacation home they’ve always wanted?
- You have such limited vacation time, let us schedule it all for you with an all-inclusive package for the whole family
These kinds of siren songs hit you hard after training, and you’ll probably respond to them in some form.
Because of the temptations brought on by an attending salary, most docs might save 10% of their income for retirement. For a lower earning professional who can expect more of their retirement expenses to come from Social Security, that might be ok.
However, for a doctor used to living a decent lifestyle, it’s nowhere near enough. Have you ever looked around the hospital and seen how many 60 and 70 something-year-old doctors are still practicing? Most of them aren’t there full time because they have a pure love of medicine.
How Much Can a Typical Physician Expect to Have in Retirement?
Younger physicians get hammered because they have huge student debt compared to past generations.
One way many MD’s avoid feeling the full impact from their student debt is through the PSLF program. It provides student loan forgiveness after 10 years of not for profit or government employment.
Let’s use Lily the Pediatric EM doctor as an example. Lily has $300,000 of student debt at a 7% interest rate. She works for an academic hospital in a rural area, and she expects to make $250,000 a year as an attending, adjusted upwards for inflation.
Lily plans to use Public Service Loan Forgiveness (PSLF )to have her debt forgiven. She plans to save 10% of her pre-tax pay for retirement. I’m assuming Lily earns 5% a year on her investments, and that inflation is 3%.
Note that after the 10th year, all her debt is forgiven and she experiences a big jump upwards in her net worth.
Notice in the column on the far right that I adjust Lily’s projected portfolio of investment savings to today’s dollar values because of inflation. If she started residency at 26, she would be able to live a lifestyle of about $47,000 in today’s dollars from her retirement account.
This is based on the 4% rule which states that you can live on 4% of your investment portfolio and expect it to last in retirement. You take 4% of her net worth in today’s dollars and that’s the income you could potentially live on.
To be fair, Lily might be able to benefit some from $20,000 to $30,000 per year in Social Security, but I think it’s important that you and I not count on that for our generation.
How Much Money Can You Earn as a Physician on Your Investments?
Many financial advisors tell me that doctors are some of the worst and best investors they know. The ones who stick with a passive, automated approach to investing tend to do well long term. They don’t try and pick stocks, they don’t follow trends, and you’d never catch them day trading.
Perhaps that kind of doc would do better on their investments than what I’m modeling. However, many doctors are like my friend’s dad, who is a cardiologist. He invests in the flavor of the moment. Tech stocks, bitcoin, social media, real estate, etc. Whatever is hot, he wants to put down money on it.
That’s a fantastic way to get below-market returns for the long term.
I think these projections of a 2% real return for the typical physician are accurate. They certainly are not optimistic and could be too low, but most physicians make so many mistakes that I don’t think I’m off by too much.
How Much Do You Need to Save Thanks to PSLF?
Most professions with big student debt do not have the luxury that physicians do. They do not receive PSLF and must plan on paying a tax penalty when the loans get forgiven. Alternatively, they have to pay back the debt on a lower income than what most attending docs make.
Because the government has shielded many physicians from the full impact of the student loan crisis, I’ve seen an alarming sense of complacency, and maybe you have too.
New attending docs still go to the car dealer after their first big bank deposit. No or low money down doctor mortgages are on fire right now, as banks can’t seem to make enough of them to go around.
If anything, you should find the monthly payment on your loans if they were on the Standard 10-year plan. That’s the same amount that you want to watch your assets grow by each month in order to not put your family at financial risk.
Here’s how it would work: you have $400,000 in debt, use PSLF, and find that it would take $4,200 a month to pay back your loans in 10 years.
Between paying off your mortgage, maxing your 403 / 401k and 457 accounts, and investing in Vanguard, you need to watch your assets increase by at least $4,200 every month to be allowed to feel safe about rolling the dice with PSLF.
After all, if it ends up working out and you benefit from it, great! You’ll have a ton of money left over. If not, then you’ll be totally screwed unless you have significant savings you could use to pay down the debt with a lump sum and refinance the rest.
The Minimum Savings Percent You Need to Retire By 50
This chart below assumes Lily our Pediatric EM doc saves 30% of her pre-tax income instead of 10% as before. That’s a super high savings rate and one the vast majority of physicians do not achieve until they get to their 50s and realize “oh crap I’m broke and need to save like crazy now.”
Looking at the income she could get in today’s dollars on the far-right column, Lily makes work optional as soon as she can replace her annual expenses by what she can safely pull out of her investment portfolio. That could be as soon as her early to mid-50s.
Physicians Who Refinance Need to Save Even More
Typically, physicians planning on PSLF pay about $100,000 to $150,000 toward their student loans over 10 years before the government would pay them off. Most private sector physicians earn more than their academic and government counterparts.
However, the total in principal plus interest paid could easily eclipse a few hundred thousand. We didn’t even talk about how much taxes will eat into your earnings and make it more difficult to save the more money you make. After all, lifestyle inflation happens to most people.
Since private practice physicians have to pay back so much more debt, it’s even more important to increase your savings rate.
Where Do You Start so You Don’t End Up as an Old Broke Doctor?
The first step is to get your retirement savings maxed out for both you and your spouse. If you are an attending and can’t do that, then you have a spending problem no matter how responsible your friends tell you that you are.
The good news is that you can always get yourself out of financial mistakes. I had a client last week who had an expensive Lexus lease and he’s getting out of it. Another bought a huge whole life insurance policy and is dumping that to shop for a term life policy instead like the one I’ve got at Haven Life.
Your retirement accounts include a 401k, 403b, and 457 if you have one. All should be maxed out on a pre-tax (not Roth) basis for physicians planning on PSLF.
After that, max out your Health Savings account. Next, put money into a taxable brokerage account at Vanguard in index funds.
If you’re putting away over $3,000 a month, you’re doing better than most doctors.
Just realize that PSLF distorts physicians’ salaries and is putting a lot of the medical profession to sleep. Physicians planning on PSLF are going on buying the fancy houses, fancy cars, and fancy vacations.
Physicians on the “save what we can” plan will be working into their 60s and 70s.
I’d prefer if you practiced medicine later in your life as a passion rather than a necessity. That means doctors with student loans should target at least a 30% savings rate. This should start the moment they get their first attending paycheck.
To save less it to plan to work for a long time.
Are you trying to navigate having a financially secure future while owing a bunch of student debt? We specialize in making custom plans so you can feel relaxed about your money. Just start saving so you can make it easier on us.