Written by: Corey Janoff
As a doctor in the last year of residency or fellowship, you can see the light at the end of the tunnel! Now is the time to get your financial house teed up for success as you will soon morph into a new attending physician. This week we put together a short finance checklist of things to address in the last year of residency or fellowship to help you on your journey. Let’s get started!
1. Get an Attending Job
The first order of business in your last year of residency or fellowship is to graduate and get a job as an attending physician somewhere.
You have likely already determined if you plan to pursue a career in academic or clinical medicine. If non-academic, do you want to be employed by a hospital or join a private group? That likely depends somewhat on your specialty and where you want to work.
Polish up your CV, start interviewing, and get a contract signed. Before signing the contract, it’s wise to have someone who specializes in physician contract review take a look at the contract for anything to be aware of or possibly negotiate on.
2. Develop a Student Loan Repayment Plan
The big question with student loans is whether you are trying to pursue the PSLF program or plan to pay off your student loans the old-fashioned way.
If PSLF isn’t a viable option for you, there are other ways to get medical school loan forgiveness. Otherwise, once you become an attending, it could make sense to refinance your medical school loans to a lower interest rate so you can pay them off faster.
Regardless of which route you are pursuing, brace yourself for a higher loan repayment amount. If on one of the income-driven repayment plans for federal loans (IBR, PAYE, REPAYE), it may take a year of full attending income before the loan payment amount goes up. Be prepared for that increase, though, as it could be several thousand dollars per month!
3. Get Own-Occupation Disability Insurance
Your income is the linchpin to your entire financial world working properly. Without income, there is no paying down debt, buying a house, saving for retirement, eating, taking vacations, or anything else you want in life. So as long as you depend on income, it’s prudent to protect it as best as possible.
Underwriting is more lenient while you’re in residency/fellowship, and policy discounts are more prevalent. This makes it easier to secure and less expensive than if you wait until you are in practice.
If you have health issues and can’t medically qualify for disability insurance, there are some residency programs where you can purchase a guaranteed standard issue disability insurance policy without medical underwriting.
4. Get Term Life Insurance
While we’re on the insurance topic, you may as well look at life insurance too. If you have a spouse and children, life insurance is mandatory. If you are currently single but one day plan to have a spouse and children, use your age and health to your advantage and lock in an inexpensive term policy now.
Physician life insurance is no different than life insurance for the rest of the population. However, the ability to get it is contingent on health and age affects cost, so get it as a future planning tool even if you don’t need it today.
5. Hold on House Hunting
As tempting as it can be to start looking at houses once you have a contract lined up, please wait. Rather than looking at the new salary figure and asking yourself, “How much house can I afford?” hold on looking at the new house until you actually start working and are working in the new job for at least a few months.
I have seen scenarios where physicians think they have a job lined up, and then a month before their start date, the employer pulls the rug out from under them.
Countless times I have doctors start working at a new practice or hospital, quickly learning it is not what they expected, and they start looking for new opportunities.
I ran into a situation once where a doctor failed their boards and therefore was unable to join their planned employer.
Ideally, you plan to stay in that location for at least a handful of years before upgrading or moving on.
Selling a house shortly after purchasing it can be costly. (Related: Cost of Short Term Home Ownership).
6. Learn the Backdoor Roth IRA Rules
Your attending income level will likely put you above the income eligibility for direct contributions to a Roth IRA. Therefore, you will need to do the Backdoor Roth IRA in order to still get money into this account.
Since the academic calendar ends in June, there is a chance your attending income in the back half of the year will tip you over the limit.
Rather than blindly making a Roth IRA contribution in the year you graduate, calculate if your combined residency/attending income in that transition year will exceed the IRS threshold. Then, google it to find out the limit, as it adjusts annually.
Also, you can’t have any pre-tax IRA account if you are doing the Backdoor Roth IRA. So it could be worth rolling those into your 401k/403b account or converting those into a Roth IRA.
7. Possibly Convert Old Retirement Plans into a Roth IRA
As a resident or fellow, your last year presents a decent opportunity to convert old retirement plans into a Roth IRA. The reason for this is you’re in a relatively low-income tax bracket compared to where you will likely be during your attending years.
Converting old pre-tax retirement accounts requires you to claim the amount converted as income (and pay taxes on it, due the following April when taxes are due).
Depending on your circumstances, this could be a great opportunity to pay a little bit in tax now on some money that you will later be able to access tax-free in retirement.
If you’re starting your last year of residency/fellowship in 2021 and will complete it in 2022, converting these accounts before December 31st, 2021 would be ideal, as you’ll still be on your resident income for that tax year. However, converting in 2022 when you only work half the year (or less) at an attending income level could still be advantageous.
Obviously, you need to have the ability to pay the income taxes due on the conversion. Assuming that is the case, this is worth considering.
8. Map Out a Retirement Savings Plan
Now that you are about to begin your real career as a doctor, it’s time to start thinking about the end of that career!
Are you content going the smooth and steady route and retire in your 60’s?
Either way, you’ll need to start saving for retirement sooner rather than later. However, if you can start saving at least 20% of your gross income for retirement, that should put you on a decent track to be able to retire at a reasonable age.
If you want to retire sooner, save more. Simple as that.
Before mentally spending all of your future attending paycheck, carve out at least 20% of it to earmark for retirement.
9. Establish a Relationship with a Financial Advisor
If all of this seems overwhelming to do on your own, or you simply need someone to hold you accountable, a financial advisor specializing in financial planning for physicians can be of great service.
If you’re not already meeting with us at Finity Group, I encourage doctors to consider an independent financial advisor (or independent financial advising firm).
By being independent, their company doesn’t manufacture any products, nor are they affiliated with companies that do. This helps minimize conflicts of interest.
If you work with someone whose company has their own products, odds are, your advisor is recommending their own company’s stuff. Not that their products are necessarily bad, but you potentially could be getting more objective advice elsewhere.
You have a great opportunity to get the rest of your career and financial life on track during your final year of residency and fellowship. Take advantage of it!
If you can establish good habits early and get things in order, your future self will thank you.
This should not be construed as individual investment or tax advice. Consult with your tax professional to learn the tax implications for your particular circumstances. Qualified withdrawals from Roth IRAs can be made tax-free if the account owner is over the age of 59.5 and has held the account for at least five years.