How To Plan An Exit Path In Less That 10 Years Right Out of Residency
Medical school is an expensive investment, you might come out with $300,000+/- of debt. Residency will pay somewhere in the $50-60,000 range per year. And when you start working as an attending you can expect an income of $160,000-800,000/yr. Let’s work with some examples and see how a medical student can develop a plan for financial solvency before they hit their 10 year career mark.
3 Years of Residency, NW of -$300,000
We will use Dr. Mo here… she just completed her medical school and has a net worth (NW) of -$300,000 and is about to choose a residency program. She has decided to go into Internal Medicine, there are programs that will pay $51,000/yr and some that will pay $62,000. For the most part the programs are similar but the cost of living in these places is different. The wise thing to do is to select the residency that ideally allows her to either not have a car or use a car very infrequently. Housing is also important so the program situated in a city with a lower cost of living is likely the better financial choice. She might even take into consideration a State that doesn’t have income taxes.
She gets a roommate and decides to keep her car. Tries to cook some quick meals at home and spends no more than $100/mo on entertainment. Her total monthly expenses comes out to $1,160.
Her gross income in her first year is $58,000 and her take-home after maxing out $18,000 in her 401(k) is approximately $35,000 which comes out to around $2,900/mo. She is left with $1,740 of disposable income ($2,900-$1,160=$1,740). She decides to spend this money to pay down some of her student loans which are currently accumulating interest at 5.5%. Her minimum payments are lower since her income is low. Over the next 3 years of residency she therefore will pay a total of $62,000 towards her student loans bringing the balance down to $271,812 after some of the money goes towards the accumulated interest.
Transitioning To An Attending, NW -$205,000
In her 3rd year she has the option of moonlighting and making about $100/hr which she can use towards further paying down student loans or affording herself a little nicer living arrangement. Let’s say she decided to get her own apartment without a roommate and spend a little more money on entertainment and buy some fancier groceries. Oh and her home internet price went up as well.
She is about to start her first year as an attending, she got a job offer from a medical group very close to where she lives. She also is in a relationship but her and her partner decide to keep their finances separate since her partner has $7,000 of student loans debt and is making $75,000 straight out of college (I know, how awesome is that!). Dr. Mo’s income at this new job as a hospitalist is just a touch under $180,000/yr. She continues to max out her 401(k) and is also going to do backdoor Roth IRA conversion.
This is what her finances look like just before starting her new attending job:
SL balance of $270,000
401(k) balance of $57,000
Savings Account of $8,000
5 Years Into Being An Attending, NW +$566,000
5 years into her career she is making a little over $200,000 and getting a Cash Balance Plan match of her income along with a traditional 401(k) which she contributes to herself. She gets a take home paycheck of $5,000 every 2 weeks after 401(k) deductions. In these 5 years she has contributed about $18,000/yr towards her 401(k), $2,500/mo towards her cash balance plan. She is still spending a touch under $2,000/mo on her living expenses and paying down her student loans much more aggressively with her minimum monthly payment now at $3,500. With this higher income and relatively low monthly expenses she has been able to set aside another $3,500/mo towards her savings account which she is investing in mutual funds. So let’s see where she is at as far as her personal balance sheet:
SL balance of $24,000
401(k) balance of $175,000
Savings Account of $249,000
Cash Balance Plan of $166,000
Final 5 Years of Employment, NW +$1,588,000
So, Dr. Mo has a net worth of $566,000 @ age 35. Now in her 5th year of high income employment she is getting regular salary increases and even took on some administration roles which bumps her salary up even more. She is able to pay off the student loans in 3 months. She then starts putting all her disposable income ($8,500) towards investments. She decides to hold off on buying a house because she is planning on travelling for a few years before ‘settling down’.
At year 10 and age 40 this is where Dr. Mo is at:
SL balance $0
401(k) balance $320,000
Saving balance $900,000
Cash Balance Plan at $368,000
Dr. Mo started out with $300,000 of student loans at age 26. She made a total gross of income of $2,374,000 over her working career and ended up with $1,588,000 by age 40. She can now resume working at her current job and drop down to part-time employment, or quit working all together. If she decided to not work at all she could have a passive income of $5,200/mo from her investments. This doesn’t mean that she would have to eat into her $1.6 million. This is the money that she can enjoy by investing that money in the stock market, in mutual funds, in bonds, real estate etc.
If Dr. Mo decided that she had enough of working at age 35 then she could switch to part-time or per diem employment and let her stash of $590,000 grow on its own. If she parks this money in regular savings account then it likely won’t grow to any sizable amount. However, if she invested it in the market she could expect a return of 3%-5% which would catapult her investment to $1,900,000 by age 65. She could accomplish this without adding a single dime to the $590,000. However, if she even added just $1,000/mo to her savings then she could enjoy a net worth of $2,650,000 by age 65.
What if she had $400,000 of student loans @ 7%.?
What if she decided to only work part-time right out of residency therefore making only $120,000/yr in order to travel or spend more time with family and friends?
What if she stopped working for 2 years to raise a child or take care of a parent? During this time she had to enter deferment/forbearance because of lack of income.
What if she wanted a really posh lifestyle therefore spending $5,000/mo on housing/eating out/traveling/cars etc.?