Dealing with student loans is merely the beginning of the financial journey to becoming a doctor. As a doctor’s career progresses their income levels change over time, from completing their residency to transitioning through career stages and starting their own practice. This makes saving and retirement planning a challenge. However, by setting clear financial goals and developing good saving habits doctors can achieve financial stability while planning for the future.
Exactly how much should doctors save every year? In this article, we’ll explore the factors that influence this decision, drawing insights from real-life experiences shared by medical professionals.
Are You Saving Enough?
Common advice for how much a doctor should save per year is to allocate at least 20% of gross income while avoiding big financial purchases. However, many doctors aim for a higher percentage, often saving between 30% and 60% of their income, depending on their financial goals and personal expenses. For instance, one doctor reported saving 20% towards retirement and 20% towards student loans with the remaining income allocated to taxes and living expenses. Another doctor saved about 38% of their post-tax income which included contributions to student loans and equity in home/rental properties.
Pre Tax vs. Post-Tax Savings
Understanding the distinction between pretax and post-tax savings is important for effective financial planning. Pretax savings involve contributions to retirement accounts such as 401(k), 403(b) and pension plans which are typically made with pretax dollars. This strategy significantly reduces taxable income and maximizes retirement savings. For example, contributing to a 401(k) or pension plan means that savings are deducted from salary before taxes, lowering the immediate tax burden.
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On the other hand, post-tax savings are derived from net income after taxes. These can be invested in various accounts like Roth IRAs, taxable brokerage accounts or savings accounts. Contributions to a Roth IRA, for instance, are made post-tax but withdrawals during retirement are tax-free providing a future tax advantage. This dual approach creates a diversified tax strategy, balancing immediate tax benefits with long-term tax-free growth.
Investment Strategies
Diversification is a key investment strategy among doctors, with the goal of spreading risk and maximizing returns. Common investment vehicles include index funds, individual stocks, bonds, real estate and business ventures. Index funds are popular due to their low cost and broad market exposure, providing a simple yet effective way to achieve long-term growth. Some doctors invest in individual stocks or bonds to tailor their portfolios to specific risk tolerances and financial goals.
Another popular investment among doctors is real estate which provides additional income streams and potential appreciation. This includes owning rental properties or participating in real estate syndications. Additionally, some doctors invest in or own business ventures, such as franchises, to diversify their income sources and leverage their entrepreneurial skills.
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Retirement Goals
Setting clear retirement goals is essential for long-term financial planning. Many doctors target a retirement savings goal between $3 million and $5 million depending on their desired lifestyle and expenses during retirement. For example, one doctor with $1 million in savings already aimed for a $3 million nest egg to retire around age 55-58. Others have pursued FIRE (Financial Independence, Retire Early) strategies to retire even earlier with a substantial savings rate and diversified investments.
Considerations for Uncertainty in Healthcare
Healthcare employment can be unpredictable with changes in healthcare policies, high stress job demands and economic downturns (such as COVID), potentially impacting job stability for medical professionals. Given the uncertainties in the healthcare industry, financial flexibility and adequate insurance are crucial. Maintaining a robust emergency fund and keeping a portion of savings in liquid, easily accessible accounts provide a safety net for unexpected expenses. At the same time, proper insurance coverage, such as malpractice insurance, and asset protection strategies like LLCs or trusts, help safeguard assets against potential liabilities.
Getting On Track
In the end, how much a doctor should save each year or per month is a personal decision. It is, however, one that can be guided by financial planning services for physicians. These services can help doctors understand the average net worth by age for physicians, and set and achieve their savings goals, putting them on a path to financial security. By planning today, you can build a healthy financial future tomorrow.