Improving Financial Literacy in Medical Professionals
As physicians, we often have tunnel vision within our specialty that we forget at times to educate ourselves about other essential topics. One gap of knowledge within physician education is financial literacy.
Physician income is within the top earners in the U.S. However, based on a recent InCrowd survey, over 30% of physicians between the age of 50-75 do not have a net worth of over a million dollars and 20% note their retirement plan is not on track with their expectations. With such high income, how is it possible that we must work just as long (if not longer) than lower-income professionals to retire?
Of course— student loans, opportunity cost, and delayed gratification play major roles in decreased wealth; however, a few changes in behavioral finance can decrease the age of retirement for medical professionals.
- Maximize 401k/403b match. Most employers will match their employee’s 401k/403b contribution up to a maximum. Simply, this is part of your overall compensation package, and by not utilizing it, you are leaving money on the table (and essentially a guaranteed return of your investment!). If an employee chooses to contribute above the match maximum to reach financial independence earlier, the IRS dictates maximum employee contribution of $19,500 per year ($26,000 for individuals 50+ years old) and total contribution (employee + employer) contribution of $58,000 per year in 2021. Investing in low-cost, highly diversified funds like the Vanguard Total Stock Index Fund or SP500 allows individuals to hedge their investments without relying on a single company to have long-term viability and success.
- Pay off high-interest (7+%) debt before contributing beyond the 401k/403b employee max match. As discussed earlier, an employer contribution match is a guaranteed rate of return of investment; in contrast, an investment beyond the employer match depends on the volatility of the market, and the rate of return may be less than the interest accrued on high-interest debt.
- Utilize IRA contributions. There are two Individual Retirement Account (IRA) options: Traditional IRA (pre-tax) and Roth IRA (post-tax) contributions. Both accounts grow tax-free; however, withdrawals from a Traditional IRA are taxable while withdrawals from a Roth IRA are tax-free since the initial Roth contribution was post-tax. In general, it’s beneficial to contribute to a Roth IRA during low income-earning years and contribute to a Traditional IRA during high income-earning years to maximize lowering an individual’s taxable income. The maximum individual contribution towards either IRA is $6,000 (or $7,000 for individuals 50+ years old) for 2021. The maximum income to contribute directly to Roth IRA is $140,000 (single) or $208,000 (married) for 2021.
Of course, these are not all-inclusive, and financial strategies vary based on individual situations; however, education is essential. Great resources include White Coat Investor, Physician on FIRE, and Financial Residency which are specific for medical professionals. If you lack the time and energy to organize a financial plan by yourself, hiring a fiduciary (as opposed to a financial advisor) is a great alternative.