One question I am asked quite frequently by young physicians in residency is, "where do I start? Would you recommend buying a disability policy, even though we are strapped for cash right now? How important is it that I make payments on my student loans right now?” These are all very good questions, and the correct answers are debatable and may vary from person to person, but I happen to love a good debate, so here is my take on what should be done and what order it should be done in.
1. Purchase a good disability insurance policy. There are a ton of reasons to buy a disability policy, some of which were outlined in this previous article. Although all the reasons listed in the article are valid, the first reason makes the strongest argument to buy disability first. The biggest advantage residents have on their side is a lifetime of good earnings potential, and that could easily be ruined by losing a hand, foot, or even just losing a thumb. A serious injury would prevent a surgeon from being able to operate again. Without a good disability policy that lifetime of earnings is in jeopardized.
I believe disability insurance is even more important for residents with a large balance of student loans. If you are unable to perform your job as a doctor, who is going to pay for your student loans? If you are disabled and unable to perform your duties as a physician but not permanently disabled, you are still on the hook for the student loans.
2. Purchase a term insurance policy. This is really only necessary for married residents, and especially residents that have kids. I could share horror stories of individuals in their 20s dying of a car accident or cancer, but being in the medical field you are probably already aware of the possibilities. Adequate term insurance would probably cost a resident between $10-$60 a month.
3. Make applicable decisions on student loans. For most residents, this will involve starting to make payments. This is vital for residents that think they may qualify for Public Service Loan Forgiveness (PSLF). I did a series recently on how qualifying for PSLF could impact young doctors, and the amount of forgiveness could add up to hundreds of thousands of dollars.
Another reason to make payments is for the interest savings that the income based payments provide. REPAYE offers significant savings on student loan interest while your income is low.
If you are sure that you will not qualify for PSLF, then you may want to refinance your student loans while in residency, which could potentially provide thousands of dollars of savings per year.
4. Fund your 401k or 403b if you get matching. This is number 3 instead of 4 for one reason - it is awfully hard to get an immediate return of 50% or better on your money. Many hospitals will offer a program that matches dollar for dollar or possibly a 50% match up to a 6% (or higher) contribution. In other words, if you have access to free money, take it!
5. Build your emergency fund. This was really hard for me to put so low on the list, and a solid case could be made for it to come a little sooner, but I believe the first three points are a higher priority. An emergency fund is important to have for a couple of reasons, but I believe the biggest is peace of mind. If you have 3-6 months of income in a secure instrument that you have access to immediately, you will sleep better at night knowing that a car issue, furnace replacement, etc., is not going to put you in a serious bind.
6. Fund a Roth IRA. This one is pretty simple - it makes sense to pay income taxes at a 15% rate versus a 28-39.6% rate. Most residents are in the lowest tax bracket they will ever be in right now. Once you contribute to a Roth IRA, you never pay income taxes on that money again. So… it makes sense to pay taxes now at a 15% rate.
Most residents don't get past number 5 on the list, but if were to make it past number 5, here are a few other things to consider. A strong case could be made for number 6 to be higher on the list.
7. Fund an HSA.
8. Contribute the max to your 401k or 403b.
9. Fund your deferred comp plan.
These points could be debated, but I believe that they are in the correct order for the average resident's situation. One of the first things I do with my clients is sit down and develop their specific priority list. If you would like help with any of the above issues, you can contact me at email@example.com.
Brad Bobb, CFP® is the owner of Bobb Financial Inc, and an expert in retirement planning for federal employees.