Wednesday, September 07, 2022

(If you’re a physician reading this, the answer is most likely yes)

by Andrew Harms

Every so often, a multi-state lottery jackpot in the US becomes so enormous that casual conversations and nightly newscasts take up the topic of playing the lottery with great anticipation and fascination. This summer, the Mega Millions lottery doled out their second-largest prize to a fortunate ticket-purchaser in the Chicago suburbs after 29 consecutive draws without a jackpot winner. A nearly $1.3 billion dollar jackpot!

If there was ever a remedy for financial difficulties, certainly windfall lottery winnings would be the answer, right? On the contrary, researchers studying lottery winners conclude that while lump-sum payments reduce the probability of bankruptcy in the first two years after winning, this reduction is followed by statistically significant increases of similar magnitude three to five years after winning.^[1] Research scientist and economist Jay Zagorsky points to imprudent spending behaviors and poor savings and investment choices as culprits for financial woes despite winning millions.^[2] “The key lesson for everyone, whether you play or not, is that when you get a windfall or win the lottery, plan ahead and resist the all-too-human temptation to spend all the money,” notes Zagorsky.

What can the hard-working physician earning a salary take away from such findings? Perhaps most simply: it appears even good luck and millions can’t replace financial literacy, a good financial plan, and responsible money management in achieving healthy outcomes.

A recent study published in The American Surgeon takes a closer look at the fiscal situation of surgical residents in a paper titled “Medically Smart, Fiscally Illiterate: Lack of Financial Education Leads to Poor Retirement Savings Strategies in Surgical Trainees.”^[3] The authors introduce important findings about the need for addressing fiscal issues among physicians early in their training, concluding “surgery residents have a large debt burden, minimal retirement savings and an overall lack of understanding of savings strategies. Well-designed, early, and accessible educational interventions may improve the “financial vital signs” of surgical trainees and establish habits for long-term financial success.”

Regardless of medical specialty, what sorts of early interventions relating to personal finances can a physician pursue to avoid financial mistakes early-on in their careers, set themselves up for successful years ahead, and ultimately enjoy a stable financial picture in retirement?

Assessment and Diagnosis of your Financial Picture

Earlier this year, the AMA’s medical residency personal finance team outlined financial advice for residents in a series of blogs from Senior News Writer Brendan Murphy.^[4] We’ll highlight a few points we think are helpful in assessing where you may need to begin in formulating a financial plan. 

• Understand your income: The typical annual salary for a first-year resident is about $58,000, according to the Association of American Medical Colleges. But that does not mean that you will have $4,833 each month to spend as you see fit.
• Create a budget: There is across-the-board consensus—from fellow residents who have had experience in living on a comparable salary to financial experts who have worked with young physicians—that it is critical to put together a realistic budget and to stick to it as best you can.
• Have a loan-repayment game plan: For those in federal loan repayment, the present climate—which has allowed for two-plus years of interest-free loan forbearance—has been beneficial. Setting a repayment strategy—whether that involves remaining in federal loan repayment after the forbearance period ends or refinancing—is paramount for shaping a young physician’s financial well-being going forward. 

Interventions in Personal Finance: The earlier the better when it comes to saving!

The findings from the recent “Medically Smart, Fiscally Illiterate” study suggest both a deficit in financial literacy and a lack of widely adopted solutions cause physicians challenges with respect to saving and investing, namely “despite these data establishing that there is indeed a problem, reports on sustainable solutions have been rare.” As we know well, our time demands and responsibilities as physicians leave us little or no room to become financial experts. Regardless, we must start somewhere if we desire financial well-being, and the earlier we start the better.

Following the creation of a budget, it's time to map out our goals and take some corrective actions where necessary. Once comfortable with their debt-repayment strategy and once reassured with an emergency fund in the event of the unforeseen, most physicians we talk to have goals which turn to saving and investing.

Although a wealth of information about saving and investing is available, we prefer to point our readers to resources focused on physician financial health. One important note we must point out: before jumping into the world of investing, be sure to understand well the investment vehicles you’re opting into and the tax consequences of each. And don’t hesitate to ask questions—you’re sure to have some, if not many!

For those investing during residency, our experienced friends serving nationwide physicians from Larson Financial Group point to two crucial steps every resident should take to protect their future income and reward themselves for their hard work:

• Start contributing today. We understand the financial constraints you’re up against during residency, but the benefits of saving just a small portion of your salary to a tax-deferred account can quickly add up, especially if you contribute enough to take advantage of your employer’s matching fund program. For example, if your hospital matches up to 5 percent of your salary, but you only contribute 3 percent, you leave thousands of dollars in free money on the table. Plus, because contributions are pre-tax, it hurts a bit less in the moment. You may also consider contributing to a tax-advantaged Roth IRA in addition to your 401(k) or 403(b), but contributions are capped at $6,000 each year.
• Make your move. Your income will be at its lowest during residency compared to any other time in your professional life moving forward if you remain in healthcare. That’s why we encourage residents to convert their tax-deferred account to a tax-advantaged account, such as a Roth IRA, upon graduation (or as early as you can) with both as low of income and as low of a balance as possible. When you retire, that money you earned in residency can be distributed tax-free, providing you with thousands more in retirement income. For instance, a graduate who converts $20,000 to a Roth IRA can potentially generate $5,000 more each year in income when they retire and benefit from $100,000 in tax savings. But before you do convert, it’s best to speak with a financial advisor to avoid any possible tax repercussions.^[5]

In lieu of winning the Mega Millions jackpot (odds of a winning ticket are 1-in-302,575,350), we physicians must navigate a longer road to wealth requiring countless hours of medical training and years of providership. Though as we indicated above, even a lucky lotto winner must formulate and implement a sound savings and investment strategy without overspending and blowing it all away. Nothing is a given on the road to financial success.

If you’re struggling with diagnosing or treating your “financial vital signs” (to steal a phrase coined by the authors of “Medically Smart, Fiscally Illiterate”) and/or looking for assistance with how best to save and invest, please feel free to reach out for guidance and support. As in medicine, early interventions when it comes to personal financial planning may save you some troubles in the near future and provide benefits to you throughout your years of practice and long into retirement.

^[1]Hankins, Scott and Hoekstra, Mark and Skiba, Paige Marta, The Ticket to Easy Street? The Financial Consequences of Winning the Lottery (March 26, 2010). Vanderbilt Law and Economics Research Paper No. 10-12.

^[2] https://theconversation.com/odds-are-1-5-billion-powerball-winner-will-end-up-bankrupt-52972

^[3] Medically Smart, Fiscally Illiterate: Lack of Financial Education Leads to Poor Retirement Savings Strategies in Surgical Trainees - PubMed (nih.gov)

^[4] https://www.ama-assn.org/medical-residents/medical-residency-personal-finance

^[5] Investing During Residency Options to Maximize Your Current Benefits and Future Retirement – Larson Financial