The 3 Biggest Financial Mistakes New Doctors Make

family discussing disability insurance

A doctor’s transition from training to an attending physician position is typically accompanied by a salary increase of about 400%. While this income spike is a huge relief for physicians who have spent years living on a residency salary, it can also lead to some common financial planning pitfalls.

A typical salary for a resident averages around $65,000 a year, whereas the average salary for physicians across all specialties is about $300,000/year. Quadrupling one’s income overnight hardly sounds like a cause for financial problems, but new physicians have often reported difficulty in determining how to appropriately allocate their increased income according to their financial priorities.. As you increase your earning ability, it’s important to create a long-term wealth plan that helps you reach your goals and maintain your financial security throughout your career and retirement. 

In order to transition with confidence into your first attending position, avoid these common financial missteps:

Mistake #1: New doctors wait too long to purchase disability insurance.

While most medical residents and fellows have heard about the importance of disability insurance, it can still be tempting to wait until a few years into your medical career before purchasing such a big-ticket investment. However, delaying the purchase of an individual, own-occupation long-term disability insurance policy is a mistake for young physicians. 

Doctors is training have a unique opportunity to save on disability insurance premiums for the rest of their career. Most residents qualify for a 10-20% discount on own-occupation disability insurance that applies for the lifetime of the policy. Even if you’ve finished your training and missed the window to receive a residency discount, you can still lock-in low premium rates by purchasing a policy early in your career, as policyholders who are younger and healthier tend to be insured at lower costs. By purchasing a policy with a Future Increase Option Rider, young physicians maintain the option to increase coverage as their income increases, so they only pay for the coverage they can afford now. 

Another financial perk of purchasing disability insurance early: doctors are often eligible for lower premium rates before they pick a sub-specialty. A physician’s specialty is one of the many factors that determines the cost of their disability coverage. Insurance companies group specialties into different classes based on physical hazards of the role, the difficulty in resuming full occupational duties after a disability, and the average income of the specialty. Because of this, physicians may have to pay more for disability coverage after training in a sub-specialty. For example, a physician in training who is looking at internal medicine could likely purchase a disability policy at a lower rate before sub-specializing in oncology, which is a more expensive class to insure. 

If new doctors wait to invest in long-term disability insurance, they are virtually guaranteed to pay higher premiums for the rest of their career. But doctors aren’t only risking a price-hike on premiums by putting off the purchase of disability insurance: doctors without long-term disability coverage at any stage in their careers risk financial catastrophe in the event that they become too sick or injured to work. New doctors should seize the opportunity to purchase an own-occupation long term disability insurance policy at lower rates in order to establish a crucial financial safety net. 

Mistake #2: New doctors don’t negotiate their employment contracts.

Contract negotiations are a normal part of the hiring process for any physician, but many residents, fellows, and young doctors feel completely unprepared for this hurdle when applying for their first attending position. As a result, it’s all too common for new physicians to accept a boiler-plate employment contract without any professional review, negotiation, or revision. Unfortunately, this mistake leads many young doctors to accept insufficient compensation and unfavorable terms.

One of the most common issues with employment contracts is the structure of the compensation. Many contracts present a salary figure calculated using a “base plus bonus” formula. At first glance the salary seems generous, however upon closer inspection, the metrics required to earn the “bonus” are virtually impossible to achieve. In particular, contracts that tie compensation to high production and collections tend to disadvantage doctors who lack an established practice. 

There are many contract terms that are commonly negotiable in a physician’s employment offer, including salary, call hours, vacation time, bonuses, and non-compete clauses. Different employers will have different leeway to comprise on various terms, but it’s important to discuss your priorities and find room for compromise with a new employer. Most importantly, new physicians should research the standard compensation for their speciality in the area they are applying. Many young doctors jump at an initial job offer without thorough review because the initial salary seems so much higher than their salary as a resident, only to later learn they are earning substantially less than their peers.

It is perfectly normal and acceptable for doctors to negotiate their employment contracts, even for a first attending position. To prepare for a fair and competent contract negotiation, it is recommended that physicians use professional contract review services from an attorney and financial advisor. Physician-specific financial and legal professionals can advise you about the industry standards and norms for a contract, and quickly identify any problematic terms.

Accepting an unfavorable contract can set a young physician back financially before their first attending position even begins. Contract review services are a professional investment that can result in hundreds of thousands of dollars in compensation over the course of your employment and prepare you for a contract negotiation that is mutually beneficial for both you and your employer.

Mistake #3: New doctors neglect saving for retirement in order to pay off student loans faster.

The final common miscalculation the young doctors tend to commit is putting all of their extra money towards paying off student loans and waiting too long to save for retirement. It can be overwhelming for doctors to juggle the pressing obligations of bills and loan repayments as well as their future financial goals, like buying a home and starting a college fund. Often when physicians weigh these priorities, they end up putting retirement savings on the backburner to their financial detriment.

With the median student loan debt for new doctors hovering around $175,000, it’s understandable that physicians are tempted to put their sole financial focus on loan repayment. While it initially feels satisfying to see your student debt quickly shrinking, this single-minded focus is a hindrance to the long-term financial security of new doctors.

After completing medical school, residency and fellowships, a physician first begins earning a full income approximately fifteen years later than the general population. This professional timeline also delays doctors’ ability to save for retirement. By putting off retirement savings even longer for the sake of quicker loan repayments, physicians are merely trading one financial setback for another. As gratifying as it is to pay back student debt as soon as possible, that feeling can quickly pivot to discouragement and stress when doctors realize they are far behind in saving for retirement. 

It’s important to physicians to begin saving for retirement as soon as they start their first attending position so that their retirement investments have as much time as possible to accrue value and grow. Working with a financial advisors can help you develop a savings strategy that aggressively pays off your loans while still saving for retirement. 

Planning for Your Post-Training Salary Increase

Most of the common money mistakes that young doctors make are based on emotional reactions: it feels productive to pay off your student loans right away, or it feels like it’s too early to spend a lot of money on disability insurance. Fully understanding the long term consequences of early career financial decisions is often overlooked.

By working with a financial advisor, young doctors can create a strategic plan for their increase in income that helps them balance their short-term and long-term goals. Our advisors can present you with different savings strategies and show you how each one would play out differently over time. Rather than making important financial decisions based on how you’re feeling day-to-day, consulting one of our advisors can help you to take the long view of your financial future.  

While it’s true that most doctors earn relatively high salaries, a physician’s career path also comes with a unique set of financial challenges and setbacks. By avoiding a few common financial pitfalls, young doctors can start their career on the right foot and make up for lost earning years. If you are a resident, fellow, or new doctor, schedule a time to talk with a trusted financial advisors to create a financial plan that helps you pay off your loans, save for the future, and pursue your other financial goals. 

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