Achieving financial wellness: A primer for early financial security for plastic surgery residents
Becoming a plastic surgeon involves a long journey marked by the increasing financial burden associated with the pursuit of medical education. Upon finishing medical school, most doctors have accrued a high amount of debt. The Association of American Medical Colleges reported that 73 percent of medical school graduates in 2019 had $200,000 or more in personal debt, and 18 percent owed more than $300,000. Because of the long duration of plastic surgery residency, trainees face unique financial challenges. Residents often must contend with salaries far below the average for others with professional degrees – and lower than other healthcare professionals such as registered nurses and advanced mid-level providers.
Worsening financial conditions contribute to the overall stress of residency, and studies have shown that financial stress contributes to burnout. Collier, et al., surveyed residents on financial stress and found that higher levels of debt were associated with increased levels of depressive symptoms. Although plastic surgeons can earn substantial income following their training, discretionary income is limited during residency, which puts them at risk for financial stress and burnout. Financial wellness can help alleviate life and work-related stressors. Fortunately, plastic surgery residents can achieve financial wellness while also preparing for life as an attending by developing the financial habits listed below.
PGY-1: Build a budget around your lifestyle
For many plastic surgery residents, PGY-1 is when you get your first paycheck as a physician. According to the 2020 Medscape Resident Salary and Debt Report, the average resident salary in 2020 is $63,400, which after-tax and other withholdings reduce to 75-80 percent, depending on geography. During your first year of residency, it's essential to set a budget to cover all expenses and, ideally, begin to save for the future without falling into further debt. Categorizing your housing costs, utilities, food, transportation, debt repayment and savings will reveal your fixed expenses. The remaining amount is referred to as discretionary income and is used to cover your variable living expenses. There are many online resources and mobile applications that can be used to track your monthly expenses and categorize them, and even provide recommendations for areas to reduce cost and increase savings.
PGY-2: Managing your student loans
As a PGY-2 resident, you need to address your outstanding student loans. The Public Service Loan Forgiveness (PSLF) program was established in 2007, and debtors who work for government organizations, 501(c)(3) organizations or non-profit organizations can enroll in an income-driven repayment plan. The PSLF program allows residents to make payments toward the 120 repayments needed to have their federal student loans forgiven.
Because plastic surgery residency is six years in addition to one year of possible Fellowship, only three to four years of repayment would be made as an attending. However, it's crucial to keep a record of all eligible payments made, so that no issues arise at the time of debt forgiveness. It's recommended that you annually submit the PSLF Employment Certification Form, thereby documenting your qualifying your payments.
Most student loans are not one large loan, but rather a collection of smaller loans through one or more lenders. Since the PSLF only applies to loans from the federal government, one strategic decision for residents who intend to remain in a non-profit setting is consolidating their loans into a single federal loan. Despite the higher interest rate federal loans tend to carry compared to private loans, federal loans allow you to remain eligible for PSLF.
PGY-3: Planning for your retirement
Although you're only halfway through your residency, PGY-3 is an excellent year to start planning for your retirement. In some plastic surgery programs, residents can participate in their employer's pretax workplace retirement plan (401K or 403B). These plans, which are sponsored by the employer, usually have mutual fund investment options, and your hospital's human resources department will have institution-specific information about that.
As a result of these plans being pretax, you can invest dollars that haven't yet been reduced by taxes. For example, if $100 from your bi-weekly salary of $1,600 is withheld from your paycheck and invested in your retirement plan, income tax is only paid on $1,500. So even if your retirement plan grows at the same return rate as a non-qualified account, you will have invested a higher amount – since taxes were not deducted. Over the course of your career, this can result in a much higher investment account balance.
Upon leaving your employer, these pretax retirement plans can be rolled-over into your new workplace plan or consolidated into an IRA. Understanding your options and the tax implications that go along with them will optimize your long-term financial growth.
PGY-4: Taking advantage of limited income
By the time you become a PGY-4 resident, you're likely familiar with delayed gratification – and Roth IRAs embody that principle. A Roth IRA is an individual retirement account that allows you to accumulate tax-deferred investments. But unlike other retirement accounts, a Roth IRA allows for tax-free withdrawals after the age of 59.5. In addition, Roth IRAs are versatile, allowing you to choose between stocks, bonds, mutual funds, exchange-traded funds, real estate, certificates of deposit, promissory notes and more.
The limitation of this account type is that Congress has limited who can contribute to a Roth IRA based upon income. In 2020, the maximum allowed yearly income is $124,000 if filing single, and $206,000 if filing jointly. Therefore, residency is likely the only time a plastic surgeon can take advantage of the Roth IRA. In addition, the maximum contribution allowed per year is $6,000. Assuming a 6 percent internal rate of return, the account's value at the end of a six-year residency program would be approximately $41,000. After 30 years, even without additional deposits, it would have grown to nearly $136,000, all of which is tax-free. The Roth IRA is a great way to get started with good investing habits and with little to no maintenance.
PGY-5: Expecting the unexpected
For many plastic surgery residents, PGY-5 is a year marked by planning for your next job – a process that includes Fellowship applications, interviews and the costs associated with all of these. Your savings, which primarily has been your emergency fund until now, will likely now double as your Fellowship fund.
An emergency account protects you if something should happen to your main income stream. This account ensures that expenses can be paid on time, thus avoiding any negative credit report marks and further debt. As a rule of thumb, you should have at least three to six months of expenses saved in your emergency fund. At this point in your training, Fellowship interviews will require travel and accommodations including, but not limited to, flights, ground transportation, hotels and food. All are deemed necessary for your career development; this is an excellent use of your emergency account, as it allows you to invest in your future.
PGY-6: Insuring your future
As a plastic surgery resident, your most valuable assets are your education and future income potential. By reaching your final year of residency, you've invested in your education and postponed the accruement of wealth. Although your future is bright, any negative impact on your health (e.g., disease, physical or mental disability) can jeopardize your assets. Investing in a disability insurance policy protects your investments.
Group and personally owned disability insurance policies are designed to replace your earned income with a monthly benefit in the event of your becoming disabled for longer than 90 days. Group insurance is often offered through your employer, and although it may be less expensive, it's typically more limited in coverage. Obtaining a personal disability insurance policy as a resident might give you access to better overall policy.
Completing a policy as a resident will result in a lower premium, as the rates are directly based on your age, health and specialty. At a minimum, residents should consider a base policy that includes a future purchase-option rider. This allows you to increase your coverage by providing proof of income without any additional testing, and owning this policy earlier in life will protect you against unforeseeable health problems that could increase your rates.
Residency is often the last opportunity for you to obtain a disability insurance policy both at a group discount rate and with "starting professional" guidelines, where you may be eligible for enhanced coverage based on your anticipated income. After this "starting professional" period ends, your coverage eligibility is based solely on your income at that moment in time. As for the group rates: Many medical facilities offer their employees discounted premiums on personally owned disability insurance policies. These group rates are usually tiered, and you could benefit from a significant discount by applying for insurance while you're an employee of a large facility. Where an emergency account protects against a temporary loss of steady income, disability insurance protects your most valuable assets: your surgical education and your anticipated future income.
After successfully completing your plastic surgery residency, you're finally an attending. By implementing good financial habits as a resident, you've maximized your resources and set yourself up for a successful future as a plastic surgeon.
Mr. Pelletier is a wealth management advisor at Barnum Financial Group.