Guide to Financial Wellness for the Academic Physician | White Coat Investor

[Editor’s Note: Today’s guest post was submitted by Jonathan Rogg, MD, MBA. Dr. Rogg is the Vice-Chair of Strategy and Operations and an Associate Professor of Emergency Medicine at McGovern Medical School. He regularly lectures to medical students, residents, and attending physicians on financial wellness and physician leadership. In addition to his medical training, Dr. Rogg earned an undergraduate degree in management/finance from the Sloan School at MIT and an MBA from Harvard. We have no financial relationship.]

Some physicians (and other high-income professionals) find that in addition to clinical practice, teaching is part of a fulfilling career. While there are a number of rewards for working in academics (such as mentoring young minds, developing new research, etc.), maximizing income is not one. Generally, academic physicians earn significantly less than their community peers. However, working for a university or non-profit hospital can provide some financial advantages that a smart academic clinician can use to functionally close the pay-gap. 

This is meant as a guide for academic physicians. However, there are a few caveats. 

1. Academic medicine has different employment models; therefore, some of the benefits described may not be applicable to all teaching physicians.
2. Community physicians, and in particular, employed physicians, may have some of these benefits available to them and can use this guide as well.
3. All of the information in this article can be found elsewhere, but this is designed to be an easy-to-use guide for the academic physician.

The article addresses these topics:

1. 403(b) 
2. 457
3. PSLF
4. Health insurance
5. FMLA
6. Dependent care FSA/Childcare
7. CME

403(b)

A 403(b) is the government/non-profit equivalent of a 401k and is the most commonly available retirement option for academic physicians. The first and simplest step in meeting future financial goals is to maximize retirement matching. Fortunately, academic employers tend to have favorable match percentages. This is “free” money, so why not do it?

There is even an additional surprise benefit that may be possible for academic clinicians. Some organizations and state institutions use a mandatory match. In most cases, if this happens, you can still make a voluntary retirement contribution up to the pre-tax contribution limit of $57,000 (in 2020). 

For example, a physician who makes $250k per year with an 8% match can put $20,000 mandatory contribution + $20,000 matching + $17,000 voluntary contribution in a 403b. Keep in mind there is also a voluntary contribution limit ($19,500 in 2020).

It is also worth noting that many governmental organizations also give the option of a defined benefits plan, which is rarely seen in private industry these days. Each program is different, but often these are most beneficial if you think you will be near retirement age when you leave that institution. This is because the pension in the defined benefit is often based on years of service and your salary when you leave.

If you leave the institution at 40 years old, you usually have to wait 25 years to collect your defined benefit, which is not indexed with inflation. However, if you join one of these institutions at 60 years old, you can collect your benefit immediately upon retiring at 65 as long as you meet all other requirements for vesting. Generally, you have to decide if you want to take the defined contribution or defined benefits program. It is worth taking the time to do the math and see which is best for you.

457

A deferred compensation program is another great advantage for employees of non-profits and governmental organizations. This allows you to contribute money pre-tax ignoring your current tax rate and then receive the money in retirement at your future tax rate. 457’s backed by the government are generally considered to be safe. 

Let’s look at an example.

Imagine a physician who earns $200k per year with a marginal 32% tax rate. In retirement, he would expect his tax rate to be 24% ($100k in yearly retirement earnings). Now assume a retirement growth rate of 7% and capital gains tax rate of 15%.

After the physician has maxed out his 403b, he could invest $19,500 in a taxable account or the $19,500 (2020 contribution limit) in a 457. After 30 years, the value of the taxable account minus initial marginal taxes and future capital gains taxes is $1,198,864.25. The value of the 457 minus future taxes at the marginal tax rate is $1,497,902. So, an investment in the 457 is worth significantly more than the taxable account. Combine this with a maximized 403b and you could put away $57k +$19.5k=$76.5K per year.

While a backdoor Roth is not unique for academic physicians, adding a married couple’s contribution of $12k ($6k each) would let an academic MD put away $88.5k in retirement every year. Given the relatively lower salaries in academics, a prudent physician may be able to meet retirement savings goals entirely with tax-advantaged retirement accounts. 

Public Service Loan Forgiveness (PSLF)

One big perk for academic physicians is that they usually qualify for PSLF (public service loan forgiveness). This has been written on extensively in the past, but ultimately this is a great option if you know you will make 10 years of repayment while working in a qualifying organization. A higher debt burden and longer training makes this more valuable. If you have $200k in medical school debt eligible for PSLF at a 6% interest rate and you stay in training for 5 years before making an attending salary, you would save approximately $26,645 in payments over a 5-year time period which is over $133k. 

Family and Medical Leave Act (FMLA)

This is another perk of being an employed physician which is often available to some community and many academic physicians. While FMLA is only sometimes paid, many academic programs allow employees to build up sick time to turn FMLA into paid time off. Governmental employees often receive generous sick time accrual.

Imagine an academic physician at the beginning of their career making $250K. If that doctor takes two 12-week periods off in 5 years for the birth of 2 children, the value of that time off is 24/52*$250k= $115K. Even amortized over 5 years, that is equal to a salary increase of $20k per year.  Usually, all other benefits, such as health insurance and matching, are still paid during this time.

Health Insurance/Health Savings Accounts

Many large universities and medical centers self-insure and offer free or low-cost health insurance to employees. This is a benefit offered to many community employed physicians but can be valuable when compared with options for solo practitioners or independent contractors. Often these health plans are not considered high deductible, which will affect your ability to use an HSA; however it does provide high value to some physicians. Plans may offer discounts for families where the employer will pay a portion of a family member’s premiums. If you or your family think there may be impending high health costs due to chronic conditions, or you have a large family, then these plans can provide thousands of dollars in savings. 

As mentioned above, many academic clinicians do not have access to HSA’s because the deductibles are too low to qualify. However, many offer the less useful FSA which still allows tax-advantaged spending for healthcare costs. Similar to health insurance, the most useful way to get the tax advantage is if you expect large healthcare costs, such as the birth of a child. These are nice to have but do not provide anywhere close to the triple-tax advantage of the HSAs.

Dependent Care FSA/Childcare

Academic institutions sometimes offer surprisingly good benefits for childcare when compared with other employers.

First, the dependent care FSA can be a useful way to pay for childcare (or even elder care) pre-tax. Because the FSA limit is usually much less than the cost of childcare, putting money in the FSA can be an easy way to save (your marginal tax rate* $5000) without having to worry about not spending all of it.

Second, an often-overlooked benefit is that many university-affiliated institutions and some private hospitals offer nearby childcare. University-affiliated facilities often have longer hours than private daycares and can be significantly cheaper. This can lead to huge savings, especially if you plan on having multiple children. Plus, they tend to be conveniently located near your work.

Third, some large employers offer emergency backup childcare at subsidized rates. You might pay only $5 or $6 per hour for an in-home babysitter if you need to be at work and can’t find other options. If having a new caregiver in your house isn’t ideal for you, these benefits often let you also pay a nominal fee to put your child in a pre-screened daycare for a set number of days per year. 

Continuing Medical Education (CME)

Since education is one of the primary goals of academia, CME allowances are often a part of benefits packages at teaching institutions. Asking for additional CME when starting as new faculty is a great idea. However, academic job negotiation strategy is a topic for another post.

CME is usually worth a few thousand dollars in money you might otherwise spend on board exam preparation or fees. Plus, it can be used to travel to exciting destinations and maybe learn a little bit in the process. While CME is not usually a make or break item when taking an academic job, it can make a position a little bit sweeter. 

Conclusion

Academic physicians, like most doctors, do not choose medicine for the money. Although nearly all physicians are high-income earners, physicians who teach make significantly less than peers in their respective specialties. This means that in order to reach the same retirement goals, they must work a bit harder and smarter. Wise academic clinicians maximize the benefits uniquely available to them as part of their strategy for financial wellness.