Finances for the soon to be residents...

[anes121508]

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Just want to say that I really enjoy reading this forum.

I'll try to keep it short and not long winded, but trying to get an idea of how to budget out the next four years considering many people on this forum predict major cuts in reimbursement.

Wife makes 60K, we've been living comfortably on that for the past two years. Not a problem. We're cheap and frugal. Crappy paid off hondas that still have more miles in them, no iPhones, Aldi's and buy by the bulk groceries, no kids, ect...

We have saved about 7k.

185K in debt, majority at 6.8%

Initial thought is to live off of her salary for the next four years, and use my entire salary to pay off loans. IS THAT THE BEST THING TO DO?

Should we invest any, while we still can, in a roth IRA or her retirement plan (still need to find out the details about it)?

How do I calculate the possible return 30 years down the road by maxing out a roth IRA over 4 years vs. paying that 10,000 towards student loans(5,000 per person max is that correct?)

Are there other places to put money that would pay off more in the long term that I'm not aware of?

I ask on this forum because I know people out there like blade seem to be fairly well read on finance and investment. Also, because you people will tell it straight without sugar coating it.

 

[lord_jeebus]

Paying your loans is pretty much equivalent to a guaranteed 6.8% investment, which can't be achieved in any sort of investment context. There is also a tax advantage to paying up to $2500 in student loan interest annually, which applies even if you take the standard deduction.

As for anticipated return in the long-term on investments (such as those in a Roth IRA), it's debatable. It is very likely that your tax rate in 30 years will be higher than that as a resident, which favors the Roth IRA. Many point to a historical return around 8% or even higher on stocks. If this were to continue, investing in stocks would be advantageous compared to that 6.8%. However, there is no certainty, and I wonder if the historical data is colored by the unique position of the United States in the world economy of the 20th century that may not continue for the next 30 years. Check out the 30 year return on the Nikkei 225, for instance.

Personally, I do a bit of both, but have been shifting towards more of the guaranteed 6.8% and less of the volatile investments. I used to max out my Roth IRA in addition to mandatory 403(b) contributions, but I didn't max it out last year or this year. There is no right answer, of course, just speculation.

 

[BobBarker]

I invest in my student loans. I would not put your entire salary into them. You deserve an increase in lifestyle. You need more savings first off no matter what.

 

[docrower]

Lord_jeebus is spot on with his/her analysis. You may also want to consider reading a book or two about personal finance that tackles these issues (another similar question is should I invest in the stock market vs. pay the mortgage down on my house). I highly recommend Larry Swedroe's "The Only Guide to a Winning Investment Strategy" (despite the corny title), it is an excellent read with a lot of studies to back up his key points.

 

[cchoukal]

1) Cash savings for emergencies. 3-6 months of living expenses.
1.5) max out whatever 401K equivalent that is available to you, particularly if there is a match. Pre-tax investments are an automatic 30% (or so, depending on your tax bracket) return.
2) Debt pay-off in the order of the highest interest rate debts first.
3) As your payoff strategy clears debts with interest rates of around 4-5%, you'll need to start thinking about whether investments will yield higher returns than debt payoffs. It is very tempting to invest in IRAs while you're still at an income level to do so. Obviously, if you and your wife remain under the cap for deducting student loan interest (around 120K if married, I think?), this deduction should factor into whether you continue to pay off low-interest rate loans vs investing.

 

[lord_jeebus]

Pre-tax investments are an automatic 30% (or so, depending on your tax bracket) return.

If 401(k) matching is not available, that automatic 30% is more of a loan than a return, as it's still taxed at the time you start taking distributions. What that tax rate will be in 30-40 years is anyone's guess.

I agree with everything else you said.

 

[gasblaster]

So, if the hospital doesn't offer any matching or contributions to the 403(b), would you try and max out the Roth IRA first?

 

[BrainDoctor]

So, if the hospital doesn't offer any matching or contributions to the 403(b), would you try and max out the Roth IRA first?

Are there any residency programs that offer a 403(b) match? I was an intern at one hospital, a resident at another and will soon be a fellow at a third, all of which do not offer matching. The rotten thing is that one of those hospitals would match everyone else in the institution from janitors to CEO, but not house staff.

 

[anes121508]

Thank you for the responses...

"Many point to a historical return around 8% or even higher on stocks. If this were to continue, investing in stocks would be advantageous compared to that 6.8%"

- This is exactly why I was confused about whether I should pay loans at a 6.8 rate vs. the potential 8-10% return on a roth IRA that many companies out there quotes as their average return. I guess the catch is the 6.8 loan is GUARANTEED vs roth could potentially lose money right? For those of you out there with roth IRA's how have they performed over the last five years? Are you getting 8-10%? what do you expect to see over the next 5 years?

"1) Cash savings for emergencies. 3-6 months of living expenses."

- in searching other finance threads this is what many other people have said too. That's why I added the 7K in savings part in my OP. Glad you mentioned the fact that savings should be around what it costs for 3-6 months of living expenses. How does my wife's job security play into that role? Is it basically a gamble to only put away 2 months before investing or just plain naive to think really bad things don't have happen to people?

"If 401(k) matching is not available, that automatic 30% is more of a loan than a return, as it's still taxed at the time you start taking distributions. What that tax rate will be in 30-40 years is anyone's guess."

- This is kind of like the difference between a roth IRA vs. traditional IRA right? roth IRA = taxed now, none later on a potentially larger sum vs. traditional IRA = escape the 30% tax bracket, pay whatever the future capital gains tax is....I would think the roth is the way to go at first right?

Docrower....thanks for the reading suggestion...i'll try to find that. Anybody else have reading suggestions?

cchoukal....thanks for the prioritizing list...really sorts things out in a simple way.

 

[anes121508]

two other questions....for those people out there planning on participating in the loan forgiveness program.....is that program a guarantee? I would be nervous just letting my loans pile up hoping the government keeps it's word.

also...I think it was Blade who made a comment in another thread along the lines of the government wants to dictate physician reimbursement rates so they probably ought to pay for our schooling or help out on our loans. I completely agree. They take over the loan programs, increase the rate to 6.8% as part of the deficit reduction act, then say the aren't going to pay us as much. Anyways...is there any new legislature in the works (in addition to the loan forgiveness program) that would help young physicians out with the enormous debt load in the face of decreasing salaries? Think that sort of thing would ever happen? Would stink if we rushed to pay back loans and then somewhere down the line the government decided to help out.

 

[BLADEMDA]

Best Advice ever on this forum regarding finances came from none other than Jet/Jpp when he eloquently said:

EVERYONE NEEDS AN F U ACCOUNT.

 

[kazuma]

two other questions....for those people out there planning on participating in the loan forgiveness program.....is that program a guarantee? I would be nervous just letting my loans pile up hoping the government keeps it's word.

also...I think it was Blade who made a comment in another thread along the lines of the government wants to dictate physician reimbursement rates so they probably ought to pay for our schooling or help out on our loans. I completely agree. They take over the loan programs, increase the rate to 6.8% as part of the deficit reduction act, then say the aren't going to pay us as much. Anyways...is there any new legislature in the works (in addition to the loan forgiveness program) that would help young physicians out with the enormous debt load in the face of decreasing salaries? Think that sort of thing would ever happen? Would stink if we rushed to pay back loans and then somewhere down the line the government decided to help out.

I wouldn't hold your breath, I'm definitely not counting on loan forgiveness being around. I'm in the process of setting up IBR because the gov will help pay some of the interest on my loans for 3 years. Then I plan on paying off all my loans asap. There is no way in hell the gov is going to forgive highly profitable/low default physician loans. I've read that there might even be a physician loop hole that that would prohibit physicians from participating in loan forgiveness.

 

[dbiddy808]

I disagree. Residency is not the time to be worrying about investing and saving. Pay your bills and live comfortably. If you have anything extra, take a nice vacation. When you graduate you will make 5-10x more money and can worry about investing. I graduated in 2008 and made $550K in my first year. I could have paid off my loans in my first year if I had wanted to.

Life is short and you could die tomorrow. We are lucky enough to be guaranteed a good income for the rest of our careers (regardless of how reimbursement changes), and a job that we love. Take a deep breath, look around you and realize that you are blessed and life is good. Enjoy being young and healthy and enjoy life. Don't stress over money.

 

[gasblaster]

I disagree. Residency is not the time to be worrying about investing and saving. Pay your bills and live comfortably. If you have anything extra, take a nice vacation. When you graduate you will make 5-10x more money and can worry about investing. I graduated in 2008 and made $550K in my first year. I could have paid off my loans in my first year if I had wanted to.

Life is short and you could die tomorrow. We are lucky enough to be guaranteed a good income for the rest of our careers (regardless of how reimbursement changes), and a job that we love. Take a deep breath, look around you and realize that you are blessed and life is good. Enjoy being young and healthy and enjoy life. Don't stress over money.

Wow I'd want to get into whatever group you're in.

 

[partydoc]

I disagree. Residency is not the time to be worrying about investing and saving. Pay your bills and live comfortably. If you have anything extra, take a nice vacation. When you graduate you will make 5-10x more money and can worry about investing. I graduated in 2008 and made $550K in my first year. I could have paid off my loans in my first year if I had wanted to.

Life is short and you could die tomorrow. We are lucky enough to be guaranteed a good income for the rest of our careers (regardless of how reimbursement changes), and a job that we love. Take a deep breath, look around you and realize that you are blessed and life is good. Enjoy being young and healthy and enjoy life. Don't stress over money.

I like the way you think.

 

[anbuitachi]

I disagree. Residency is not the time to be worrying about investing and saving. Pay your bills and live comfortably. If you have anything extra, take a nice vacation. When you graduate you will make 5-10x more money and can worry about investing. I graduated in 2008 and made $550K in my first year. I could have paid off my loans in my first year if I had wanted to.

Life is short and you could die tomorrow. We are lucky enough to be guaranteed a good income for the rest of our careers (regardless of how reimbursement changes), and a job that we love. Take a deep breath, look around you and realize that you are blessed and life is good. Enjoy being young and healthy and enjoy life. Don't stress over money.

WOW impressive

 

[anes121508]

I disagree. Residency is not the time to be worrying about investing and saving. Pay your bills and live comfortably. If you have anything extra, take a nice vacation. When you graduate you will make 5-10x more money and can worry about investing. I graduated in 2008 and made $550K in my first year. I could have paid off my loans in my first year if I had wanted to.

Life is short and you could die tomorrow. We are lucky enough to be guaranteed a good income for the rest of our careers (regardless of how reimbursement changes), and a job that we love. Take a deep breath, look around you and realize that you are blessed and life is good. Enjoy being young and healthy and enjoy life. Don't stress over money.

If I'm going to be making much less in the future, doesn't that mean paying back loans right now is even more important?

I really have no idea about new grad salaries, but something tells me I'm going to be seeing less than half of what you came out making in 2008. In my eyes, less debt load = more flexibility when accepting a job. I'd much rather take a job with people I like in a desirable area than be forced to move my wife somewhere she doesn't want to be just because we need the money.

 

[anes121508]

Originally Posted by dbiddy808
I disagree. Residency is not the time to be worrying about investing and saving....live comfortably


....many people have told me you're never too young to invest.

....I feel like we already live comfortably on 60K that she makes which is why I feel the need to be responsible and just pay back the loans.

I see your point though.....trying to save and live tight during residency can cause stress. It's temping to say that the savings during residency aren't worth the stress considering it's not much compared to what you'll make as an attending....I guess I'm like the guy hoarding stock piles of canned food in his basement because thinks the world is ending?

 

[dbiddy808]

Different strokes for different folks. If you feel compelled to pay off loans and that will help you sleep at night, then go for it. I'm just saying that the value of money changes as you make more. A thousand dollars is a lot of money when you are a resident, and its not when you are an attending.

 

[michigangirl]

Are there any residency programs that offer a 403(b) match? I was an intern at one hospital, a resident at another and will soon be a fellow at a third, all of which do not offer matching. The rotten thing is that one of those hospitals would match everyone else in the institution from janitors to CEO, but not house staff.

my program didn't do a match as a resident, but they did put like the equivalent of I believe 2% of our salary in the 403b regardless of what I put in. So seven years after I've finished residency 3 years worth of employer contributions is like 4000 bucks. Not bad.

 

[polar403]

If I'm going to be making much less in the future, doesn't that mean paying back loans right now is even more important?

I really have no idea about new grad salaries, but something tells me I'm going to be seeing less than half of what you came out making in 2008. In my eyes, less debt load = more flexibility when accepting a job. I'd much rather take a job with people I like in a desirable area than be forced to move my wife somewhere she doesn't want to be just because we need the money.

I figure, even with the possibility of two resident salaries, that any amount I use to pay off my loans isn't going to make much of a dent over 4 years in comparison to that little bit of extra money that could go a long way as a resident. My goal is to pay the accruing interest on the loans every year and then see what I want to do with the rest of the money I'm left with.

For $200k, it's about $13,600 a year. That equates to ~$1134 a month. That's approximately the third of a resident's salary after taxes. Off the top of my head, I believe you get up to $2500 of deductible interest every year paying off your school loans, which you'll get back the next year.

Don't forget to start putting away some money into savings. $1000 a month or so will add up very quickly and you'll never know when you'll need it.

 

[hb2998]

I figure, even with the possibility of two resident salaries, that any amount I use to pay off my loans isn't going to make much of a dent over 4 years in comparison to that little bit of extra money that could go a long way as a resident. My goal is to pay the accruing interest on the loans every year and then see what I want to do with the rest of the money I'm left with.

Let me make a suggestion that I seldom see made. I suggest you forfeit your deferment and start income based repayment (IBR) as soon as you finish medical school and receive your very first paycheck. That means you gotta apply for it 2-3 months before July, like now.

Why?

The first 6 months of your pgy1 year (ie. first year) you're only getting 6 paychecks, your total income (if single etc) is close to national poverty line (~$6000 more), therefore your monthly obligation based on IBR is close to ~$30 a month. These 6 months are important because you will never again make so little money. There are several advantages in doing IRB.

1) Federal government will continue to pay the remaining interest of your subsidized loans remaining after you make your contribution. They don't pay anything while you're in deferment. They will also match a LOT during this time, because your payments are low ~$30. In my case the interest on my subsidized loans are ~$380/month, so with this method for 6 months the government will pay $350 towards your loans.

2) Avoid capitalization of your interest: If you simply let your loans stay in "deferment" your loans will start to accumulate interest, and will capitalize once you pick a payment plan (or default to standard). If you start IBR 6 months earlier no interest will capitalize (in my case 6 months * $1,700 a month worth of interest alone that you could potentially pay interest on for another 25 years).

3) Based on the current proposed plan -- I know I'm going to get a lot of heat for this one.. theoretically, if politicians keep their word and hell did freeze over -- on some of these payment plans we are obligated to make only 120 payments (10 years worth). I'd rather make 6 additional payments at $30/month vs making it at $6,000/month.

Look I just saved you a couple grand. I didn't do this myself cuz I didn't know 🙁 (life would be much easier second time around), but no reason why you shouldn't be able to. You're doing them a favor by starting to repay your loans earlier 😉. These loan agencies are very hard to work with (Direct Loans particularly). I have horror stories maybe for another time.

 

[polar403]

The first 6 months of your pgy1 year (ie. first year) you're only getting 6 paychecks, your total income (if single etc) is close to national poverty line (~$6000 more), therefore your monthly obligation based on IBR is close to ~$30 a month. These 6 months are important because you will never again make so little money. There are several advantages in doing IRB.

1) Federal government will continue to pay the remaining interest of your subsidized loans remaining after you make your contribution. They don't pay anything while you're in deferment. They will also match a LOT during this time, because your payments are low ~$30. In my case the interest on my subsidized loans are ~$380/month, so with this method for 6 months the government will pay $350 towards your loans.

2) Avoid capitalization of your interest: If you simply let your loans stay in "deferment" your loans will start to accumulate interest, and will capitalize once you pick a payment plan (or default to standard). If you start IBR 6 months earlier no interest will capitalize (in my case 6 months * $1,700 a month worth of interest alone that you could potentially pay interest on for another 25.

Nice. Thanks for the tip! I didn't realize the government paid the remaining interest on the subsidized loans after the IBR payment. While only a small fraction of the total loans, it's basically free money for the first six months. Also a good tip to avoid capitalization.

I'll definitely look into it. Are there penalties or any downsides to paying more than the amount required?

 

[BLADEMDA]

Let me make a suggestion that I seldom see made. I suggest you forfeit your deferment and start income based repayment (IBR) as soon as you finish medical school and receive your very first paycheck. That means you gotta apply for it 2-3 months before July, like now.

Why?

The first 6 months of your pgy1 year (ie. first year) you're only getting 6 paychecks, your total income (if single etc) is close to national poverty line (~$6000 more), therefore your monthly obligation based on IBR is close to ~$30 a month. These 6 months are important because you will never again make so little money. There are several advantages in doing IRB.

1) Federal government will continue to pay the remaining interest of your subsidized loans remaining after you make your contribution. They don't pay anything while you're in deferment. They will also match a LOT during this time, because your payments are low ~$30. In my case the interest on my subsidized loans are ~$380/month, so with this method for 6 months the government will pay $350 towards your loans.

2) Avoid capitalization of your interest: If you simply let your loans stay in "deferment" your loans will start to accumulate interest, and will capitalize once you pick a payment plan (or default to standard). If you start IBR 6 months earlier no interest will capitalize (in my case 6 months * $1,700 a month worth of interest alone that you could potentially pay interest on for another 25 years).

3) Based on the current proposed plan -- I know I'm going to get a lot of heat for this one.. theoretically, if politicians keep their word and hell did freeze over -- on some of these payment plans we are obligated to make only 120 payments (10 years worth). I'd rather make 6 additional payments at $30/month vs making it at $6,000/month.

Look I just saved you a couple grand. I didn't do this myself cuz I didn't know 🙁 (life would be much easier second time around), but no reason why you shouldn't be able to. You're doing them a favor by starting to repay your loans earlier 😉. These loan agencies are very hard to work with (Direct Loans particularly). I have horror stories maybe for another time.

Work the system or the system will work you.

 

[hb2998]

Nice. Thanks for the tip! I didn't realize the government paid the remaining interest on the subsidized loans after the IBR payment. While only a small fraction of the total loans, it's basically free money for the first six months. Also a good tip to avoid capitalization.

I'll definitely look into it. Are there penalties or any downsides to paying more than the amount required?

Oh no, if you can pay more, definitely do so, but I would send in two checks, one for the minimum amount for your IBR obligation, then midcycle (a week after your payment is usually due) send in a check and on the "For" line write to be applied towards your principle. You'll see your principle come down. I've tested this myself, and it worked, they even took the money out of my unsubsidized principle.

 

[hb2998]

My Loan Horror Story

I consolidated all my loans towards the second half of 4th year. I keep close eye on my loans, and noticed that out of nowhere they added an additional $19,500 to my loans 😱. It turns out that through the consolidation process they made a duplicate payment to one of my lenders... they were very unapologetic about it too, and gave me a real hard time when I brought it up over and over and over again.

In these situations the lenders send the money back after a 30 day period after you inform them of the problem which they did, but the weighted average of my loans increased because now it looks like had $39,000 at 8.5% rather than $19,000 at 8.5%, it has taken them over a year (started consolidation process March 14, 2011) to fix this. (Its honestly too much work to sit down and figure out if I paid interest for the money they wrongfully paid... they don't have reports/charts/graphs on their site to make these things easy.. you have to keep track).

Don't snooze on your loans, they make huge mistakes, and Direct Loans has the worst customer service of any organization I've ever dealt with (they talk down to you, are arrogant, extremely uneducated and lack common sense and reasoning, don't bother to read the notes from prior interactions), plus their systems are incredibly inefficient, complex and redundant old and new system that don't talk to each other or reflect the same information. Its taken me 3 months to setup "auto-pay" their so called Kwik pay, to take advantage of their 0.25% loan discount, despite 2 online applications and 1 mail in application. Be very careful with them (log every phone call, date, who you talked to and about what), and make sure you can account for every cent they put on your tab. Their site doesn't have a feature where you can look at what your loan was worth x number of days ago, and you can't pull up old statements, so I make sure I log on every 15th of the month, download a copy of the PDF, file it, dump the relevant information in an excel file for quick easy review / analysis. I know it seems like a lot of work, but 😴 could've cost me 20k (plus interest!).

They've never made a mistake that was in my favor, its always in their favor, always. Makes you think that there is something up, huh.. yea, me too.