Approaching the concept of retirement savings is particularly unique for medical professionals: Balancing a tremendously demanding career with family life and personal time allows few to have the luxury of extra time to address financial planning. Many in the field have higher priorities than saving for retirement on their minds, which compounds the issue.
According to the Association of American Medical Colleges, 76% of medical students will have student debt by the time they graduate. Among those students, the average debt is a staggering $190,000. The average American couple has only about $163,000 in savings by the time they are about 60 years old, so coming out of school, the average doctor will have more in debt than most have saved in their lifetimes. This means that many doctors can’t really start saving significantly until the latter half of their careers. With that in mind, consider these tips to help you on your journey to financial security.
Pay off debt or start saving for retirement?
When it comes to the decision of investing toward retirement or paying off debt more aggressively, there is really only one question that needs to be answered: “Can I make more investing than the loan is costing me?” Given the fact that Direct Graduate Plus Loans are now sitting at about 7% interest rates, an investment would have to make more than 7% per year to make sense. While we can look back at the historical performance of the stock market over time, it is pretty safe to say that in this scenario paying off the student loans as aggressively as possible is the best choice. The reason being is that the loans have a guaranteed cost of 7% per year in accrued interest, whereas an investment is never fully guaranteed to grow.
Make no mistake: High-interest debt is a financial dead weight; the longer it sits, the more it will attempt to sink you financially. A general rule of thumb is that the higher the interest rate on the loan, the more aggressively it should be paid off. Once the high interest loans are taken care of, saving for retirement can reenter the equation.
The company match
That being said, there is one caveat to this rule that you should strongly consider if the opportunity exists: the 401(k) or 403(b) company match. If you work in a position that offers a match on retirement plan contributions, taking advantage of this could substantially benefit you. In a typical safe harbor retirement plan, you will see something like a 3.5% company match for a 6% salary contribution. While there is no one formula that applies to every situation, an opportunity such as this shouldn’t be passed up.
Saving for retirement can be difficult enough. Why not take advantage of a situation in which you are getting free money? You should think about contributing enough to get the maximum match and putting the rest toward student debt. If you are unsure about your particular course of action, I’d suggest speaking to your financial professional to assist in coming up with a suitable game plan.