How Much Should a Doctor Invest (Hint: Don’t ask your friends and family)

How Much to Invest as a Doctor

One of the hardest parts of a medical track is understanding how much should a doctor invest. You’re on the farthest thing from a traditional career path, so who do you ask?

1. Don’t ask your parents

Your parents will probably be the first people you ask before you ask friends or visit personal finance websites. If you ask your parents how much should a doctor invest and they are somewhat financially savvy, they will tell you to invest 10-15% of your post-tax income. If you want to live really well in retirement, they will tell you to push to invest 20% of your net income. The reason they might tell you this is because it is the most widely cited recommended amount to invest. Guess what? They’re wrong.

Those numbers are for standard career paths that begin after 4 years of undergrad. Going to medical school and completing a residency is the farthest thing from being a “standard.”

2. Don’t ask your friends

Asking your friends how much should a doctor invest is an equally futile venture. Your life trajectory is so different than your peers’ that it is difficult to compare yourself at different ages.

For one, medical school is is 4 years after undergrad with a minimum of 3 years residency afterwards (and maximum 7 years.) You do earn a salary of a little over $50,000 in residency but it is very hard to invest any as the income that you could normally invest should go to paying off interest each year if you are financially savvy doctor like Jim in my example. Assuming you have significant debt, you will not be getting ahead but rather not letting your debt grow at all during residency.

Most of your friends will be earning a full time salary right after 4 years of undergrad. Engineers, financial analysts, marketers, computer science majors and the majority of students will follow this path. Some will be slightly delayed like accountants doing a 1 year masters or PA’s doing a 2 year program after undergrad. The closest non-premed student to which you can compare yourself is a pre-law student, but even they earn a full time salary after 3 years unlike your minimum of 7 years of schooling/reduced salary before full time salary. These people can’t give you any advice!


So, how much should a doctor invest?

The lost decade investing rule

Almost every specialty residency (except plastic/neuro/cardiothoracic surgery) is between 3 to 5 years with the distribution pretty even among 3, 4, and 5 years. Thus, 4 years is a pretty typical length for a residency. Also, most medical students took at least 1 gap year before medical school because the average age of matriculation was 24, so we’ll tack on another year for that. That brings us to a total of 9 years after graduation before you start earning a full-time salary. 

It is often in the news that you should start investing in your early 20s versus your early 30s because waiting 10 years to start investing means you will have to invest twice as much every year to get to the exact same retirement goal. For example, investing 10k every year from age 22 to 65 at a 7% return will give you about the same retirement savings as 20k every year from age 32 to 65.

This also applies to the percentages like we were talking about before (10-15% savings with 20% being an overachiever.) If you wait nearly a decade to start investing, then you have to invest 20-30% (or 40% as a super saver) of your post-tax income to be at the recommended level.

But doctors, this shouldn’t scare you at all

This is true for doctors as well, but it is not something to worry about because you have significantly more disposable income to start investing than almost all of your peers in your early 3os. If you make 250k after your 4 year residency, it is pretty easy to live off of 80% of your post-tax income. Assuming you didn’t use a 401k, your post-tax income would be $176,000 and you would have to invest $35,000 of that each year. If you were not a doctor and made the $48,000 national average, (or $39,000 post-tax),  you would have a much more difficult time investing 20% or  $8,000.

There is a minimum amount of money that you need to live relatively comfortably. If we exaggerate the example to make it a little more obvious, would it be easier to invest 20% of your $1M salary or 20% of your $15,000 salary? One is 200k and one is 3k but the 3k is much harder to invest because $15,000 is already poverty level.

My Personal Rule

Let’s assume that the investing doctor makes $250,000. It doesn’t actually matter how much the doctor makes because we are trying to find what percentage of your income to invest rather than what dollar amount. Before I give my recommended percentage to invest, I will divide people into two groups:

(i.) Those with a full debt load of, say, around 250k when they graduate can pay off their loans in 3 years like Jim. If they start medical school at 23, they will be done with 4 year residency at 30 and will finish paying off loans at 33. That leaves 31 years to invest.

How much to invest as doctor case 1

How much should a doctor invest after paying off a full debt load? I would recommend investing 17.5% to 30% of post-tax income with a magic number of 22.5%. Your income is completely dependent on how much income you want in retirement vs during your career. Keep in mind that in retirement you don’t have to keep investing obviously, so @22.5% pre-tax retirement income of $172,000 should really be compared to $210,000 ($250,000-$39,400) during your career because during your career you have to invest 40k/yr. Also, you are not paying for kids, their college, and you can probably downsize houses.

(ii) The lucky 30% who have little or no debt have a few more years to invest. They will finish 4 year residency at 30, which leaves 34 years to invest.

How Much to Invest as a Doctor Case 2

How much should a doctor invest with no debt? I would recommend investing 14% to 24% of post-tax income with a magic number of 17.5%. Notice, 14% to 24% will get you to about equivalent retirement incomes as the case of the debt-laden student above that has to spend 3 years paying it off.


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Takeaways

  • How much should a doctor invest really depends on whether you have debt. Not having debt  drops your recommended investing level from 22.5% to 17.5% on the same career salary to get the exact same retirement income.
  • The recommended investment amount is not related to how much money you make. It is related to the number of years you have to invest; however,  the longer your residency is, the more you usually make.
  • Most personal finance nuts would be shocked that you started to invest at 34 (like the debt-laden student) but it is really more than doable on a doctor’s salary. You have a salary of 250k, post-tax of 175k (w/o any deductions), and you invest almost 40k per year. That leaves 135k of pure cash to spend each year. Very few people in America who start to invest at 34 will be that lucky.

I will have a blog post soon about how exactly you can invest!

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