Making Cents of it All: The Challenge of Paying Down Debt While Saving for Retirement
By - March 28, 2023
Becoming a pathologist or medical laboratory scientist is an exciting career choice, but also one that can accrue a significant amount of debt. By the time the average pathologist or laboratory professional begins earning an actual salary, they may be struggling to figure out how to balance paying off their school loans, saving for retirement, and supporting their other goals, such as starting a family, buying a home, and traveling. Financial experts offer some useful tips for paying down debt and saving for retirement at the same time.
Keep debt low
In planning for the future, it’s important to keep in mind one’s debt-to-income ratio, according to Zachary MacDougall, certified financial planner™ and President of North Star Resources Group’s Medical Division, out of San Diego, California.
According to the Education Data Initiative,1 the average medical school debt is around $202,450 (which doesn’t include premedical undergraduate and other educational debt), though with interest, the average graduate ends up owing $250,990 in total student loan debt (and sometimes quite a lot more). While this is a high amount of debt, pathologists have equally high earning potential, uniquely positioning them to be able to pay down their debt more quickly than other professions. According to the Bureau of Labor Statistics,2 the average salary for pathologists (across all specialties) is $267,180, though many can earn upwards of $350,000 per year. Medscape3 asserts that the average, as of 2020, was $316,000.
EDI also estimates that average debt amounts for a master’s degree and bachelor’s degree hover around $80,000 and $38,000, respectively, and $20,000 for a two-year degree. What’s more, educational costs for healthcare professionals skew higher than those of non-healthcare professionals.4
For pathologists with student loans, Mr. MacDougall says, “We draw a good debt/bad debt threshold around a six percent interest rate.” With diversified portfolio investments, which can average around eight percent in a growth portfolio over time, you’ll be accruing money rather than losing it, even as you pay interest on student loans.
Most importantly, Mr. MacDougall urges his clients not to let emotions, such as fear or anxiety, drive their financial strategy. “You can use software to determine how to best allocate savable funds on a monthly basis to increase a client’s net worth as efficiently as possible.”
Pay yourself first
Tyler Scott, a financial planner at Aptus Financial in Salt Lake City, Utah (and former dentist), recommends pathologists and laboratory professionals “pay yourself first,” by which he does not mean spend money wildly on boats or fancy vacations, but “fill up all the tax protected retirement accounts to their max.” He points out that the IRS allows up to $22,500 per year in a 401K, $6,500 in a Roth IRA (the interest earned is tax free), and some people even have Health Savings Accounts through their insurance plans that allow for up to $7,750 for family coverage and $3,850 for self-coverage.
“These three tax protected buckets are pretty sacred because once the tax year ends, we can never get that tax protected bucket back,” he explains.
Mr. Scott believes that pathologists and laboratory professionals should consider having both a 401K and a Roth IRA if they can because they are both taxed differently. With a Roth IRA you don’t get a tax deferment for the money you put in, but the money grows tax free. With a 401K you get the tax deduction today but will have to pay taxes on it when you take the money out later.
“When you get to retirement, having those two different taxable buckets to withdraw money from allows the retiree to withdraw money in a tax-efficient way,” he says.
In a similar vein, Mr. MacDougall urges pathologists and laboratory professionals, when the option is presented, to take advantage of the company match at your current employer’s qualified plan. Whether that is a 401K at a for-profit company, a 403B at a non-profit organization, or a 457 plan through a government establishment, all of them have similar pre-tax deductions and/or tax deferred growth.
“You get a one hundred percent rate of return on the money you put into your retirement account if they match it,” Mr. MacDougall says. “That’s like five times better than paying down a twenty percent interest rate credit card toward your net worth.”
How much do you need in retirement?
If retirement seems a long way off to pathologists and laboratory professionals today, taking an honest look at how much money you’ll need later on can increase the urgency of saving for it. According to Citizens Bank,5 one rule of thumb is to try and replace 80% of your highest working year multiplied by how many more years you estimate you’ll need to live on it.
For example, if you plan to retire at 67, and your income is $150,000 per year, then you would want between $1.5 and $1.8 million saved in retirement accounts by retirement. Despite these somewhat astonishing figures, according to the “How America Saves 2022” report by Vanguard,6 the average American only has about $141,000 saved for retirement.
Paying down debt
Once you’re putting aside as much money as possible into your retirement accounts, you have a more accurate picture of your income, and can think about how to approach the debt process, Mr. Scott says.
Depending upon the interest rates you locked in, if it’s possible to refinance your loans to a lower rate, this is never a bad idea, Mr. MacDougall says, although currently the Fed has continued to raise interest rates to try and tone down inflation making refinancing unlikely at this time.
Public student loan forgiveness
Another possibility for pathologists who work for non-profit and government institutions, is to see about getting public service loan forgiveness (PSLF). After making 120 on-time payments (approximately 10 years), any remaining balance on qualifying federal loans are forgiven. “So, if you’ve been in residency four years and fellowship for two, that’s six years, you’re more than halfway, and it often makes sense for young physicians to take a job at a qualifying non-profit, do four more years and get their loan forgiven. Then they can make the minimum payment required,” Mr. Scott says.
Live like a resident or student
Once in the field, it can be tempting for new pathologists or laboratory professionals to want to spend their newly increased salary on things they’ve had to live without. But to optimize wealth building, Mr. Scott urges pathologists to continue living like a resident or a student for as long as possible. “You go through all this training, delaying gratification, and go from poor to big income. It’s justifiable that people want to loosen the purse strings.”
By redirecting all or most of the new income into retirement accounts and refinancing loans if possible or making the maximum payment you can afford on your loans, pathologists and laboratory professionals can get out from under their medical debt much more quickly and reap the benefits of their salaries sooner.
Getting out from under school debt doesn’t have to take decades, either. According to a 2019 survey from staffing agency Weatherby Healthcare,7 35 percent of doctors paid off their medical school debt within five years of graduating. The average length of time to pay off this debt was around eight years.
Financial literacy
Whatever approach is taken, Mr. Scott says his most successful clients seek financial advice early on and make sure that advice is unbiased or free of conflicts of interest. “If physicians and laboratory professionals take time to self-educate a bit, it puts them in an empowered position,” Mr. Scott says.
Mr. MacDougall also recommends checking in with your financial planner every six months, which he does proactively with his physician clients. “We reflect on how the last six months went and what we are doing for the next six months, and any changes we have to make. It’s a major confidence boost to know they have an offensive plan on track.”
References
1. Hanson, Melanie. “Average Medical School Debt.” Education Data Initiative. Updated, November 22, 2022. https://educationdata.org/average-medical-school-debt
2. “Occupational Employment and Wages, Physicians, Pathologists.” Bureau of Labor Statistics. May, 2021. https://www.bls.gov/oes/current/oes291222.htm#(5)
3. Martin, Keith. “Medscape Pathologist Compensation Report 2021.” May 14, 2021. https://www.medscape.com/slideshow/2021-compensation-pathologist-6013858#2
4. Hanson, Melanie. “Student Loan Debt Statistics” EducationData.org, October 26, 2022,
5. “Determining How Much You'll Need to Retire.” Citizens Bank. Accessed January 30, 2023. https://www.citizensbank.com/learning/how-much-money-do-you-need-to-retire.aspx
6. “How America Saves Report. 2022.” Vanguard. Accessed January 30, 2023. https://institutional.vanguard.com/content/dam/inst/vanguard-has/insights-pdfs/22_TL_HAS_FullReport_2022.pdf
7. Weatherby Healthcare Medical School Debt Report 2019. Accessed January 30, 2023. https://weatherbyhealthcare.com/blog/medical-school-debt-report-2019
Jordan Rosenfeld
Contributing Writer