Pediatrics sometimes becomes the “whipping boy” in the physician financial blogosphere. When people want to use an example of a doc on the low range of the income scale, they reach for a pediatrician despite family docs and internists having similar incomes and some docs (occupational medicine, public health, preventative medicine, military medicine etc) having even lower incomes. Maybe it is because there are so many pediatricians or maybe it’s just tradition, but it is what it is.
I’m as guilty of it as anyone and I’m going to do it again today. Except for today, we’re going to take a little bit different approach. Today I want to actually quantify the opportunity cost. I want to mathematically examine the argument that is often only alluded to.
Before we get into the numbers, however, I think a few things ought to be said. Any time I write a post about this and actually name a profession or specialty I get hate mail. “Why are you discouraging budding pediatricians/dentists/veterinarians/whatever?” I was even accused of being “anti-dentite” recently. So I want to be really clear about where I stand on a few issues.
- The average pediatrician income is $225,000.
- The average dentist income is about $200,000.
- If you can’t live on $200,000, you have a spending problem, not an earning problem. My clinical income these days is less than that of the average pediatrician and we’ve never actually lived on more than that. I assure you it provides for a very nice financial life. New cars, boats, heli-skiing, European vacations etc.
- I think borrowing up to 1X of your future six-figure salary is a good investment.
- I think borrowing 2-3X of your future salary is a bad investment.
- Borrowing 3-4X+ of your future salary is stupid. Especially when that future salary is under $100K.
- The cost to become a physician is very similar across specialties, but the median income across specialties is very different.
- Intra-specialty pay variation is far larger than inter-specialty pay variation.
The primary consideration for specialty/profession choice should be to do something you love, not only for happiness reasons but also for financial reasons since longevity of career has a larger effect on end wealth than annual income.
- A student who doesn’t give at least some consideration to future income and lifestyle of their chosen career is a fool.
I think all of those stances are either clearly based in fact or that I can make a strong argument for my opinion. But there is nothing between the lines there, so don’t try to find something and accuse me of it.
Measuring The Opportunity Cost of Pediatrics
Okay, let’s get into the main purpose of the post. What does it really mean financially to choose a lower-paying specialty? Today, I want to actually quantify it. First, we’re going to look at how much longer it takes to pay off your student loans and second, we’re going to look at how much longer it takes to become financially independent. I think most readers will be surprised a bit by this exercise.
Let’s start with a few assumptions. First, we’re going to compare two doctors. One is an emergency physician making the median income of $350K and the second is a pediatrician making the median income of $225K. Both docs did a 3-year residency. Both docs left medical school with the median MD debt of $200K at 7% that grew to $230K during residency. Both are good WCIers who know how to live like a resident. They give themselves a little raise after residency, and will live on $60K a year until the student loans are paid off. At that point, the docs will save 20% of gross for retirement until they reach financial independence. We will also assume that all disposable income goes toward loans until loans are gone. That’s not necessarily what I recommend, but is a simplifying assumption that won’t make a huge difference. We’ll assume incomes stay constant and that investment returns are 5% after-inflation. The emergency doctor will have an effective tax rate of 22% and the pediatrician will have an effective tax rate of 18%. Those are arbitrarily chosen and will obviously be higher than some docs pay and lower than other docs may pay. If you don’t like my assumptions, make your own and run the numbers yourself.
Question # 1 How Much Longer Will The Pediatrician Have to Live Like a Resident?
Emergency Doc: Earns $350K. Pays 22% * $350,000 = $77,000 in taxes. Lives on $60K. $350K – $77K – $60K = $213K. $213K/12 = $17,750 per month going toward student loans.
Conclusion: The loans will be paid off in 13-14 months.
Pediatrician: Earns $225K. Pays 18%*$225,000 = $40,500 in taxes. Lives on $60K. $225K – $40,500 – $60K = $124,500. $124,500/12 = $10,375 per month going toward student loans. The loans will be paid off in 23-24 months.
Conclusion: The pediatrician will have to “live like a resident” for 2 years instead of 1.
Question # 2 How Much Longer Will The Pediatrician Have to Work to Hit Financial Independence?
In this situation, we’ll assume the doctors’ FI number is 25 X 1/2 of their peak earnings, basically $4.375M for the emergency doc and $2.81M for the pediatrician.
Emergency Doc: Starts investing $350,000 * 20% = $70K/year in attending year 2. At 5%, that grows to $4.375M in attending year 30.
Pediatrician: Starts investing $225,000 * 20% = $45K/year in attending year 3. At 5%, that grows to $2.81M in attending year 31.
Conclusion: The pediatrician will have to work one year longer to become financially independent.
Question # 3 How Does That Change if the Two Doctors Have the Same Lifestyle?
Now, it would obviously not be very smart to try to live the same lifestyle as someone earning $350K if you were only earning $225K, but who says doctors are smart? In this example, let’s consider what happens if the two doctors actually spend the same amount of money, both during their career and in retirement. Let’s peg that at an arbitrary $144K/year on lifestyle. That’s $12K a month. That pays for a pretty nice life. In order to preserve that lifestyle in retirement, they’ll need something like $144K * 25 = $3.6M.
Emergency Doc: Earns $350K, pays $77K in taxes, spends $144K and thus saves $129K/year. At 5%, it will take 19 years (including the one spent paying off the loans) to become FI.
Pediatrician: Earns $225K, pays $40,500 in taxes, spends $144K and thus saves $40,500/year. At 5%, it will take 37 years (including the two spent paying off the loans) to become FI, almost twice as long as the emergency doc.
Conclusion # 1: It’s really important to adjust your lifestyle for your actual income. You don’t get a pass on math. The less you make and the more of your income that you spend, the longer it will take to reach financial goals.
Conclusion # 2: A pediatrician family will have enough income that, if managed well, will provide a wonderful life during the career and still allow for retirement at traditional retirement age without ever feeling financially deprived.
What do you think? Did you put any consideration of income/lifestyle into your specialty choice? Why or why not? Were you glad you did or didn’t? When, if ever, would you recommend against a lower-paying specialty? Comment below!
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