Go become a doctor. It will be worth it. Your education is the best investment that you can make. Don’t worry about the loans. You’ll be able to pay them off in no time once you’re a doctor. I heard all of these things on my journey to becoming an attending physician. I took them at face value at the time. And, at first glance, I don’t disagree with them. But I’ve never actually taken a closer look at the return on my medical education and decision to become a doctor.
In short, was my decision to become a doctor and plastic surgeon a smart financial one?
Before getting started, I have to acknowledge that my inspiration for this analysis and post comes from a recent great post from a guest author on The White Coat Investor. It got me thinking and so I sat down to do the math on my own situation.
How can we analyze return on medical education?
There are so many moving parts and variables in our education prior to becoming a doctor. It’s impossible to net all of those and factor them in. But, the best way to examine the return on my medical education seems to be using these equations:
- Net Present Value (NPV), and
- Internal Rate of Return (IRR)
Net present value looks to estimate the present value of past and future cash flows. Basically, you figure out what your future cash flows are and then subtract your initial investment from them.
The equation therefore looks like this:
NPV = (Today’s value of expected future cash flows) – (Today’s value of invested cash)
It’s generally used by businesses to determine if a current investment or project is worthwhile. If the NPV is negative, then it’s not. If it is positive to a satisfactory degree, then it is.
Internal rate of return meanwhile looks to estimate the expected annualized rate of return that you will receive from an investment. IRR is very commonly used in real estate investments as a prediction of investment returns. It’s a more complex equation but basically averages expected returns over the number of years of the investment.
Now that we’ve established that we are going to use NPV and IRR as surrogates for return on medical education, I want to lay out quickly the assumptions that I made in the calculations.
- My undergraduate and medical school cost was about $50,000 each year. I paid for it all in loans. No financial assistance from family, etc.
- My residency and fellowship salaries are estimated based on what remnants of documents I could find. You may notice they seem high for a resident. But this is because CMS inflates trainee salary in uber expensive cities like New York where I trained.
- My attending salary for my first three years in practice are accurate.
- My attending salary thereafter is based on my recent renegotiations. I am making the assumption here that it will never go up again.
- In the NPV equation on Excel, you need to place an interest rate on your debt/growth. I used 7% for this rate.
What makes up a good return on this medical education?
Before the actual calculation, we need to decide what we would consider a good return. Otherwise we can find ourselves rationalizing any result we get.
So, what would make a good NPV?
Well, it’s kind of tricky to figure this out. Mainly because NPV seems to be best at just showing if a positive future cash flow exists or not. In that sense, anything positive is demonstrating a good return.
But for the sake of narrowing in a little more, let’s assume that you want a retirement nest egg of $3.75 million because your estimated annual expanses in retirement are $150,000. Assuming you have no current savings and a conservative 5% annual return on investments, you would need to save $56,500 annually over your 30-year career to achieve this nest egg. That’s a total savings amount of $1.7 million. However, you also want some money to spend. So let’s say you average $10,000 of monthly expenses now so that’s $120,000 annually and $3.6 million over 30 years. Put these two together and let’s say we want to get an NPV of $5.7 million as our goal.
If the above nest egg calculations don’t make sense, check out this post and download my free FIRE calculator to play around with.
What about IRR?
IRR is a little bit easier because it is just a percentage that comes out. It’s the expected annual rate of return on your money.
When Selenid and I look for cash flowing rental properties to buy, our goal cash-on-cash return is 10% or greater. I think this same value is a good goal for any investment and can be roughly translated into a goal IRR of 10% or greater.
Now, let’s look at my analysis
Here is a look at how I calculated all of this:
The full Excel sheet was too big to fit but all that is missing here is the same annual cash flow amount going down until year 30 as an attending.
So, based on this, the net present value of my medical education is $4.9 million. Meanwhile, the internal rate of return on my medical education is 22%.
Let’s dig in
In terms of NPV, I did not meet the goal of $5.7 million. It was pretty close but not quite there. Meanwhile, my IRR was a robust 22%.
These numbers generally jive with those in the WCI article where a dentist had an NPV of $1.2 million and IRR of 18% while an orthopedic surgeon has an NPV of $5 million and IRR of 31%. Actually, in their post, a pediatrician had the same IRR as me at 22% but with a lower NPV of roughly $2 million.
In this sense, I kind of underperformed. Especially given my annual income in one of the most highly compensated medical specialties. This really shows the impact of the debt that I took on for undergraduate and medical school studies.
However, by both accounts, the return on my medical education and decision to become a doctor was worth it from a financial sense.
And of course, this whole discussion ignores that intangible reasons that make a career as a physician so worth it. Helping others and providing care to those in need is extremely rewarding. However, we have seen in the burnout epidemic that this is not enough. It takes personal well-being, including financial well-being, to be the best doctor you can be and for these intangible rewards to ring their most true.
But there is something more…
All of these calculations take place inside of a vacuum. You could have an NPV of $10 million and an IRR of 50%. But if you don’t follow sound, healthy (and simple) financial principles like these, you will fail to save, invest, and create a path to financial freedom.
And on the flip side, you could have an NPV of $1 million and an IRR of 10% and, through building basic financial habits, find financial well-being and achieve the ability to work and practice medicine on your own terms.
So, none of this guarantees anything. It is up to you. In the end, all that these numbers show is that it is possible. And for doctors, your NPV and IRR will always be high enough to allow you the chance to reach financial freedom except in the most extreme of circumstances.
You can see this proven here as my IRR as a plastic surgeon is the same as the average pediatrician!
So, here are some must-read resources to help you set and automate your path to financial freedom using your hard-earned education so that you can focus on exactly what you love about medicine!
- 6 Steps for Physicians to Attain Financial Freedom
- Should Doctors Die with Their Student Debt?
- 9 Reasons Doctors Need to Save Money Too
- Debunking 7 Financial Myths Overheard in the Doctors’ Lounge
What do you think? What is your NPV and IRR? Did the results surprise you or make sense? Would you choose this path again? Let me know in the comments above.