Doctor's Bill: Big Apple Decision

Johanna’s Take:

Dr. K. L. Dare is an intern who lives lean, surviving on only $12k/yr in Manhattan (XRAYVSN – good interview topic for a future blog post?).

[I have to admit I did not get the reference initially alluded to by Johanna so I inquired. Dr. K.L. Dare is based on a fictional New York surgeon in the 30s. 🙂 ]

He finishes residency in 2023 and dreams of buying a modest apartment in Manhattan (preferably close to Blair General Hospital) – to the tune of $1M.

Can a new attending possibly afford to continue living in a HCOL city and buy a $1M apartment right out of training?

Let’s begin the exploratory!

The positives:

· Lives a spartan lifestyle

· No family to support

· “Doctor” income

The negatives:

· $1M home right after graduation from training

· HCOL city including high RE and income taxes

· Student loans

· Not a high-income specialty

· Early retirement

Assumptions (I will use conservative estimates wherever there is an uncertainty.)

· 6% average long-term returns on savings (assuming no emotional mistakes in upcoming bear markets and cor-rections)

· Average inflation

· No marriage/children in the projection

· You have plenty of appropriate life and LTDI in place.

· You invest in an appropriately-diversified portfolio and do not make any behavioral mistakes

· No significant financial assistance for other family members

· Reasonably good health

· TCJA 2017 does not sunset in 2025 and current tax rates remain in effect

At first blush, I was blown away by a new attending making $250k (in today’s dollars) hoping to buy a $1M apartment in Manhattan.

No way!

Then Dr. Dare told me that he lives now on a meager $12k/yr in NYC– how is that possible?

Everybody has their tricks, but this one out-Dahle’s the godfather of post-training frugality.

Other information provided in our convo’s:

· Hopes to save enough for a 20% downpayment on his apartment while he’s in training.

· Expects living expenses (outside of mortgage and taxes) to be $50k/yr after graduation.

· Willing to take on a little work on the side, if necessary (maybe a little acting?)

Would super-frugal living be enough to enable Dr. Dare to afford his NYC digs?

I approached the problem as follows:

· First, I inflated $250k 4 years into the future and rounded to $300k for extra shifts

· Assumed Dr. Dare would save $40k/yr for 5 years upon becoming an attending.

This reduced his investment savings rate to 33%.

· Calculated an $800k loan for 30 years @5%

· Calculated taxes and insurance at ~$20k and $10k, respectively

· Assumed at that point (in 9 years), Dr. Dare will be making $350k/yr.

· Inflated living expenses in 9 years to ~$75k

The biggest impacts, of course, are income taxes and home-ownership costs.

· At $350k/yr, Dr. Dare will pay taxes at a blended rate of 33.1% after a $19k 401k contribution and itemized deductions of $47k (including $37k of mortgage interest deductible on the first $750k).

o I expect a much higher 401k contribution in 2028, but didn’t try to guess.

o This gives us a tax bill (fed, state, local, and FICA) of ~$116k.

· Costs of home ownership are broken down and rounded as follows:

Mortgage payments: $51,500
RE taxes: $20,000.
Homeowner’s insurance: $10,000.
Total: $81,500.

One thing I was sure of before beginning this exercise was that Dr. Dare was not going to be able to save at the hoped-for rate of 50%.

Typically, CYAI applicants are already working as attendings and able to provide their savings rate.

In this case, I had to back into the projected rate.

This is how it broke down:

Income/FICA taxes: $116,000
Home ownership: $81,500
Living expenses: $75,000
Subtotal: $272,500
Gross pay: ($350,000)
Available to save: $ 77,500

At ~22%, this is less than half of what Dr. Dare would like to save.

So, what does retirement look like for our determined doctor?

My calculations over the 3 tranches of Dr. Dare’s career give him just under $4M at retirement at age 50 – and, we hope, an appreciating piece of Manhattan real estate.

Can Dr. K. L. Dare afford his dream home?

Or does he need a better agency to handle his television side hustle?

(Cue Billie Mays) But wait, there’s more!

We increased Dr. Dare’s pay – but not the $1M apartment.

Do you think real estate costs will stay flat over the next 9 years? Pshaw!

To simplify this calculation, I inflated the total home ownership costs by 3%/yr over the next 9 years.

That results in annual costs of $106,331, rounded to $106,500.

At this level, Dr. Dare would have to earn at least $400k – $450k/yr to make the apartment work.

While I think an expensive NYC apartment may be possible at some point in the future, I believe Dr. Dare will need to do at least one of the following:

· Wait longer before purchasing

· Work a lot more or plan on a higher-paying specialty

· Plan on retiring later than age 50

Xrayvsn’s Take:

This entry was a bit more challenging than previous submissions as a lot of the financial data is projectional given that this doctor is still not out of residency and does not have several years of true financial data as an attending to rely on.

Johanna has done a wonderful job of projecting anticipated finances based on her assumptions (and her expertise is way above the scope of mine in this matter so I will defer to her numbers).

I am therefore going to approach it from a practical standpoint of whether buying a 7 figure property is wise to do when you first become an attending.

Dr. Cory Fawcett has written an excellent book on this matter, The Doctors Guide To Starting Your Practice Out Right, which I cannot recommend highly enough.

There are so many things at play when you first become an attending and on top of this you do not want to add being financially tied down from buying a home right away.

It often takes a couple of years before you truly know if the practice you joined is the right fit.

Everyone is on their best behavior during an interview (both potential employer and potential employee), much like a first date.

Rarely does anyone get married right after the first date and if they do, the odds of it working out is even less.

This doctor is currently single but will that be the case in 10 years time?

And if this doctor does become married and potentially starting a family, will a 1 bedroom still cut it?

The transaction costs at this level of real estate are not insignificant and you cannot predict if the real estate market in New York continues to stay red hot or if it starts to cool down.

Under current tax law, SALT deductions are limited, also reducing the benefit of real estate ownership.

Using Johanna’s calculations, this doctor will have an anticipated net take home pay of $234k, making the $81.5k cost of ownership suck 35% of every dollar coming in.

Although this doctor in training is demonstrating a remarkable level of current frugality in NYC, how long can this last?

[By the way I agree with Johanna that I am sure readers would love to see how this doctor does live in such a HCOL area on only $12-20k/year and would love to have the submitter do a guest post on it if he is willing.]

Forced frugality to make things work is the definition of being “house poor.”

This may very well end up being the case if he does commit to a 7 figure apartment at the beginning stages of a medical career.

The Decision:

Johanna:

Thumbs Down

Xrayvsn:

Thumbs Down