The Academic Financial Lifecycle in Comparative Perspective

We’ve all thought it, right? “You know, I really should’ve been a [doctor / lawyer / Wall Street person / dog walker / whatever].” Maybe we saw a previously perpetually high classmate at our 25th high school reunion roll up in a beamer and a bespoke suit, or checked our 403(b) balance for the fifth time this month to see if maybe it had finally gone up a few dollars, or just had one of those weeks when the grade grubbers completely overwhelmed your email system and you had to close the browser tab before you lost it. Maybe those other jobs would be soul killing too, we grouse, but at least we’d be getting paid for it. Which raises the question, how do academics’ finances compare to other professions’?

To answer this question, I’ll adopt a financial life cycle perspective here, focusing on your likely financial trajectory from young adulthood to retirement age in three different ideal type scenarios:

1. You get a bachelor’s degree then have a middle class career.
2. You get a PhD and pursue an academic career, with a good but not spectacular outcome (postdoc then salaries typical of a low R1/high R2 jobs).
3. You get an MD, get a family medicine residency, and work in a large medical chain until retirement.

In each case, my focus is your net worth trajectory throughout your life from age 22 to 65 subject to assumptions discussed below. Of course, each of these educational / earnings trajectories involve a great deal of between-person variation, so please think of these scenarios more as ideal type comparisons than describing a particular individual’s counterfactual. In each case I’ve tried to choose a solid but not spectacular earning trajectory for a medium cost-of-living area. If you don’t like these assumptions and want to try different parameters, you can do so in the Google Sheet I used to create these figures and tables.

The Assumptions

Assumptions for All Careers

The results below are generated using the following assumptions that apply to all three ideal type net work trajectories:

1. Undergrad student loans: All three finish their undergraduate degree with $40,000 in student loans. This is about 4x the average annual loans per year among federal loan recipients at private, non-profit universities in 2020-21. (However, this doesn’t matter for the end result because I assume for simplicity that workers don’t reduce their investment contributions while paying off student loans. Obviously that’s not true for everyone or probably most people, but I wanted to keep the comparisons simple.)
2. Undergrad student loan interest: Undergraduate student loans are subject to 5.5% interest (the current federal rate as of this writing) and repayment is deferred until terminal degree graduation.
3. Market returns: Nominal market returns are assumed to be 8% annually and inflation is 3% annually (for real annual returns of 5%). Returns are compounded annually for simplicity.
4. Annual raises: Nominal annual raises in non-promotion years are 4%.
5. Investment rates: Everyone contributes 15% of their salary annually post-graduation from terminal degree.
6. Student loan repayment: Everyone repays their student loans on a standard 10-year repayment schedule once fully employed (see post-graduation training exception below).

Career-Specific Assumptions

There are also some pathway-specific assumptions to note:

1. Time in graduate school: BA/BS graduates enter the workforce immediately at age 22. PhDs spend 7 years in graduate school followed by a 2-year postdoc before beginning as an assistant professor. MDs spend 4 years in med school and 3 years in residency before beginning as an attending physician.
2. Salary: When BA/BS graduates enter the workforce, they begin at $60,000 per year. PhDs earn $25,000 while in school, NIH rates as a postdoc, and start as an assistant professor at $75,000. MDs earn no salary as med students, the 25th percentile resident salary, then the mean annual wage for family physicians.
3. Grad school loans: PhDs don’t take out loans to fund their post-secondary education, but MDs borrow about $65,000 per year during their 4-year medical degree (based on $41k average tuition, fees, and insurance for 1st-year public residents + $24,000 in annual living expenses), subject to a 7.05% interest rate (the current federal rate as of this writing).
4. SAVE during post-graduate training: During post-graduation training (2-year postdoc for PhDs, 3-year residency for MDs), PhDs and MDs both repay their loans using the SAVE program which caps payments at 10% of discretionary income (defined as the difference between total income and 2.25x the federal poverty rate, which I calculate at $33,885 for a single individual). They switch to standard repayment once they begin jobs as assistant professors and attending family physicians respectively.
5. Promotion raises: BA/BS graduates get a 10% raise every 20 years (promotion). Professors get an 8% raise in year 7 (promotion to associate professor) and year 17 (promotion to full professor). MDs get a 10% raise at age 50.

The Results

Enough preamble — let’s see the results!

Here are the detailed results in simplified graph form (you can see year-by-year numbers with greater detail in the Google Sheet):

	Net Worth
Age	BA/BS	PhD	MD
25	$2,017	-$42,273	-$251,343
30	$81,535	-$44,392	-$278,783
35	$168,200	$36,059	$112,637
40	$272,356	$153,238	$550,529
45	$410,308	$272,739	$914,180
50	$591,174	$425,532	$1,389,091
55	$825,454	$625,825	$2,020,435
60	$1,128,081	$885,674	$2,838,837
65	$1,520,806	$1,221,750	$3,896,620

As you can see, things don’t look great for our intrepid PhDs. They stay in negative net worth for longer than the BA/BS crowd, and earn less post-graduation than MDs. Furthermore, they wait the longest to start investing, which means the income they do earn has less time to compound. They do earn more than the BA/BS crowd once they start their career, and thus their lifetime investment contributions are nearly identical in these scenarios ($515,407 for BA/BS and $512,806), but BA/BS graduates retire with about $300,000 more than PhDs due to the longer compounding period.

MDs provide another interesting counterfactual because it is very common for MD students to go massively into student loan debt, often at unfavorable, unsubsidized interest rates. As a result, in this simulation they have a -$278,273 net worth at age 30, much more than PhDs who are just beginning to repay their undergraduate loans (-$44,392 net worth). Despite digging themselves into a deeper debt hole than PhDs at the start of their careers and similarly missing out on several years of high-compounding investment years, however, unlike PhDs they can catch up in a big way just by saving the same percentage of their income once they get an attending job. I even used numbers appropriate for a family medicine career despite it being among the lowest-paid medical specialties — you don’t want to see the numbers for neurosurgeons. So, MDs share PhDs’ late career start disadvantage, but promise enough earnings to make up for it.

What it Means and What to Do

The academic financial lifecycle combines the worst of all worlds: a later start to our earning and investment career than BA/BS graduates, but lower earning potential than other similarly highly-trained education/career trajectories like MDs.

This is why so much of this blog is focused on what you can do to defray the significant opportunity costs of pursuing a PhD and an academic career. An academic career will rarely be a financially optimal move, but you can reduce these costs through a combination of strategies I’ve written about before:

1. Coast FIRE, then Apply: Get a job straight out of undergrad, save enough money so that it can realistically compound into enough to fund a decent retirement, then apply to grad school (if you still want to).
2. Grad school Roth conversions: If you saved pre-grad school investments in traditional (tax-deferred) 403(b)s or IRAs, you can pay taxes on these contributions at low marginal tax rates in grad school and let the money compound tax-free forever thereafter.
3. Student loans in grad school so you can afford Roth IRA contributions: I would only do this if you weren’t performing Roth conversions from prior retirement contributions since those conversions are treated as income. If you aren’t, if student loan interest rates are below historical expected market returns, it could be worthwhile to borrow so that you could afford to max your Roth IRA from your graduate stipend.
4. Keep living like a grad student (or postdoc): My first ever blog post! TL;DR: Once you get that coveted post-graduation job inside or outside academia, you should be in catch-up mode, contributing much more than is typically recommended for several years to get your net worth back on track.

In future posts, I’ll take the projections on the spreadsheet here and quantify how much of a difference these strategies could make within this framework. I’ll continue to post these ideas under the Grad School Finance tag.