Historically, the title of physician came with the near automatic assumption that the individual was or would be very wealthy. As highly educated professionals, many have worked much harder by the age of 35 than most of their peers and they excel in the high-pressure, high-stakes game of saving people’s lives daily, something that many of us wish we could do. Despite these achievements, most physicians reach their late 30’s and early 40’s feeling as though they will never earn enough to have the finer things in life, comfortably fund their children’s education and, most importantly, retire securely.
Due to their earning potential throughout their careers, there are many challenges that are unique to physicians when it comes to successfully implementing a sound financial plan that offers financial security now and into retirement. Below is a roadmap to help physicians achieve these financial goals now and into the future.
Physicians are top earners with unique financial challenges
Most doctors have one commonality among them – they have high annual earnings. Though they are high earners, physicians surprisingly don’t view themselves as being on top of the wealth spectrum. For instance, according to a recent Time Magazine article, only 15% of physicians view themselves as “rich” and yet every single job listed in U.S. News and World Report’s Top 10 Best Paying Jobs were all in the medical field. Certainly, a physician’s specialty plays a part in determining the growth trajectory of individual earnings, but by the mid-point in their career, most doctors have achieved very high-income levels. These high earnings are not without challenges.
There are a couple of unique characteristics of the medical profession that distinguish doctors from other high earners in the corporate or entrepreneurial world. The first is taxes – virtually all of the income that physicians receive is often times exposed to the highest tax rate, regardless of whether they are employed by a huge medical teaching system, for-profit hospital systems, or are in private practice. And the next challenge that is unique to physicians when it comes to earnings is what is known as Replicable Enterprise Value. Take, for example, a physician that has a private practice. He or she does not really have “sellable” enterprise value like many other businesses, which would create an exit value in retirement. In private practice, when a founder exits his or her enterprise, value is simply a function of the pro-rata ownership of the capital goods and receivables. Generally, the actual enterprise has little or no value because the physician is no longer there to perform the work. Those that are employed by health systems have even less enterprise value than those operating in private practice.
Tips for navigating these financial challenges
MainLine Private Wealth has worked with physicians for the past 35 years, steering them closer to their investment goals and helping them achieve a successful retirement strategy that meets their unique needs. There are four key do’s and don’ts that physicians should keep in mind as they work toward retirement and financial security over the course of their careers:
- Do: Save Early, Save Often
It might sound simple, but this core piece of advice is often overlooked or ignored by physicians: save as much income as you can, as early as you can. The easiest way to save in the early years is by utilizing a qualified retirement plan, which most employers provide (i.e. 401k, defined benefit and pension plans). Large health systems often have very generous qualified plans with significant matching. Once you have maxed out those plans, many have non-qualified plans that can be utilized to create additional savings. These plans often allow a physician to save a target number of $40,000 or more per year.
- Do: Let Your Money Do the Work
It’s suggested that Albert Einstein once said, “the power of compound interest, the most powerful force in the universe.” Compound growth is a commanding factor in creating significant wealth. Consider a 35-year-old doctor with a starting balance of $50,000. If that physician contributed $40,000 per year for the next 35 years (saving approximately $1.4M), at 6% that money would grow to nearly $5M by retirement at age 70. Compound growth models are very sensitive to early savings. Every $10k in the first 10 years becomes exponentially more valuable than the same amount, or even double that amount, saved in the last ten years prior to retirement.
This hypothetical illustration is for demonstration and educational purposes only, is not intended to provide individualized financial planning or investment advice, and does not represent the return on any particular investment. Pre-tax and not adjusted for inflation. All investing is subject to risk, including the possible loss of the money you invest.
- Don’t: Buy Depreciating Assets
Focus on assets that typically appreciate, such as investments and the purchase of a family home, which can be a significant source of wealth over time. Avoid depreciating assets like expensive cars and boats. These types of assets can dilute your wealth quickly.
- Don’t: Spend more than Your Income
It might sound like a no-brainer but trust me – it happens. It often takes physicians some time to adjust to the inflows and outflows on their balance sheet before they can create positive cash flow. Some never figure it out and thus struggle to save more than the income directed into their qualified plan(s). Many physicians earn enough that in most years they should be able to save significantly more than that.
The landscape for physicians has certainly changed significantly over the last 25 years, making the road to financial success seem more challenging now than ever. For instance, while physicians now find more opportunity in hospital-based employment, there are reduced entrepreneurial opportunities. And, the impact of the changing regulatory environment and rising student debt also currently impacts physicians operating in today’s ecosystem.
Younger physicians tend to be hesitant to start working with an advisor, as they don’t think they need financial guidance until they have more money. But, waiting often hurts them in the long run. Ultimately, it’s important to find a trusted advisor now that can help establish your investment goals and create a plan you’re ready to stick with. Trust us, your future self will thank you.