Financial Planning for Physicians


Why Doctors Spend More than They Realize?

Case in point: My brother and his wife are doctors, and my fiance and I are not. We both bought a new patio set for our homes in the same year. My brother's furniture cost about $3500, and mine was about $850. If you looked at both sets, you would think mine was the more expensive one — and indeed, the original price on it had been much higher, I had bought it during end-of-season sales when it was deeply discounted.

My brother's furniture was much more expensive because not only did he not bother to wait for a sale, he also didn't comparison shop or ask for regular shipping. Instead, he walked into a store one fine day, picked out whatever he liked, and had it delivered with premium white glove service.

In addition, my brother and his wife make three to four times what we do — yet we have much more savings. This is very common — I see this with my physician clientele all the time. Physicians spend more because they make more.

Because they have such high salaries, it feels like budgeting or value shopping is not needed at all. Spending $400 on a haircut when $400k in income is being earned each year seems reasonable. But take away taxes on a $400k income, saving for the kids' college and perhaps graduate educations (physician's children tend to go on to medical or graduate school), retire­ment, health issues, student loans, weddings, and soon that $400k simply dissipates into thin air. However physicians can have a false sense of security when the spigot of income is turned on and cash is flowing in their direction.

But what happens when the cash flow dries up, during retirement or your sunset years when you can no longer work? The sad fact is that you could have been a plumber or a neuro­surgeon — it won't make a difference after a certain age. If you are no longer able to bring in income, it doesn't matter whether you used to earn $ 15 an hour or $ 1500 per hour. You are in the same position — helpless and dependent on your children or the government because your finances were mismanaged and you've run out of money.

Physicians forget that the lavish lifestyle to which they are accustomed has to be sustained for another 20-30 years after they stop working. And most physicians only work for 20-30 years since they get a late start to begin with. So essentially, almost to ½ of their income should be going towards retirement and savings, but instead, years of splurges, impulsive shopping, and lack of budgeting take their toll. I have a few clients who are ready to retire and have come to me too late for me to do much beyond advise them to work a few more years if possible. Some of them can, but not all, in which case the only other alter­native is to drastically reduce expenses when they are just getting ready to travel and enjoy their free time.

As someone in the financial and accounting industry for the past 25 years, I've seen it all — couples who fight about money, spendthrift spouses who won't stop shopping, know-it-all clients who think that fancy investments and risky tax avoidance strategies will enable them to triple their earnings. Add to that a distorted sense of income and expenses, and many physicians that I've come across are on a path that will lead them to a shortage of funds in their 70s or 80s.

However the good news is that physicians can avoid most of these pitfalls because, in many ways, they have already won the game of life! They have gotten through the toughest years, and are now set for a lifelong future of financial security, should they simply spend wisely, stay on top of their cash flow projections, and invest their money in a reasonable manner.

Some of the guidelines I give my physician clientele consists of good, old fashioned advice:

  1. Aim for a conservative 6-8% return pre-retirement, and 4-6% post-retirement. Anything on top of that is a bonus, but don't count on it.
  2. Choose vanilla, transparent, liquid mutual funds and principal protected securities. Perhaps purchase some hard assets like real estate or gold if you are able to manage them. Do not be tempted by fancy, murky, illiquid hedge funds or private invest­ments that can be highly risky.
  3. Try to live on 50-65% of your after tax income, because it's not all available for you to consume in the present. Your current cash flow has to pay for past student loans and future retirement goals, and you may have a shorter career span than others, especially ER physicians or surgeons with demanding schedules.

And my biggest piece of advice to those who haven't done so already — go to Mint or a similar self-help budgeting tool, or to your nearest financial advisor, and get your cash flow projections done (using conservative assumptions). A cash flow will show you incoming and outgoing expenses projected from now until end of life. With the right tool, you should be able to see detail for each year, and really understand where you are with your finances. Pay the most attention to your cash flow projections for age 70 and up — is there enough cushion, or is there a possibility you may run out of money?

And lastly, do not take your current income flow for granted — it is hard earned from many grueling years of study, yes, and you do deserve to splurge. But don't borrow from tomorrow to pay for today — with the right strategies in place, that pot of gold can last you comfortably for a lifetime.

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Financial Planning
for Physicians

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