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
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 ⅓ 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:
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.
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.
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
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