Well, financial freedom- it isn't easy.What I'm about to tell you may shock & surprise you...
In fact, if my hunches are correct, simply reading this article today may change your ideas of financial freedom.
In the 10 years I've been advising and consulting with folks, there are some huge mistakes I see physicians commonly make.
However, I only have so much time...
So, I am going to cover 5 of them right now and give you the opportunity to learn more
Mistake# 1: Not Saving Enough for Retirement
The first mistake I see physicians make is not saving enough for retirement.
Debt is incredibly important and should not be neglected. However, I’ve seen too many people swing the wrong direction and get so focused on debt that they have little to no savings for a “cash cushion” or retirement.
On WhiteCoatInvestor.com, I thought James Dahle, M.D. succinctly wrote great words of wisdom…
“Most people also have 40 years to save for retirement. Doctors only get 30 years, so they really need to be saving 15% if they plan to retire at 65. If you want to retire early, better bump that up to 20-25%. Remember that isn’t counting saving for your next car, that boat, a house downpayment, or your kid’s college fund. That’s JUST retirement. A 5% savings rate just isn’t going to cut it. So on a $200K salary, that’s $40K a year. Just putting $17K into your 401K each year isn’t going to be enough…. In short, you spend too much. Quit it. Like quitting smoking, it’s simple, but not easy.”
I want to add a couple of points to this commentary
If you are used to income of $200,000 and live on $100,000, your needs for retirement will add up quickly...
Consider this WITHOUT INFLATION OR WITHOUT TAXES or a rate of return on the money...
10 years of retirement and income needs of $100,000 require $1,000,000.
20 years of retirement at $100,000 require $2,000,000.
If instead, you can live on less, let’s say $60,000 (again no inflation, taxes, or ROR), 10 years of retirement require $600,000 and 20 years of retirement require $1,200,000.
Tack on an additional 10 years or a total of 30 years of retirement income... this requires principal of $1,800,000.
See the difference! $60,000 retirement income requires way
Action Step: Gather together information on your income needs and tax projections. Consider the rate of return on your investments and the inflation rate. Get a financial plan!
Mistake# 2: Lack of Patience & Discipline with $
Another common mistake I see is physicians having a lack of patience and discipline with their money.
In my experience, physicians are some of the sharpest, most productive, tenderly compassionate, and wonderfully organized folks out there.
Yet, I find that many have a common characteristic of a lack of patience and discipline with their money.
Unfortunately, investing, debt management, and insurance... all of these take a very long-term perspective.
There’s no prescription you can take to “cure” your portfolio after it has dropped 30% except to review and adjust and ride the roller coaster. Unfortunately, so many people get off at just the wrong time!
Yet, somehow, someway, the market rises once again to new heights within a few years.
I truly believe in asset allocation. You want to have a diversification of investments so that when one is doing poorly, another is doing okay. Yet, some physicians start looking elsewhere because they are tired and frustrated by the stock market.
Some physicians have passive investments in all sorts of stuff: venture capital, wineries, equipment leasing companies, oil drilling companies, tax shelters, and burger franchises.
Here are several criteria that you should consider with any investment:
1) Is it liquid? Can you sell it at any time and get at least a significant amount of money back?
2) Is it based or registered (i.e. real estate, ADRs) in the U.S.?
3) Could you manage it yourself... if you had a poor manager?
I have one piece of advice for you- KEEP IT SIMPLE!
Ride the ride and be diversified. The traditional investments of stocks, bonds, real estate, ETFs, mutual funds, annuities, and cash value life insurance all meet the criteria we have described. They aren’t always sexy or interesting or fun, but at least they are relatively liquid assets.
Action Step: Consider for a moment, what’s the biggest mistake that you (or another physician/mentor/relative that you know) have made with money?
Mistake# 3: Poor Tax Advice & Strategies
Young or old, high-earner or low-earner, what do we all hate? TAXES!
We enjoy the things that taxes provide for us- roads, schools, libraries, retirement income, and security. Yet, we hate ‘em. It’s in our blood! It’s why our forefathers dumped tea
Yet, there’s a good way and a poor way to go about this process. As mentioned in the previous mistake, please please please don’t make “investments” in so-called “tax shelters”. Especially ones based overseas.
You cannot AVOID taxes, but you can work to MINIMIZE them. There’s a basic acronym that I like to refer to as “DOCS ED”.
Deduct everything to which you are entitled
Offset tax by use of available tax credits
Convert ordinary income to excludable income
Shift income to lower bracket family members
Exclude income legally from the tax return
Defer taxation of income to a later year
We don’t have the space to cover all of the possible scenarios, but consider the following ways that you can tax-defer and minimize either current tax obligations or future tax obligations:
1) MAX your traditional 401k/403b/457 DC. If you have a choice of two plans, max out both!
2) Utilize Roth IRA conversions (i.e. Back-door Roth) to shift taxable income to tax-free income
3) Start your own business or do locums. There are lots and lots and lots of deductions for biz owners.
Action Step: Hire an accountant, a really good bean counter, who you meet with during tax season AND AFTER tax season to assist you with “DOCS ED”.
Mistake# 4: Expensive Life Insurance
The next important type of insurance for physicians is life insurance.
Are you engaged or married? Do you have any children?
Imagine what it would be like for your family to lose your income.How would it
In the last 10 years of being a financial advisor, I have seen unexpected death drastically change the lives and fortunes of my clients. It is an incredibly difficult transition time for families.
The last thing you want on top of the emotional distress is financial distress.
If you are single (& plan on staying that way) and have little to no obligations, then there is little to no need for external life insurance outside of what is provided at work and you can skim over the rest of the text here.
However, if you are a physician and you have a spouse and/or children, I would strongly encourage you to make sure your family is covered!
For term insurance...
The longer the term, the more expensive it is.
The shorter the term, the cheaper it is.
You could be extremely cheap and get
Keep in mind that the premiums will increase after the designated period. Work towards having insurance until the time you calculate that you should be close to self-insured or alternatively near retirement.
In addition to the differences mentioned between term and cash value insurance, let’s walk through some examples so that you can further understand how this could work practically.
Here is an example of a quote for a
Case Study# 1: The Length of Insurance
Preferred Health 10 Year Term: $495
Preferred Health 20 Year Term: $870
Preferred Health 30 Year Term: $1,380
Preferred Health Universal Life: $3,340
See how the longer the insurance goes, the more expensive it is?
Cash value insurance (in this case universal life) is the most expensive because it is supposed to last up until you are at least 90 years.
Let's take a look at another example...
Case Study# 2: Your Health Determines Your Cost
Preferred Plus Health 20 Year Term: $615
Preferred Health 20 Year Term: $870
Standard Plus Health 20 Year Term: $1,050
Standard Health 20 Year Term: $1,350
Also, see how the stronger your health, the cheaper the premium?
Thus, the healthier you are, the cheaper your insurance is!
Although I am an admitted “
Mistake# 5: Family & Friend Loans... I Mean Gifts!
We all love our friends & family. Well, most of them anyhow.
What happens when someone wins the lottery? All of their “extended family” and “friends” who never cared before all of a sudden show up with hat in hand. Then, guess what, these poor, foolish, generous souls who never had money before
In your case, you’ve won a lottery too. Although, in your case you earned it through blood, sweat, tears, and hours and hours of studying and working for an average to below-average wage while accumulating debt.
Now, you are in practice and you are the “rich doc”. Hey, you have
Can’t you help your dear Aunt Sally? She’s going through a hard time. But your sister just lost her job and your brother started a new business. 20k “loaned” to dear Aunt Sally, 10k “borrowed” to your sister, and a 50k “debt” for your brother. You can afford it! Right?
NO! You can’t!
You are not a bank. You are not going to do underwriting and credit checks on friends and family. You do not have loan loss reserves. You’re probably not even going to charge them interest.
Let’s call a family “loan” what it is, a gift!
I love helping people and I love giving gifts, but within reason.
For example, would you give a 50k Christmas gift to your brother?
Maybe $1,000 or $2,000 if you feel
Give gifts and be a wonderful person, but don’t give loans. It's a quick way to lose money. So, don't do it!
Action Step: Don’t give personal loans! But be generous, and give gifts selectively to those you love and care about. Just don’t expect the money back….
There's so much I want to cover. We've covered the 5 big mistakes that I see physicians make.
What have you observed? What are the biggest mistakes that you've seen physicians make with their money?
About The Author
Dave Denniston, CFA is a professional wealth manager and financial advisor located in Bloomington, MN.
You can contact him at (800) 548-1820, at [email protected], or visit his website at www.daviddenniston.com/free to apply for a free
Advisory services through Capital Advisory Group Advisory Services LLC and securities through United Planners Financial Services of America, a Limited Partnership. Member FINRA and SIPC. The Capital Advisory Group Advisory Services, LLC (CAG) and United Planners Financial Services are not affiliated.
The views expressed are those of the presenter and may not reflect the views of United Planners Financial Services. Material discussed is meant to provide general information and it is not to be construed as specific investment, tax, or legal advice. Individual needs vary & require consideration of your unique objectives & financial situation.
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