Established physicians in high-income specialties and positions tend to make many of the same potentially disastrous errors with how they manage and multiply their income. Make sure you’re not one of them.
1. They don’t articulate what they really want for themselves so they can make those goals reality
So many physicians go through life without prioritizing what really matters to them and forging their lifestyle and financial decisions around those objectives. This is a huge missed opportunity. Your voice can be a powerful tool: By stating what you want, you take the most important step toward putting it into existence.
A critical part of the process to meet your desires for the future is examining all the concrete possibilities for what your life could look like, both now and down the road, and understanding the numbers of how your individual choices will impact your life across the board. When working with our physician partners, we walk them through various physician lifestyle simulations, so they can see for themselves where they would like to make changes to further advance their priorities. As physician lifestyle planners, we’re here to support physicians in achieving what’s important to them.
2. They fail to take into consideration the ripple effect of their decisions
Many younger physicians don’t understand how their decisions now will determine what their life looks like 15 or more years from now. For instance, we often work with physicians in their early 40s who want to pay for their children’s college educations at private institutions and then, if their children are so inclined, for another four years of medical school.
It’s a great objective, but if they don’t plan appropriately, they may have invested all of their money in their two children’s educations just as they themselves are ready to retire. But now they don’t have the funds for the retirement they had envisioned.
Similarly, physicians who are near the end of their careers don’t always realize how big of an impact investments and risks at this stage can have on the rest of their retirement years. It’s not uncommon to see a 65-year-old physician save $7 million in investments and funds that produce an income of close to $500,000 per year, then agree to invest $500,000 of that $7 million in a business they believe in.
They often realize the investment is a high-risk decision, but they figure that losing the sum can’t impact their lifestyle that substantially, considering how much they still have saved. They fail to realize just how much income they will lose over the next 20 or more years of retirement after that kind of a hit to their interest-producing nest egg. They may not see the effects right away, but they certainly will see the detrimental results in their later years.
3. They follow “rule-of-thumb” guidance, rather than advice geared toward their specific career and lifestyle
For instance, a common piece of advice is to pay off your debt before you start saving. This may make a lot of sense for the average professional, but what about your particular specialty, lifestyle and other circumstances unique to you?
By way of example, if the interest rate on your loans is 3 percent, you could actually save significantly more money by only paying your minimum monthly payment and properly investing your money where it has projected returns of 6-10 percent. These kinds of decisions need to be specific to you.
4. They follow the same advice they received as residents
Physicians often relay to us that they were told as residents to save for their futures by maxing out their qualified retirement plans, such as their 403(b) or 401(k). While this is a wise approach when you are making $70,000 a year, it is less wise when you are making many times over that amount.
With caps on how much you can contribute to these plans, you’ll find this approach will make it impossible to maintain a lifestyle in retirement that is similar to the one you live now. The more money you earn, the more sophisticated your financial planning structure needs to be.
5. They underestimate inflation
It may not be top of mind while you’re making a respectable income, but the cost of living continues to climb every year. Many physicians fail to think about just how much more money they will need to live off of during retirement than they do today, if they want to maintain a similar lifestyle.
For instance, a physician who owns a house in New York City might have paid just over 11 percent in taxes on their property back in 2000, while the rate they would pay on the same property just 20 years later is more than 21 percent. And just think of the difference in the value of the property during that time. Everything—from a cup of coffee to a new car—costs significantly more as time goes on. What you spend to live your life today will cost you substantially more 20, 30 or 40 years from now.
6. They don’t know when their investment portfolio isn’t being managed optimally or minimizing their tax burden
Working separately with various financial professionals can drive inefficiencies and excess fees. When one physician couple came to us, we discovered that they were paying taxes on unrealized gains for their mutual funds. They had high expenses because of the structure of their mutual funds, and they were paying an advisor fee on top of that.
On the flip side, when they partnered with us, we were able to recommend the right mix of investment instruments, configured based on expected returns, their goals, risk tolerance and other factors specific to their situation. At the same time, we worked together to design their portfolio in a way that saved them as much as possible in taxes, so they could direct that money toward investments that would grow for their family’s future.
7. They lack updated, coordinated insurance and estate plans
People don’t often like to think about the worst happening to them, but insurance policies, wills, trusts and other estate plans are all critical instruments to provide for your family. Most physicians have insurance policies in place, but they fail to plan them hand-in-hand with the other aspects of their estate plans. This lack of coordination and up-to-date planning can lead to significant inheritance tax issues as well as other burdens and undesirable effects on your family.
One such issue is misdirected funds. If you specified beneficiaries when you first set up your insurance policies, 401(k) or 403(b), IRA or bank accounts but did not update them down the road when your circumstances changed (such as marriage or divorce), these funds will go to those beneficiaries by law. That means that even if your will specifies that your assets should go to your spouse and children, those assets will bypass your will and go to the direct beneficiaries you first named in your accounts.
→ Read more insights: Why Physicians Need to Integrate Their Insurance and Estate Plans
8. They fail to educate their families on financial matters
For physicians who made all the right decisions, there’s one more action that’s frequently overlooked. They have successfully built up wealth to provide for the retirement of their choice and to leave an inheritance for their children. While it’s no simple feat for the physicians themselves to build up wealth to pass on to the next generation, it’s another thing entirely for their children and grandchildren to capitalize on the value of their inheritance and pass it along to their children and grandchildren. According to a commonly cited study by the Williams Group, a wealth consultancy, 70 percent of wealthy families lose their wealth by the second generation, and only 10 percent of these families preserve their wealth into the third generation. The general pattern is that the first generation makes the wealth, the second generation at best lives off that wealth, and the third generation completely loses the family wealth. How do you know which category your heirs will fall into?
Common themes for successfully transferring wealth from generation to generation focus on teaching: both the value of hard work and sound financial practices. Failing to teach the next generation can very well mean that hard-earned legacy you leave will quickly fade away.
Our approach to wealth management and estate planning is to work with physicians to facilitate generational planning, with a focus on the family holistically. In line with their wishes, our standard practice with physicians who have older children is to sit down and explain everything their parents have planned thus far (sometimes at a high level, other times with full detail, depending on the parents’ preference).
Making a conscious effort to educate your children on financial matters and even bringing them into family wealth planning can help ensure your financial legacy benefits your heirs—and their heirs after them—to the fullest.
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Asset Allocation neither assures a profit nor protects against a loss in a declining market. Consult your own personal attorney legal or tax counsel for advice on specific legal and tax matters.
If the interest rate on your loans is 3 percent, you could actually save significantly more money by only paying your minimum monthly payment and properly investing your money where it has projected returns of 6-10 percent.