Financial Planning for Resident Physicians, Item #10 Invest for Financial Independence
This is the eleventh article in a series dedicated to helping the resident physician take steps to put their house (financial and otherwise) in order. My previous articles on the subject may be found here.
Are older doctors financially independent?
In 2016 Medscape released its “Physician Debt and Net Worth Report 2016” which included some interesting findings. According to the report, of physicians aged 60-64, 12% had a net worth under $500,000. Another 14% had a net worth under $1,000,000. Now you probably didn’t enter medicine for purely financial reasons, but I expect that you hope to have more than $500,000 in assets to your name in your early 60s. More than one in ten of your colleagues aged 60-64 do not.
The objective of this article isn’t to theorize why that’s the case, but to offer an antidote to your ending up that way. The benefits of financial independence are obvious, but it’s worth mentioning a few of them.
One reason is that physician burnout is real. You signed up for a tough job. A very important one, but a job that can be extremely taxing. A radiology resident friend of mine said that he wants to build up an “F-You Fund,” so that he can walk away from his job if he wants to someday. It’s debatable how tasteful this fund title is, but financial independence can free you from having to cave to administrative demands. You literally don’t need to answer to anyone to earn enough to cover your needs.
Perhaps most importantly, when you achieve financial independence and your financial house is in order, that frees you up to invest in others, and help your community. And there’s a whole lot of value in that.
Where should you start?
While it’s appealing to dream about the day you answer to no one, you’re not there yet. Financial independence feels far away. So where should you begin? We’ve discussed a lot of important tasks for residents to complete during their training, and now it’s finally time to start talking about investing.
If you have an employee match program through your company’s 401(k), that’s a great place to start. Don’t miss out on contributing to the plan because you want to buy a home, car, or even because you want to throw more money at your student loans. A company match is money left on the table if you don’t take advantage of it.
An increasing number of employers are offering Roth 401(k)s as well. Traditional 401(k)s allow contributions on a pretax basis—meaning that money contributed to a traditional 401(k) is not taxed today, but will be when you take the money out of the account. Roth accounts are taxed when you make contributions, but then the money is never taxed again.
Considering the comparably low tax bracket that you currently find yourself in, it may be beneficial to contribute to the company Roth 401(k), if there is one. Don’t worry, you’ll still get the match so long as you contribute the company-mandated amount. The match will be deposited in the traditional 401(k) no matter which account you contribute to (Roth or traditional). Though the advantageous of Roth contributions while you’re in a low tax bracket may seem obvious, your individual circumstances may make it more advantageous to contribute to a traditional 401(k) rather than a Roth. Remember that one of the planning opportunities for lowering your monthly income-driven repayment plan payments is to lower your adjusted gross income by increasing pre-tax contributions. This would suggest not contributing to a Roth account. Your individual circumstances will dictate which strategy is best for you.
From there, decide if you can save more. If you can, do it! If you can’t, keep in mind that the investing you do in residency isn’t likely to make or break you financially over the long haul. But if you’re skipping out on investing so that you can drive a nicer car, or so that you can eat out more, you’re probably not developing the right habits that you need to.
As your pay increases, systematically increase your savings rate. Doing this can make saving feel less like a burden. The most important time to do this is when you graduate residency and become an attending physician. Don’t skip out on dramatically increasing the amount you save when your income quadruples.
Keep investment expenses low.
As we consider this section, let me share with you two quotes from the late great John C. Bogle from his 10th anniversary edition of The Little Book of Common Sense Investing.
“The more the managers and brokers take, the less the investors make” (62, emphasis is Bogle’s).
“Fund performance comes and goes. Costs go on forever” (54).
Too many of us don’t understand the drag that investment expenses and fees are having on our portfolios. It is of primary importance that you keep investment fees low in order to keep more of your investment returns. Do you know how much you’re paying for investment fees? Remember, these fees aren’t something you would write a check for. They’re coming directly from your investment account.
As you review your portfolios, both through work, as well as though your investment advisor, consider the following questions. Am I paying a sales load for the purchase of my investments? Are my mutual funds charging a reasonable expense ratio?
I recently reviewed a friend’s investments that he had with a national firm. For every purchase he made, 5.75% of his money was evaporating in front-end fees. In addition, his portfolio was being charged .75% in mutual fund expenses every year. It didn’t take long for him to see how these fees were really going to hamper his return over time.
Consider utilizing low cost, tax efficient, globally diversified index mutual funds as part of your plan for long term investment success.
Invest in what matters most.
A discussion about the importance of investing really wouldn’t be complete without a reminder to invest in what matters most. Don’t forget to invest in your family. There’s no rule that says that you must save the maximum amount of money no matter what—although most of us could benefit from saving a little more and spending a little less.
It’s vital that you invest in your relationships. They require time, energy, and often money to stay healthy. If you’re married, your relationship with your spouse is the most important investment you will ever make. Life is richer and fuller when you have meaningful relationships.
Some final thoughts.
I hope you’ve enjoyed this brief series on important tasks that resident physicians should complete during their training.
No matter what your current situation, begin where you are, and take steps forward. Financial planning, like most things, is more about the direction you are headed in than the final product.
Be wise, work hard, and enjoy the journey.
These are my opinions, unless I’ve specifically cited other material. The information and ideas I’ve presented are for informational purposes only. Before you implement anything, make sure you have a thorough discussion with a qualified professional who understands your situation.