Mid Career Physicians Blew a Great Opportunity

Everywhere I go I see unhappy doctors.

All everyone does is complain about rising malpractice premiums, more paperwork, declining pay, and 60 hour workweeks.  This includes physicians just graduating from residency and physicians who’ve been practicing medicine for several decades.

All of those complaints are legitimate, but one question I always have in my mind about the physicians who are in their 50s is “Why are you still practicing medicine full time?”

I keep hearing about the “golden age” in medicine. I don’t know what that means, but I assume it has something to do with making more money than we do now.

Suppose you’re a 55 year old physician and you’ve been practicing medicine for 25 years full time.  If you absolutely love it, that’s great. It’s your passion so go for it. But for the rest of you (which is the majority I think) who are in your 50s, who experienced the “golden age” in medicine and are still practicing full time and complaining, I've got to be blunt: you have failed miserably in your investment career.

What do I mean by this? Let’s say you graduated from residency in June 1985 and started making some money. Suppose you socked away on average $25,000 per year in the US stock market each year for the past 25 years starting in January 1986.  The US stock market as represented by the S&P 500 index had an average annual return of 9.9% in that period.  So over 25 years your investment portfolio should be at least $2.5 million.

And that’s with putting away only $25,000 a year on average. Bump that up to $50,000 every year—which is an entirely reasonable and attainable amount for a physician to invest every year---and you should have at least $5 million in the bank.

Even if you invested only in bonds you’d have about $1.7 million saving $25,000 a year and nearly $3.5 million saving $50,000 a year. This is based upon the US aggregate bond market index.

How many of you actually have that? Sure a few you might, but I’d bet that the vast majority of you don’t. And I also bet that the reason you’re working full time right now is because you realize you didn’t save enough and invest well. Common reasons why you have a meager portfolio value are:

1. You spent every penny you made
2. You didn’t save enough because you overspent
3. You took way too much risk and got burned
4. You hired a commission based financial advisor who put you in inappropriate investments
5. You invested in speculative investments like restaurants, limited partnerships, or hedge funds, and they tanked
6. You got divorced.

Now you feel trapped in your current situation.

So if you are a physician in your 50s or older and are complaining about your situation, you completely blew a phenomenal time to invest and really don’t have anything to complain about except your missed opportunity. You should have enough to walk away if you want. If you don’t and unless you jump up and down in joy every time you go to the hospital or when you’re on call, it’s time to crack the whip and get moving because the next 25 years are going to be a challenging environment to practice medicine to say the least. And if the chatter I’m hearing is accurate, I don’t think you want to practice medicine full time until you’re 80.

Comments

[A concerned doc]

I agree with most of what you say. Nobody should HAVE to practice medicine if they are more than 25 years out of residency (I would hardly call that "mid-career" but I suppose if one is planning a 50 year career one could.) I disagree with the simplicity of the example. If you're going to use such a long time period, you really should use real (after-inflation) returns instead of nominal ones. Take 2.9% for inflation off your 9.9% returns and you're left with 7%, growing that $25K/year investment to less than $1.6 Million, supporting an inflation-adjusted withdrawal of only about $63,000 per year. And that isn't counting the effects of investment expenses and taxes, which John Bogle showed us are extremely important. Those could easily reduce even that amount by half if the physician investor isn't careful. More significantly, the timing of the returns is very important. Most of the returns that get your average up to that 9.9% per year came in the 1990s, when the example physician would not have had very much money invested. The most important returns are the most recent ones, which most of us are aware haven't been very good. Most of the increase in the value of this particula rportfolio over the last ten years would have been due to new contributions, not returns. Lastly, most investors can't or don't invest in a 100% equity portfolio, so returns would have been even lower.

So yes, you are correct that most docs should have enough money saved to retire, or at least work part time, after 25 years. But to get there they need to be saving a lot more money (minimum 20%, preferably 30%) and taking care not to lose much of it to investing expenses or taxes. There are too few of us doing that.

[berto]

I've been out of residency for 7 years, and my highest income has been $250,000 (less than many specialized physicians). When I started I had a retirement portfolio of $50,000. Now, it is $1.1 million. Nothing fancy... just saved 30-40% of my pay every year, bought stocks heavily in 2008 and 2009, and drove investment expenses and taxes into the basement by using only index MFs and ETFs while maximizing tax-advantaged space. I have enough now to go part-time, and could conceivably never save another penny and still be just fine: if my portfolio grows 4% real every year til age 63, I'll have $3 million, real, to retire on. That would be more than enough. I'm even married, with 2 kids. However, one huge advantage is that I had very little educational debt - my parents paid for college, and I chose an inexpensive (state-subsidized) medical school. Those have obviously had a huge impact - thanks mom and dad. I agree with the premise, 25 years of hard work should be enough for most physicians to have put their nut away.

[Greg Bledsoe MD]

Excellent post, Setu, and great feedback from Berto and A Concerned Doc. Physicians as a group have not had much success as investors primarily because they lack the knowledge they need and the motivation to learn finance, a field outside their medical/scientific backgrounds.

Berto, I'd love ot hear more about your investment strategy. Feel free to contact me (my email is ghbledsoe AT gmail.com ) Your "in the field" experience is a great example of what physicians should be doing. You should write a guest post here on Freelance MD to tell your story.

I appreciate the conversation here. One of the great things about the community that's developing here on Freelance MD is the sharing of information among colleagues. Both of the comments and Setu's post offer excellent perspectives. I'd love to hear what more of our colleagues have to say about financial management and investing.

[Setu Mazumdar MD]

@a concerned doc--I agree with your point about inflation and withdrawal rates. However, to keep things simple I used nominal returns since most investors and most physicians don't understand real returns. Regardless, in nominal terms while there are some physicians who have built up a few million dollar portfolio, I personally have met a good number of physicians who have practiced the last 25 years and simply don't have a portfolio anywhere near the numbers I quoted. While the timing of returns is of course important, I can't change what really happened. Now of course most investors didn't get these returns and numerous studies have shown the reason is that very few investors have the discipline to ride out the bad times. And finally, the last 10 years actually have NOT been a bad time to invest. A well diversified low cost portfolio did just fine from 2000-2010 and actually would be up somewhere between 70-90% for those 11 years. Hard to believe but true. Most investors made the mistake of investing only in US large company stocks. I appreciate your comments and hope you enjoy freelancemd.

@berto--you've done an excellent job of saving and I commend you for it. You are certainly an exception to what I typically see with physicians. As you allude to, building wealth at an early age gives you tremendous freedom and takes away a lot of stress. You can work because you want to not because you have to. Thanks for taking the time to read my article and I appreciate the comment.

@Greg--Thanks for the kind words about my post

[A concerned doc]

@ Setu-

Agree that the last ten years haven't been bad to a diversified investor, I started in '04 and have an annualized return around 8% nominal since that time, but the example you used was the S&P 500, thus my discussion of the returns of the S&P 500. Also agree that behavior can be critical. I have two partners near the end of their careers who went to cash in Fall 2008, locking in huge losses. And I also agree that even $25K a year would be great for most docs.

@ Berto-

That's pretty impressive to accumulate a $1M portfolio in 7 years. I consider myself a strong saver but expect that to take me 10-12 years. I did have a relatively low salary for the first four (military doc) but also no loans.

I want to encourage all the docs out there reading this to learn more about finances and investing. It will pay huge dividends in the future.

[berto]

Hello again, thank you for the compliments! We have worked hard. But as I said, no fancy tricks. My first post-residency year was 2004, and my income was only $140,000 that year. My wife has worked for the last 7 years, making anywhere from $30k to $50k per year. And we've been raising two children, so we do have some expenses. However, we live in a pretty low cost of living area. Even so, we intentionally bought a quite modest house (currently our 15 year fixed mortgage payment is less than 5% of our monthly income); my son sleeps in the same room that serves as my wife's home office. We have no expensive hobbies, save travel, and even then we are quite cautious about our expenditures (traveling off-season, taking mass transit upon arrival, seeking out specials and deals, accumulating miles and points using credit card offers, etc). We mostly cook and eat at home. We don't attend the opera, I don't play golf, and I drive a 15 year old Toyota. My favorite pastimes are reading, hiking, exercising, and finance - all quite cheap! I guess you could say it's a page from The Millionaire Next Door.

Regarding investments, some historical awareness as well as some luck played a role. Throughout the 2000s I avoided large cap US stocks almost completely, believing them to be highly overvalued - based on my reading of history. I invested substantially in TIPS, other bonds, gold and silver, cash, and was actively short the market at times (using David Tice's Prudent Bear fund). So when the economic collapse of 2008-90 came, I was well positioned to sell those investments at a profit, in order to pick up equities at fire sale prices. My portfolio has doubled from late 2008 to the present, based on buying when others were desperately selling. Since then I have dialed back my portfolio so as to minimize risk. I don't need to take a lot of risk any more, so my portfolio is roughly 50/50 stocks and bonds.

As Dr. Mazumdar wrote, our financial position has granted us great freedom. Soon, my wife may become a stay at home mom, which we can afford. We may buy a bigger home. Aside from our retirement portfolio we have been able to save almost $200,000 for college for our 2 kids (average age: 2) and plan to save more, but know that should go a long way toward meeting their future needs. In other words, we can now relax a little, consciously deciding to reduce our savings from > $100,000 per year to, say $50,000-$75,000 per year, and know that the heavy lifting has already been done. That 8th wonder of the world, compound interest, is now our friend. I also have less reason to be distressed about the future of medicine, which admittedly looks pretty physician unfriendly.

My current portfolio is listed, just for kicks. All funds are Vanguard. You can see it's pretty conservatively positioned, especially for our age (late 30s) and not at all complicated.

30% US Total Stock Market index ETF
5% US small cap value index ETF
17% International Total Stock Market index ETF
5% International small cap index ETF
6% TIPS
11% Total Bond Market index MF
27% stable value fund

I appreciate the comments and enjoy the blog. Thank you for your efforts to educate our colleagues about the need to take control of their financial lives.

[Rich]

Biggest drag for me was repayment of loans for which interest rates were pegged to prime in the early 1980s - ouch. But I got debt-free at age 40 even in a lower paying specialty.

Biggest positive surprise was how much we were able to save after the youngest was out of college with minimal lifestyle compromise. Retired at 61 with comfortable if not extravagant savings. Those last 5 turbocharged years made the difference.

[afan]

And the math in this example is so bad as to be laughable. Right now physicians on average make about $200,000 per year. Some make a lot more, some make substantially less. The high income fields that everyone hears about have a relatively small proportion of docs practicing in those areas. Many US physicians are in relatively lower paying primary care, internal medicine (not medical specialties), family practice, and pediatrics. So the author claims that people making $200,000 per year should be putting away at least $25,000 per year over their careers. Ignoring for a moment the minor details of paying off education loans, which today typically run into multiple hundreds of thousands of dollars, mortgage and education expenses for children, this makes sense.

However, these pediatricians were not making $200,000 25 years ago. Nothing even remotely close to that. So assuming that their annual savings in 2010 dollars could provide an estimate of dollar amounts saved 25 years ago is, well, laughable.

In 1985, average physician income was about $125,000. Saving $25,000 of that, after taxes, repaying loans, mortgage, etc. would have been quite an accomplishment. Basically impossible. Even less likely since the author is expecting a doc to do that starting with her first year of practice, when income is going to be well below the overall average, which includes docs at the height of their earning years.

If that is silly, and it is, how about asking a family practice doc, average 1985 income $90,000, to save $25,000 per year? She would think you are crazy. Claiming that anyone who did not do this has failed in their investment career is absurd.

"Bump that up to $50,000"??? On a $90,000 income? Nonsense.

Now make some reasonable estimate of savings, taking into account what a doc would have made in years past, not what they make now. That person who is 55 and now makes $200,000 might well have a $2,000,000 portfolio. Ready to retire? At a 4% withdrawal rate, that would generate $80,000 in annual income. Which would not seem generous to a 55 year old earning $200,000

Real life is not that complicated, but it is way more complicated than this silly post.

[HearDoc]

Last worked with a 78 yo internist on third wife with two young kids at home. Third wife was his soul-mate but he had zero savings due to bad legal representation during his two divorces. Nice guy but had the look of a defeated man all the time. ( yes, his first two wives were nurses he worked with.... in case you were wondering)

[Setu Mazumdar MD]

@afan--there is no mention of which specialty I'm referring to in the post. It is an example that if you made $200k in income you could potentially amass quite a nest egg by now. However I know many physicians today who make $500k+ who can't save $50k per year. You mention paying a mortgage, and as you know many physicians are "overmortgaged." But let's take today's income as an example. Sure family practice docs, peds, and other primary care docs don't make much compared to specialists and I also personally know many docs in those specialties with $500k houses. Now it's one thing to have all that but it's another thing to have all that and then wonder why you haven't built up any savings. So while you can laugh all you want, the point of the post is that many physicians simply aren't saving enough. You should read the post by berto above--who has done an absolutely phenomenal job of saving and investing, and I would hardly call his income very high for a physician. Many physicians can learn from his example.

@berto--your story really should be an inspiration to most physicians--that this can be done despite all of the challenges we face in medicine today. Some people might criticize you and say that you might be "giving up" too much in life to save all that, but as you know financial freedom is priceless. Have you ever read "Your Money or Your Life"--the concepts in the first part of the book are really interesting. BTW, I like your index fund portfolio.

[berto]

Written by Kurt Vonnegut regarding Joseph Heller, author of Catch-22:

True story, Word of Honor:
Joseph Heller, an important and funny writer
now dead,
and I were at a party given by a billionaire
on Shelter island.

I said, “Joe, how does it make you feel
to know that our host only yesterday
may have made more money
than your novel ‘Catch-22′
has earned in its entire history?”
And Joe said, “I’ve got something he can never have.”
And I said, “What on earth could that be, Joe?”
And Joe said, “The knowledge that I’ve got enough.”
Not bad! Rest in peace!

Enough is enough! Cheers!

[Greg Bledsoe MD]

Great story, berto. I love it.

[Mehul Sheth]

Another great article and some great feedback...if I could add my 2 cents

1. Completely agree with the average salary 20+ years ago was different than today, making 25-50K savings more difficult

2. Student debt is a huge issue. My wife and I have significant and there are ways to minimize the effect, but must be taken into account-also the idea of good debt vs bad debt

3. Returns vary and cannot be counted on, but investment fees and diversification are in our control, take advantage of that

4. Location, location, location-especially imp for a physician. A rural physician can make 3x salary of similarly experienced and specialized doc in a major city, plus cost of living is a lot lower, plus fewer "distractions" (high expense activities-eating out, entertainment, etc.) makes a higher savings rate in rural area much easier.

5. family-as residents my wife and I socked away 20% of take home, now with kids and as attendings the dollar amount is about the same, but percentage, obviously, is a lot lower. Many factors, but includes cost of kids, work/life balance (my wife woks part-time), a good financial base means we are putting money into recuring stream investments vs sotck market, etc, but the point is still valid.

6. Taxes ae higher for higher income. Sounds simple and intuitive, but if you are paying 10,000 in taxes when making 80,000 (which we were) and now are paying 70,000 for a 300,000 income. This means that tax planning is a citical part of investment planning.

[MD]

Another problem is that many physicians trust unscrupulous advisers with their money. Often, these advisers can charge upwards of 1% in fees on top of expensive mutual funds. This can be huge after 20-30 years resulting in anywhere from 25-50%+ loss in terminal wealth.

Also, many physicians also try their hand in real estate, restaurants, etc. Extremely risky time consuming investments which often fail.

Many others are gripped by the golden handcuffs. Their lifestyle is so expensive that their net worth is either 0 or negative despite a high income.

I think it is a very small minority of physicians who can save a substantial amount every year, invest it themselves into low cost mutual funds and ETFS, avoid chasing the hottest thing and shuffling their portfolio around, avoid snake oil salesmen who constantly bombard them, and live significantly below their means.