Monday, January 12, 2015

Guest post on Doctor Finances

Hi there, this is a guest post on the important subject of Doctor Finances. It is by the writer of a fantastic website The White Coat Investor. The advice, while geared towards MDs is really great for anyone who wants great advice on investing.

Come With Me If You Want To Live!

The Terminator science fiction franchise was perhaps best known for the famous Arnold Schwarzenegger phrase “I’ll be back.” However, another common phrase is used in each of the movies as the protagonists meet for the first time- “Come with me if you want to live!” Sometimes I feel like screaming that line to doctors that I see doing stupid things with their money. Sure, it’s dramatic, and I’m not going to save anybody’s life by providing a few personal finance and investing tips, but it really irks me to see wonderful people who have dedicated their lives to healing the sick and injured get taken advantage of repeatedly. Doctors have a terrible reputation for mismanaging their finances. There are several reasons why.

First, like athletes and artists, their high income is due to a particular talent, skill, or highly specialized knowledge rather than their business acumen. By the time a small business owner has an income similar to that of a doctor, he has become very familiar with the business world and its pitfalls. Not so for the doctor. He may be over 30 years old and never had a real job prior to being thrust into a top 5%, or perhaps even 1%, income.

Second, a physician education is all about medicine, not about business, finance, or investing. After 4 years of college, 4 years of medical school, and 3-6 years of postgraduate training, the typical doctor receives about 1 hour of financial training, and that’s usually from a biased source who is trying to sell something to the doctor.

Third, doctors are busy. While most important personal finance issues are heavily front-loaded in life, and investing can be made ridiculously simple, it still requires some time to do it right. If a doctor never pulls himself away from his practice to deal with these issues, he may reach his mid 50s or even 60s and realize he’s going to be looking at a massive drop in lifestyle upon retirement.

Fourth, doctors are trusting. We’re used to calling a colleague and asking for advice and being able to trust that the colleague is competent and will put the needs of the patient first. We mistakenly assume that the rest of the world works that way. It usually not until we receive an education in the school of hard knocks that we learn that there is no Hippocratic oath taken prior to starting a financial services job.

Fifth, by virtue of their high income, physicians are literally targeted by many financial professionals. They are viewed as “the mark” or “a whale.” Realtors, mortgage lenders, insurance agents, stock brokers, and financial advisors all love to specialize in working with doctors, when in reality what they really specializing in is marketing to doctors.

Sixth, doctors tend to be overconfident. It takes a lot of self-confidence to cut somebody open or prescribe dangerous medications for life threatening conditions. Doctors assume that skill and knowledge in one area (medicine) will bleed over into the other areas of their life (like finance.) Unfortunately, it doesn’t. Finance has its own peer-reviewed literature, just like medicine, and most doctors don’t read it. To make matters worse, when we do make a mistake, we tend to hide it, rather than share it with colleagues. So we all have to make all of the same mistakes, over and over. Put all of these factors together, and we end up making a lot of stupid doctor tricks.

So, what is the solution? How do I help people to “live” financially if they do choose to “come with me?” Medical school is rapidly becoming more expensive. Student loans are no longer subsidized, and low interest student loans are a thing of the past. The average student loan debt is now over $200,000, and $400-500K in student loan debt for a single doctor is no longer unusual. Physicians are losing autonomy and for many specialties, incomes are falling, even without taking inflation into account. However, by optimizing their personal finances and investing, doctors can still enjoy the “good life” and obtain financial independence, that will allow them to practice medicine and live their lives in the way they choose to, rather than being a slave to their debts, their employers, and their own bad financial decisions.

The first thing I do at The White Coat Investor is provide financial education for physicians. All the stuff you wish someone had taught you in school is available, free of charge. The best part is it is available “just in time.” When you need to buy life insurance, you can read about that. When you need to do some estate planning, the website is up 24/7. New 401(k)? Need to start a college fund for your child? Not sure how to hire a financial advisor? It’s all there, along with a lot of stuff you didn’t even know you needed to know. It’s free to you and unlike most of the financial world, all of my conflicts of interest are fully disclosed.

Here is an example of the financial education available at the site. Two of the most common errors I see are an inadequate savings rate and an inadequate knowledge of available retirement accounts. Doctors don’t realize that if they ever want to be truly financially independent, they need to carve out a significant chunk of their income, such as 20%, to put toward retirement. Physicians are also failing to max out all their available retirement accounts, which may be an unrecoverable error for many. Sometimes that is simply due to not saving enough, but more commonly, they simply don’t know what retirement accounts they should be using. Employed physicians may not know about a personal and spousal backdoor Roth IRA. Self-employed physicians may be mistakenly using a SEP-IRA instead of an individual 401(k).

The second part of the mission of The White Coat Investor is to help doctors get in touch with the good guys in the financial industry. The vast majority of financial advisors are actually commissioned salesmen, but there are still some highly qualified individuals in the industry. Connecting doctors with competent, low-cost financial professionals is a valuable service. Even if they choose to hire somebody else, at least they know what competent advice at a fair price looks like. This list is not perfect, but a good place to start.

Finally, I help doctors to stay the course. The most important part of any financial plan is sticking with it for the long term- whether it’s a spending plan (AKA budget,) a well-thought out insurance plan, or an investing plan. Understanding what has happened in the past, and what could happen in the future allows physician investors to take a long term perspective and not only survive, but thrive in the half dozen bear markets they will face during their investing career.

Physicians have already won the income game, but if they don’t learn to manage that high income properly, they will never turn it into a high net worth or reach their financial goals such as purchasing and paying off their dream home, sending their children to school without debt, supporting worthwhile charities, or enjoying a comfortable retirement. By optimizing their personal finance and investing strategies, physicians can find the financial freedom that will allow them to quit worrying about money so they can concentrate on what matters to them the most-- their families and their patients.

James M. Dahle, MD, FACEP is the editor of The White Coat Investor website and the author of the best selling The White Coat Investor: A Doctor’s Guide to Personal Finance and Investing

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