Physicians and financial acumen

[Lovetowork]

It has been my experience that physicians have a fairly disturbing lack of financial savvy and acumen with regards to investing, living below their means etc. this has been my observation from speaking to colleagues and so on. Wondering if anyone here feels the same way and have any stories to share with this regard. I know several colleagues who are not saving for kids college, are not investing outside of 401k, do not know what compound interest is etc.


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[Plastikos]

I think WCI has a page or two full of such wild stories of mismanagement. Its well documented that physicians arent financially savvy, but with WCI, his readers and some others it is becoming less so, but its a big mountain to climb.

 

[Mman]

I would agree that physicians as a group have a disturbingly poor knowledge of how to save money and invest wisely. Some of that is likely from spending so long with having no major income and racking up debt and then all of a sudden having a much higher income and not being prepared for what to do with it.


What I will say, though, is I don't think physicians are worse than any other group of Americans in this regard. In fact I'd probably say they are slightly better than most. Americans on the whole are just terrible at saving money and investing. Too many people don't understand compound interest and it's implications over a 40+ year investment horizon.

 

[Stroganoff]

The pretty famous personal finance book The Millionaire Next Door by Stanley and Dansko place physicians in the highest level of UAW (Under Accumulators of Wealth) for high-income earners. Meaning physicians often live wayyyy above their means, potentially due to all the delayed gratification. Great book if you haven't read it.

 

[Plastikos]

What I will say, though, is I don't think physicians are worse than any other group of Americans in this regard. In fact I'd probably say they are slightly better than most. Americans on the whole are just terrible at saving money and investing. Too many people don't understand compound interest and it's implications over a 40+ year investment horizon.

This may be true, especially considering that there may be a sense of comfort and no real concern they cant make money, and no real reason in the past to feel like they were in dire need of savings as they had a good income and things...It does seem most of America is terrible with these issues as well. Part of the bigger issue is the general embarrassment among doctors to discuss money or act like it matters in school. It was almost taboo, which is of course so stupid as its an important thing to know. If I could add one class to medical school it would be a business/finance primer. Nothing crazy or overly in depth, just at least a introduction to different models, pros/cons superficially, and definitely a lot of focus on loans, options (refi, etc...), compound interest, saving, etc...and how far a real paycheck goes and the kind of bite taxes/all these costs of practicing will take.

 

[QofQuimica]

I'm halfway through a CFP certification program, and I think it's fair to say that nearly ALL upper middle class Americans are bad with managing money. When my textbook says that a 14% savings rate is "excellent" for a family earning $425,000 gross income per year, that just goes to show how screwed up our perspectives on this are.

For comparison, including employer match, I save 2/3 of my gross pay, which is considerably less than $425,000. That, to me, is an "excellent" savings rate. And....now you can see why I will probably never actually work as a CFP.

 

[Lovetowork]

Are you a physician also?

Never mind I saw your profile.
Why drove you get a certified financial planner degree? Seems like it wouldn't be too fun of a job, I envision it as basically telling people to not spend too much money which probably is not what they want to hear.


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[Lovetowork]

The post about having financial class in med school is really excellent. I wonder why they don't do that. That would be so much more useful than another lecture in micro or path. Even the professional sports leagues have this type of education.


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[bc65]

I'm halfway through a CFP certification program,

I thought about taking a CFP course as well. Do you think the education was worthwhile? i.e. did you learn anything new? I was thinking of doing it for fun, although I don't see myself being a professional adviser. Learning about finance is fun, but working as an adviser seems frustrating and thankless. If I want to work, I would rather do medicine. It's probably just as fruitless as telling patients to stop smoking and lose weight.

The post about having financial class in med school is really excellent. I wonder why they don't do that.

I am in the process of lobbying my local med school to allow me to teach a class on personal finance to the med students, but haven't had a response yet.
My guess is that since most doctors don't know anything about money, the school administration doesn't know what they don't know. Most deans would probably end up inviting in the guy who sold them a whole life policy to lecture.

 

[Lovetowork]

I doubt they would let you unless you had some fancy financial degrees or certification or worked for a financial planning firm.


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[QofQuimica]

Are you a physician also?

Yes.

Why drove you get a certified financial planner degree?

For my own education. I work for a university; they allow us to take free classes as one of our job perks, and I'm taking some. It's not an actual degree. To become a CFP, you take six classes, and then you have to take the CFP boards and undergo an apprenticeship of sorts. I just took my specialty boards this year, so I'm kind of board-examed out at the moment and not planning to study for/sit for the CFP boards.

Seems like it wouldn't be too fun of a job, I envision it as basically telling people to not spend too much money which probably is not what they want to hear.

I'm guessing you are correct.

I thought about taking a CFP course as well. Do you think the education was worthwhile? i.e. did you learn anything new? I was thinking of doing it for fun, although I don't see myself being a professional adviser. Learning about finance is fun, but working as an adviser seems frustrating and thankless. If I want to work, I would rather do medicine. It's probably just as fruitless as telling patients to stop smoking and lose weight.

Yes, I think the education has been worthwhile. I do all of my own financial planning: risk management/insurance, retirement planning, education fund planning, taxes, etc. I do still need to work on my estate plan, as I have yet to write a will. For that I intend to get help from a lawyer, which is why it is not yet done.

I don't think it's necessary to take CFP classes in order to get this kind of knowledge, but as I said to the other guy/gal, I have the opportunity to take the classes through my employer, so why not. I also think you are correct that advising people as a CFP would not be particularly enjoyable, and for the exact reasons you mentioned. Most people have no more discipline regarding their money than they do regarding other aspects of their lives like diet, exercise, etc. And for sure if they're not achieving their financial goals because they're wasting their money on things like cigarettes(!), we have a convergence of the problem. Heh.

 

[bc65]

I doubt they would let you unless you had some fancy financial degrees or certification or worked for a financial planning firm.

Perhaps, we'll see. Unfortunately, most of those "fancy financial degrees and certifications" are worthless, and many (most) alleged financial planners are just salesmen in disguise. Only a few certifications indicate that an adviser is a fiduciary, and even many with those certifications act against their clients best interests.

 

[bc65]

I do all of my own financial planning: risk management/insurance, retirement planning, education fund planning, taxes, etc. I do still need to work on my estate plan, as I have yet to write a will. For that I intend to get help from a lawyer, which is why it is not yet done.

Thanks.

My taxes are quite simple, as I'm employed and don't have a business or real estate, but I use an accountant anyway. That way I have someone to ask when I have tax related questions.

I just re-did my will and trust. I'm married with young children, and we set up a revocable trust, wills, power of attorney, etc. The old plan was completely re-done. It took over a year for the lawyer to finish up ( he was very slow on revisions, but they are all slow in my experience ) and I'm waiting two months now for him to make a small revision. It also took me 4 or 5 months to be able to re-title all my accounts properly. Every account needed documents to be notarized, both my wife and I needed to be there to do it, and some needed additional certification. Every financial institution had some issue or another before everything was titled properly. I also, reluctantly, decided to use a specialist bank to be the successor trustees if my children are still young when the second parent dies. This all took an incredible amount of time and effort. Needless to say, there's no way to do this properly without a lawyer who specializes in estate planning. There's a lot of non-attorneys or paralegals working with lawyers who have boilerplate forms they use that can ruin your estate. Expect to spend $5,000-$6,000. This is the second trust that I had done, the last one was 10 years ago, and it wasn't done right. You need to be careful.

 

[QofQuimica]

My estate is much simpler than yours since I have no spouse/children along with no business or real estate, and most of my assets are such that I can name a beneficiary as opposed to them going through probate (primarily retirement accounts and a brokerage account). But I do still have some personal property, so I don't want to remain intestate - currently I have no will at all. I also obviously still need a HCP in case I am incapacitated. I agree with you that I would rather pay someone to make sure it is all done right the first time.

I'm an employee too, but this will be my first time dealing with likely AMT (first full year as an attending). I also have interest income, my first back door Roth conversion, and my first brokerage account dividends to report this year. So not quite as simple to do my taxes any more as it used to be. But still doable. And on the upside, we do not pay state or local income taxes in Florida, so that simplifies things somewhat.

 

[Dr. USMLE]

I'm halfway through a CFP certification program, and I think it's fair to say that nearly ALL upper middle class Americans are bad with managing money. When my textbook says that a 14% savings rate is "excellent" for a family earning $425,000 gross income per year, that just goes to show how screwed up our perspectives on this are.

For comparison, including employer match, I save 2/3 of my gross pay, which is considerably less than $425,000. That, to me, is an "excellent" savings rate. And....now you can see why I will probably never actually work as a CFP.

I agree that most people do not save enough.

But it is not clear that your comparison makes sense. Why would you include employer match as a percentage of your gross pay savings rate?

That is not usually included when people mention "15% savings rate." Including employer match to 401k, HSA, and/or profit-sharing can completely throw off the calculation.

In theory, if you were already wealthy, you could have a savings rate greater than 100% of your gross pay using your line of reasoning.

 

[bc65]

I agree that most people do not save enough.

But it is not clear that your comparison makes sense. Why would you include employer match as a percentage of your gross pay savings rate?

Well, I think using gross pay as the base is also wrong, because you can't save money that you don't bring home. I have very little control over my tax rate. Some people will have more taxes ( if in a high state tax, earn a high income ) or more deductions ( a big mortgage, lots of kids, lots of charitable deductions ) but most of those factors are beyond our control. So, I like to use my net after-tax income as a denominator for savings. It's more useful to me.

The only reason to use gross income is to compare to others, but I don't think that comparing one's self to others is very helpful, as everyone has different circumstances. Some people have kids, and live in expensive areas, with a stay-at-home spouse, and others have no kids in a no tax state with a two doctor income.

I use my net income as a benchmark, but not my employer contribution, because I use the percentage as a measure of my personal discipline. If you use gross percentage and employer match, it's a closer measure of savings as a percentage of future taxable income . I think I can make a better argument for using net income. In the end, it's just a guide. The goal is whatever amount you need to reach to allow your safe withdrawal rate to equal your desired income.

On the other hand, if you're getting a corporate match, you might include it because, whatever the source, it's still a contribution to savings. It's useful because if my goal is financial independence, then if someone dropped 10 years of salary into my 401k, and my goal is to have 30 times my income, I know that I'm now an additional 1/3 of the way there.

 

[deleted126335]

Agree that physicians on average have poor financial skills.
IMO there are two major reasons for this.

1. Physicians fail to consider personal finance and investing as academic disciplines worthy of serious dispassionate study.
2. Overconfidence. As a group we are brighter than average. Since everybody has to manage money, we will of course be better than average at it because we are brighter than average. (NOT)

 

[QofQuimica]

The reason they use gross pay instead of net pay is because most people make their retirement contributions pre-tax. I saved $36,000 this year pre-tax in my retirement accounts (403b and 457b). If I only included what I saved from my net pay, how am I to account for my tax-deferred savings? I consider the employer match to similarly be a form of "tax-deferred savings," which I think is the CFP book authors' perspective too. Basically, it's all deferred income that you will get taxed on later, and it isn't really relevant whether the source of that deferral is you or your employer.

Regarding saving more than my gross pay, it is not possible for me to do this since I pay way more in taxes than I receive from my employer match. I do, however, save more than my *net* pay, since, even without the employer match, my yearly expenses are less than the amount I am able to defer pre-tax into my retirement accounts.

 

[DNM]

From my experiences so far, I'd agree with the above posters, many of our colleagues are lacking / unsure / don't care when it comes to handling money issues. Personally, a lot of the people I've talked with are very open to learning and I've shared a lot of resources with them like WCI book/blog. It seems like many people are eager to learn, but just don't know where to start.

 

[bc65]

The reason they use gross pay instead of net pay is because most people make their retirement contributions pre-tax. I saved $36,000 this year pre-tax in my retirement accounts (403b and 457b). If I only included what I saved from my net pay, how am I to account for my tax-deferred savings?

Perhaps using gross pay makes sense if most people are saving entirely in tax deferred accounts. Then they can calculate their savings rate based on pre-tax dollars, and can translate that directly into the pre-tax dollars that they will be withdrawing. However, it seems to me that if one were contributing entirely to a Roth 401k, then all the calculations could be on an after-tax basis, since that's how they are going in and coming out.

In my case, my savings are evenly split between pre and post tax accounts, due to a low 401k limit, so whichever way I choose to look at the numbers will require calculation and compromise. In any case, it's an artificial construct. In order to retire, everyone needs to balance expenses against their withdrawal rate. Neither of those is directly dependent on savings rate, just on total invested. So for me, the savings rate was just a measure of my self-discipline. I just ignore the 401k contributions, both mine and my employers, and just try each month to live on one of my bi-monthly checks and save the other check. I usually fall short, but it's a nice goal, and it makes me think twice before spending.

 

[QofQuimica]

Perhaps using gross pay makes sense if most people are saving entirely in tax deferred accounts. Then they can calculate their savings rate based on pre-tax dollars, and can translate that directly into the pre-tax dollars that they will be withdrawing. However, it seems to me that if one were contributing entirely to a Roth 401k, then all the calculations could be on an after-tax basis, since that's how they are going in and coming out.

In my case, my savings are evenly split between pre and post tax accounts, due to a low 401k limit, so whichever way I choose to look at the numbers will require calculation and compromise. In any case, it's an artificial construct. In order to retire, everyone needs to balance expenses against their withdrawal rate. Neither of those is directly dependent on savings rate, just on total invested. So for me, the savings rate was just a measure of my self-discipline. I just ignore the 401k contributions, both mine and my employers, and just try each month to live on one of my bi-monthly checks and save the other check. I usually fall short, but it's a nice goal, and it makes me think twice before spending.

Actually, your savings rate is VERY important, as this post by Mr. Money Mustache explains better than I possibly could: http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/ If you can save 50% of your net income per year, you will be FI in about 17 years*. This is mathematically true regardless of whether you earn $50,000 per year or $500,000 per year. At a 100%+ income savings rate, it should take me no years, but is actually taking me 3.5 years, because I still need to pay my current expenses and am funding two education accounts. (*Edit: Caveat: the number of years needed to reach FI also depends on your investment return assumptions, but his here are quite reasonable IMO.)

Also, IMO most attendings should not be contributing to Roth 401k accounts. The ability to defer taxation now, while you are in a high tax bracket, is invaluable. If you are in the position of expecting to be in a higher tax bracket after retirement than you are while working, then it may make sense to contribute to a Roth 401k instead of tax deferring. But even then, there are probably better ways to reach your goals and help you get a bit of a tax break now.

 

[bc65]

Actually, your savings rate is VERY important, as this post by Mr. Money Mustache explains better than I possibly could

The point I was trying to make is that the percentage that you need to save will vary based on your salary, your tax rate in retirement, the types of accounts your savings are in, the number of years that you work, the performance of your investments ( and all the variables that contribute to portfolio performance ) and your anticipated expenses in retirement. So everyone will have a particular percentage that they might need to save, but it will vary from person to person. Some people might have to save 50% for 40 years, others 10% for one year. So you can't assume that someone isn't saving enough because they aren't meeting some percentage that a book recommends. I don't think you would disagree with that.

In fact, I just looked at the mr. moustache article, and I think he makes the same points in the beginning, where he points out that " someone spending all his income can never retire, and someone living on 0% of his income can retire immediately". He also uses savings as a percentage of take home pay, as I do, and recommends in a footnote that 401k contributions should be added to the take home pay amount, as well as being counted as savings.

Also, IMO most attendings should not be contributing to Roth 401k accounts.

I was just speaking theoretically as to the utility of using gross or net percentages for savings rate. I wasn't actually recommending that as a strategy. However, backdoor Roths are great. There are no downsides to those. Also, there's great advantage to having tax diversity in retirement. I have a moderate sized Roth ( traditional IRA contributions, after tax, which I was able to convert to a Roth, plus some after-tax non-qualified 401k contributions that I was able to roll into the Roth as well. I will be able to add to that from age 65 to 70 with some IRA money in low income years before the RMDs kick in. Also, if your IRA grows large enough, your RMDs plus social security could put you into a higher bracket than you're in now. Plus, it's better to inherit a Roth. The other advantage is that having less in the IRA and more in the Roth might help by lowering your required distributions.

I assume you're using 529 contributions for your niece and nephew. The money grows tax-free, like a Roth. The other advantage is that the money is out of your estate, in case that becomes a problem for you later. I've maximized mine.

 

[QofQuimica]

The point I was trying to make is that the percentage that you need to save will vary based on your salary, your tax rate in retirement, the types of accounts your savings are in, the number of years that you work, the performance of your investments ( and all the variables that contribute to portfolio performance ) and your anticipated expenses in retirement. So everyone will have a particular percentage that they might need to save, but it will vary from person to person. Some people might have to save 50% for 40 years, others 10% for one year. So you can't assume that someone isn't saving enough because they aren't meeting some percentage that a book recommends. I don't think you would disagree with that.

No, I don't disagree with that. The book is giving an average recommendation for an average client. Not everyone will fit that scenario (I certainly don't), but it will hold true for many people in many scenarios. Regardless, no one should have to save 50% of their income for forty years. That's the point: if you're truly saving 50% of your income, you will reach FI way before 40 years. That will be true REGARDLESS of what your salary is.

In fact, I just looked at the mr. moustache article, and I think he makes the same points in the beginning, where he points out that " someone spending all his income can never retire, and someone living on 0% of his income can retire immediately". He also uses savings as a percentage of take home pay, as I do, and recommends in a footnote that 401k contributions should be added to the take home pay amount, as well as being counted as savings.

Yeah, he does the calculations by net income and also adds in the pretax contributions. That's how, by his formula, I can actually save >100% of my net income. Keep in mind though that he is self employed/FI and therefore has made NO tax-deferred savings for the past decade. That is not the case for most employed people, for whom their tax-deferred savings is a significant proportion of their savings (if not all of it).

I was just speaking theoretically as to the utility of using gross or net percentages for savings rate. I wasn't actually recommending that as a strategy. However, backdoor Roths are great. There are no downsides to those. Also, there's great advantage to having tax diversity in retirement. I have a moderate sized Roth ( traditional IRA contributions, after tax, which I was able to convert to a Roth, plus some after-tax non-qualified 401k contributions that I was able to roll into the Roth as well. I will be able to add to that from age 65 to 70 with some IRA money in low income years before the RMDs kick in. Also, if your IRA grows large enough, your RMDs plus social security could put you into a higher bracket than you're in now. Plus, it's better to inherit a Roth. The other advantage is that having less in the IRA and more in the Roth might help by lowering your required distributions.

Totally agree with you here. I did the backdoor Roth for the first time this year and plan to keep doing it as long as I have earned income and make too much where I can't directly contribute.

I assume you're using 529 contributions for your niece and nephew. The money grows tax-free, like a Roth. The other advantage is that the money is out of your estate, in case that becomes a problem for you later. I've maximized mine.

I'm doing a combination of a 529 and a Florida prepaid program for each child. The prepaid program (which is basically a different type of 529) covers their tuition for four years at any of our state universities. The regular 529 will be for other COA expenses like room and board, books, etc. Assuming they even still use books in the 2030s.

 

[Mman]

I'm halfway through a CFP certification program, and I think it's fair to say that nearly ALL upper middle class Americans are bad with managing money. When my textbook says that a 14% savings rate is "excellent" for a family earning $425,000 gross income per year, that just goes to show how screwed up our perspectives on this are.

For comparison, including employer match, I save 2/3 of my gross pay, which is considerably less than $425,000. That, to me, is an "excellent" savings rate. And....now you can see why I will probably never actually work as a CFP.

That's good for you but probably not attainable for many.

My wife and I save a lot in actual dollars, but we couldn't get to 2/3 of AGI if we tried as nearly 50% of our AGI is taken up by federal, state, and local taxes. Add in some low interest student loans + mortgage/home equity and it just isn't possible. We still end up saving approximately 1/3 of AGI per year though which is mighty impressive if you ask me.

 

[rl2]

No matter who you are the key to wealth is to spend less than you make. I think there are two factors that effect doctors that make this harder to do.

1. A sense that you have to live a "doctor" lifestyle. While doctors make good money they are not wealthy compared to top earners who make in 7 figures and over. When you try to compete with them it's going to be a tough challenge.

2. You spend so many years learning about medicine that other of knowledge get pushed aside. The main one tends to be finances and learning to save. It may be the fact that you are always employable and can earn a good income that prevents you from thinking about the future, or years of delaying spending as you finish your education.

Everyone has different values and goals. No matter what they are you need to set your savings rate appropriate to what you want to achieve in life. 10% is very low, especially since you are then living a large lifestyle that you need even more to save for.

You are also targets for every financial person out there as you have high income and limited time to deal with investing it well. WCI principles will get you very far on the road to success!

If you want to learn about the game being played - read Tony Robbins, Money Master the Game.

 

[ResidentSensei]

I think the major problems plaguing doctors with regards to finance are:

1) Absolutely zero education regarding finance during undergrad, med school, residency and fellowship (11+ years).
2) As a group, we believe we are smarter than everyone else and can "beat" everyone else.
3) We never talk about it. It is taboo during our extensive training to mention $ for the fear that someone will tell us that medicine was not our calling.

This breeds ignorance and arrogance which is a combination destined for failure. Also, a little bit of knowledge is dangerous.

Luckily, the current generation has easy access to good websites like Bogleheads and White Coat Investor and such to at least guide them a little.

I hope, that in my lifetime, all medical schools offer students a finance/investments course at the end of their 4th year after matching, so that they will have at least some guidance and "plan" prior to starting residency. However, I think we are a long way off from that, until the medical students come forth and demand it. And well... "you don't know what you don't know".

-Sensei