You’ve probably heard it many times: doctors are notoriously bad investors. If you’re an MD who objects to this stereotype, think about how often you’ve heard colleagues talking about picking the next hot stocks or buying into “sure thing” investment opportunities. Why do you think doctors are prime targets for unscrupulous salespeople, brokers and insurance agents?
Even if you ignore the “you gotta get in on this one…” conversations in the doctor’s lounge, there is more to being financially healthy than avoiding bad investments. Achieving long-term financial health requires setting goals, then creating, implementing, monitoring, and sticking with a plan to achieve them. Unfortunately, doctors frequently stumble on the path to financial well being by making some easily preventable mistakes.
In this article, we review these common mistakes and why doctors tend to make them. Taken together, you might think of them as a potentially dangerous but highly curable condition, Faulty Financial Thinking Disorder. Each statement below describes the way of thinking that fosters the disorder. The good news is, it’s curable. Keep reading to discover whether you have this ailment:
“I’m a doctor. I (will) make good money. I’m not worried about saving enough – things will turn out fine.” Making good money doesn’t mean you’re saving enough money. Many M.D.s procrastinate when it comes to saving, focusing on having enough money to buy what they want today. Saving becomes an afterthought; something to do with whatever money is leftover after you’ve spent what you want to spend. A “pay as you go” mentality only works if you view saving for big-ticket items, such as kids’ college educations and your retirement, as expenses you have to pay for now, along with your rent or mortgage, utilities and groceries. As doctors make more money, their standard of living tends to creep up (luxury cars, club memberships, nice vacations), so the idea that there will be more money available for saving as your income increases simply isn’t the case for many.
“I’m making the maximum contributions to my 401(k) / IRA – I’m all set.” Maybe, but doubtful. A significant percentage of doctors delay retirement so they can continue to generate income and postpone living off of their savings. Why? First, they missed out on contributing to retirement savings during those years in med school and residency, so their retirement savings are not as big as they would have been otherwise. Also, as noted above, doctors who earn a good living often end up with assets that are expensive to maintain (a large home, luxury vehicles, vacation property). The income you earn as a physician may easily cover them now, but after retirement, those expenses could quickly consume your 401(k) or IRA. Even though you are making the maximum allowable contributions, there’s a good chance that won’t be enough to support your current lifestyle after you retire.
“After all those years of med school and residency, I’m finally making good money – I’ve earned the right to spend it.” This mentality causes young doctors to waste one of the most important investment tools they have at their disposal: Time. Remember those years you weren’t saving because you were in med school and residency? That’s lost time, and you have to try to catch up. Make time work for you. As unpleasant as it may sound, try to live on the salary you earned as a resident for a few more years. By doing so, you can increase your savings while you’re still early in your career. That means compounded investment returns will work for you as long as possible. You can also pay down your student loans faster and avoid the trap of thinking that debt is simply a normal part of life.
“Life Insurance? I think I have some through my benefits at work.” Doctors would never consider going without adequate malpractice insurance. However, even though the financial impact on your family if you died prematurely could be as devastating as a large malpractice judgment, physicians often fail to consider how much life insurance they need. As a doctor who makes a nice living, your family is accustomed to living a certain lifestyle. If the worst happened – and M.D.s are just as vulnerable to that risk as the average non-M.D. – you would want your family to be able to live in the same house, attend the same schools and have money for college. The amount of life insurance offered as an employee benefit may not be enough, nor is it portable should you leave your job.
“I can pay for my kids’ education out-of-pocket – why lock up the money in some account that I can’t access?” – It’s great to not have to worry about the cost of college, but the tax advantages to 529 Plans (and certain other educational savings accounts) are simply too good to pass up. Although the money is locked up, it’s really just shifting the amount and timing of paying those college expenses. You either make small deposits into an educational savings account over a long period of time, paying zero taxes on the investment returns, or you wait and take big bites out of your paychecks when the tuition bills arrive. If your child earns scholarship money, you can withdraw that amount from the 529 Plan, penalty-free. In a worst-case scenario, making a nonqualified distribution, you only have to pay ordinary income tax and the 10% on the investment growth. This is a fairly soft penalty since your original contributions amounts aren't impacted whatsoever.
“I don’t need to meet with a financial advisor – I’m doing fine on my own.” – When you hear patients say they don’t need an annual physical because they feel fine, what do you think? If a physical reveals a patient’s heart rate, blood pressure, cholesterol and other levels are all within the acceptable ranges, would you say the physical was a waste of time and money? It’s the same thing with financial planning. Maybe you are doing fine, or maybe there are some improvements you could make. You won’t know for sure until someone with the right education, training and experience has evaluated your financial condition.
Avoid Financial Planning Mistakes with the Help of An Expert
It is ironic that many of the perks of being a physician – respect, knowledge, high income, prestige – seem to work against doctors when it comes to seeking out financial planning advice. Since physicians are so often viewed as knowledgeable authority figures, doctors can fall into the trap of thinking they can handle almost anything without “outside help”. Also, since most doctors make good money they may think financial security will just “happen”, but it won’t. You need to set goals, and create, implement and stick with an action plan, to be adjusted as your life and your needs change. If you think that sounds like work, you’re right, it is – but it’s not in your area of expertise, it’s ours. Just as a doctor’s guiding principle is to help others achieve good physical health, ours is guiding people toward a financially healthy life.