Month: September 2015

Decreasing Physician Reimbursements Dictate Your Financial Plans

Posted on by SmartMoneyMD

Part of our financial strategy should be to create a plan to reach retirement, even if it is decades away. A written plan helps us realize what our expenditures are, and how much we hope to have by the time we finish our careers. If our time horizon for retirement is in the far distance, we have more time to adjust to our strategy so that we won’t be left asking our heirs to help us out.

One of the dangers for physician retirement planning is that our incomes are generally high compared to the average population, our expenses are generally high compared to the average professional, and many of us are oblivious (or choose to ignore) the fact that our income is unlikely to remain as high in the future.

I mentioned previously that physician income is tied to insurance reimbursement. Current Medicare reimbursement levels do not even keep up with the rate of inflation! The only way that you will ever earn more money in the future is if you see more patients or if you have ancillary income streams outside of medicine. Since most doctors don’t have enough time to even take care of themselves, it’s unlikely that they are able to invest prudently in alternative income streams.

What Can I Do To Break Out Of The Usual Doctor Habits?

  1. Income arbitrage. Like every financial blogger has written, what goes out must be less than what goes in. Doctors deal with higher numbers than the average person, but the principles are unchanged. You are already a decade behind the average person out there, so you need to count your pennies (or Benjamins!) more carefully early in your career.
  2. Be wary of easy money strategies. This includes investing in gold, rare metals, insurance policies, or shifty real estate deals. There is no easy money. You worked your butt off for a decade in order to guarantee a six-figure salary. Nothing comes easily in life.
  3. Accelerate your savings early in your career. The amount you will be reimbursed for performing an appendectomy will be cut in half between the time you start your career and the time you end your career. Maybe a quarter. You’ll never know. Live like a resident for the first few years of your career, even if you have a family to feed. You don’t need a Mercedes [yet].

What aspects of your career do you consider in financial planning?

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Sacrificing Your Career For the Good of the Family

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Our society has taught us that we need to hustle in order to succeed. Whether our goals are to get good grades in school, build our businesses, or become a gifted surgeon, hard work is mandatory. I previously described this desire as your hunger to succeed. With hunger, we develop a need to achieve our dreams.  As a result, that is how we succeed.

What is often overlooked is that we often make sacrifices to ourselves and to our families in chasing our dreams. The sacrifice usually comes in the form of lost time that could have been spent nurturing our other interests or being with family. This trade-off cannot truly be quantified or objectified. We end up making our decisions based on which one seems more important to us at the time of decision.

As doctors, we are often self-centered and focus on how hard we study, sacrifice our 20’s, and work in our jobs. Our lives revolve around our patients, and we often are called to duty during hours that are usually spent with our loved ones.  We do it for our profession. We do it for the income. We do it for the love of medicine.

How do we draw the line between career and life?

This is a challenging balance that all professional households struggle with. As recent as one generation ago, there was less of a question in a doctor household—the doctor serves as the breadwinner while the spouse cares for the rest of the family. It was a no brainer when the highest potential earning member of a family ends up being the worker since that conferred the highest level of financial security to the household.

The circumstances have evolved in modern households. Some families consist of two doctor households where both spouses have equal earning power. Some two-professional households also have similar income potential between the spouses. The prominence of technology, internet, DIY culture, and deviation from social norms have given households more flexibility in lifestyle and de-emphasized the traditional single-income family or the standard “work 30 years and then retire” mentality.

Someone has to compromise in a two-professional household.

It is very difficult for each individual in a two-professional household to have dream career opportunities in the same city. The more specialized the career, the more difficult it is to find a match.  What is more common (yet still challenging) in most circumstances is that both spouses have employment opportunities in the same vicinity but neither of them may be ideal. This is where compromise must be achieved.

I’ve come across many colleagues who had to settle on a job rather than their dream career because of spousal commitments. Point in fact:

Family where wife is an oncologist and husband is a software developer.

One of my colleagues works at Google. His wife is an oncologist. They are restricted to living in one of the cities where Google has a team. Why would a doctor ever have to settle on where to live and work because of a spouse who likely earns less that she could? Practicality. The Google developer started in his early 20’s pulling in a high $100k salary with bonuses salary that totaled the high $200’s by the end of the year. He gets 4 months of paternity leave. Additionally, there is free catered lunches at work, free child care, and a boatload of vacation time (and swag). The oncologist entered the workforce over ten years after her husband, and has a starting salary of $250k.  If she were to leave the metropolitan area, she could find a job that pays at least $350k annually.

They decided to stay in the city. The oncologist has compromised her career for the good of the family. It happens.

Do you know of other professionals who have put their careers second to the greater good of the family?

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Put Your Children’s Needs After Your Own

Posted on by SmartMoneyMD

Due to culture, social pressures, or self-imposed obligation, providing for our children has always been a priority. This care starts with food and shelter, but quickly escalates beyond true necessity as our income rises. For many professional households, the cost of raising a child easily exceeds that of the $245,340 average that is often quoted.

Where does that money go? Start with toddler toys or that quintessential toy lawnmower that most kids have. Add in rotating collection of brand-name wardrobe that your child outgrows, fancy German and Italian model race cars, fancy family vacations, and you’re already behind the average before your child turns 6. How about daycare, the multitude of extracurriculars like little league baseball, tae-kwon do, soccer, tennis, and [insert your preferred after-school activities] you’ve hit enough to pay for a year of Ivy-league education. Oh, even though you went out of your way to buy that fancy house in the top school district of your area, you still need to send your kids to private school. Better yet, with 12 years of private school, your child will definitely get into an Ivy League college of his/her choice.

It’s okay, you’re a doctor. You can afford it. Your financial advisor has mapped out your future. Your child’s education will hopefully be funded through your 529 plans, taxable accounts, and maybe even your cash-balance plans. If the future doesn’t treat you as fairly, maybe you can work an extra few years.  Have a second or third child? Wash, rinse, and repeat.

You Need To Put Your Needs Ahead Of Your Children

With all jest aside, you are only obligated to provide a safe and nurturing environment for your children until they become adults (age 18). Financially, this approach should be the default. The better of you are prepared for retirement, the better of your children will be—they won’t have to worry in their budgets to fund your retirement. Remember, the fact that your kid has the complete line of SpongeBob accessories doesn’t mean that she will get into Harvard. What if your kid becomes the next tennis star? The $150,000 that you funded into your 529 will be left to their heirs or taxed out of your retirement fund. Worst yet, your kid may flunk out of her private high school and not even make it into college. The worst thing you can do for your kid is to give her a million dollars when she the best job she could obtain is the at the local car wash.

Take a Step Back and Assist Your Children As Needed

The best step to take in helping your children make it through this world is to become financially secure yourself. Build up your nest egg, achieve financial independence, and help them as needed. They will thank you for it in the future.

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Hunger Drives Your Will To Succeed

Posted on by SmartMoneyMD

Ask any self-made successful person, and she will tell you that one of the key components in success is hard work. Life is rarely presented to you on a silver platter–you have to create the opportunities yourself.  Look at the top CEOs of successful companies; most wake up earlier than everyone else and work later than everyone else. Look at the work ethic of Jeff Bezos and all of the publicity that his company has received lately regarding Amazon’s tough nurturing of its employees. These successful people have the hunger.

It is the hunger that drives us to succeed. You too can invoke that hunger to achieve your goals.

Hunger Allowed You To Conquer College, Medical School, and Residency

As a medical doctor, you obviously have had the hunger and discipline to make it through adversity. You spent more hours in the library than the majority of your college peers. You spent your 20’s and early 30’s studying and specializing in your medical field. You practice medicine in a time with decreasing reimbursements and an increasingly litigious society. If you are still practicing medicine in this environment, there is still an amount of hunger within you. Whether it is the thrill of the science of medicine or the looming debt that you’ve accrued during your decade of education, there is a drive in you to keep you going.

Use That Hunger To Advance Your Life

If your definition of success involves advancing your life beyond what it is currently, you must outline some goals. Whether these goals are short or long term, the first step in achieving them is to map them out. Narrow the list to a few priority items and ask yourself how much you need to achieve them.

Do you want to lose 10 pounds in 2 months? Do you want to cut back on buying shoes? Do you want to save up enough to retire early or to buy a house? Are these goals desirable enough to drive your hunger to achieve them? What are you willing to give up in order to reach these goals? That is the most important question. You must ask yourself why these goals are important to you. Is there a special event that you need to go to that requires you to cut some inches off you waist? What are the consequences if you don’t lose those 10 pounds? Will cutting back on your weekly shoe purchasing allow you to retire a year earlier, which is your ultimate goal?

You must rationalize the need to achieve these goals. Only then will you be able to achieve them. Start small and think big. Make a ladder of goals that increase in difficulty to achieve. Keep sight of the end goal. Every minor victory counts, and track your progress.

Example: Achieving millionaire status by age 40.

Suppose you finish your cardiology fellowship at age 33 with a net worth of negative $200,000.  You take your first job with a salary of $250,000 annually with potential bonus. After two years of working, you make reach an earning potential of $350,000 annually. You want to have at least a $1 million net worth by the time you reach age 40. You have 7 years to do it. Suppose that you earn $275,000 for the first two years and $350,000 annually every year after that. In 7 years you should have a pretax income of $2.3 million. If Uncle Sam takes 40% of that, you should have a take of about $1.38 million post-tax. Subtract off $200,000 in loans that you repay, and you will have $1.18 million to play with. Assuming absolutely no appreciation in your earnings, you cannot spend more than $180,000 in 7 years (or about $25k annually). Now Mr. Money Mustache is able to spend $25k a year to feed his family of 3 in a lavish lifestyle, but you, the hotshot cardiologist can’t. You have to pay for your work clothing, commute, and living expenses.

The first step in making this goal achievable is to realize that it can be done. The numbers are close enough to work out. The second step is realizing that putting all of your unspent earnings into the bank will not be adequate. At a measly interest rate of around 1% pretax, you will not hit your goal. The solution to guarantee that you reach millionaire status by age 40 is easy: cut your expenses and earn more money.

From this point, you can further narrow down your game plan. Find out what fuels your desire to reach this goal, and act on it.

What does your hunger drive you to accomplish?

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Early Retirement Is Possible For Doctors and Professionals

Posted on by SmartMoneyMD

Early retirement isn’t just a pipe dream for doctors or even most professionals. It can be achieved if that is your goal. You simply have to establish a plan and execute it. Routinely (but not obsessively) monitor and track your progress. There are plenty of (non-physician) bloggers who document their achievement of early retirement—many at ages where doctors only are hoping to finish residency or fellowship.  If they can do it, so can you.

You Must Define What Early Retirement Means To You

Before you embark or consider early retirement, you must establish what it means to you. Everyone will have a different goal in early retirement. The main reason why people even consider retiring early is to free up your time to pursue activities other than what you’d do in your normal routine job without being homeless. Financially, being in early retirement means that you no longer require income from your routine job. It does not necessarily mean that you no longer generate income either. In early retirement, you still may have passive streams of income or simply a source to draw your living expenses from.

Examples of early retirement include:

  1. Lawyer who retires early to travel the world with his kids and stays home to blog.
  2. Software developer who retires early to blog at home and take care of his son. (Retire by 40)
  3. Software developer who retires early to pursue his hobbies in construction work and later just enjoys life with his family and also runs a blog.  (Mr. Money Mustache)

 

Excessively Lavish Lifestyles Cannot Be Sustained. Period.

Early retirement does not mean that you can take a Four Seasons Around the World trip every year while putting two of your kids through Ivy League schools and funding a new Mercedes AMG every year. That’s just not possible unless you’re able to draw out a mid six-figure living expense fund every year.  Most doctors can’t even do that while earning their peak salaries, so it is unlikely possible if you’re not generating doctor income. Furthermore, this type of lifestyle is actually taxing physically and mentally.  Eating Michelin-star food every day can even become mundane (and unhealthy).

In order to be able to retire early, your living expenses have to be reasonable while allowing you to live comfortably and enjoy your time. It will be different for everyone. What works for the former software developer may not work for the retired cardiologist. Ask yourself what you need to be able to sustain a happy early retirement and work backwards in your financial plan.

Is Early Retirement Truly Suitable For You?

Before you embark on your financial strategy, make sure that you really know what you’d like to be doing if you gave up your medical career. We went into the field to help and heal people (it also took many years of your 20’s)—is it worth it to give it up? Make sure that you won’t be bored if you do hang up your stethoscope.

Most importantly, is your spouse in agreement? If he/she likes his/her job and wishes to continue working, will it strain your relationship if you gave up your career? What will your extended family think of your choices?

Get A Pen And Draft A Plan 

Give yourself some time. Figure out what you want to do, and jot down your goals on a notepad or on your favorite note-taking software. Keep saving money in the meantime. When you’re ready to take the leap, go for it!

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What strategies have you implemented towards early retirement, and do you think that it will work for you?