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When can this 55 year old doctor retire?

Posted on March 11, 2018January 30, 2021 by SmartMoneyMD

What are the first thoughts that come to your mind when you hear about a 55 year old doctor who has been practicing medicine for about 15 years but only has approximately $90,000 in her 401k? I’d certainly like to hear more of the story.

Dr. X, who is a Hospitalist is exactly that doctor. She moved to the United States after finishing medical school outside of the country, and had to retrain. She has three kids, two of whom are currently college students attending private schools. Where did all of her earnings go?

As a cost-conscientious immigrant she did learn to pay for everything in cash, including her house which is worth about $700,000. All three of her children own cars that are paid off, as does her husband. As a high-income professional, she also enjoys nice vacations and fine luxuries.

I think that the easiest reaction to hearing all of this is to pass judgment. However, the reality is that not all of us have had the opportunity to learn sound financial habits. Cases like Dr. X are incredibly common. What’s more important is to realize that Dr. X’s situation thins out her financial buffer—she needs to continue working hard at her day job and make prudent financial choices going forward.

Tackle your expenses to gain control of your finances.

Dr. X’s financial situation has similar issues as someone who earns $30,000 a year and has thousands of dollars in credit card debt. The only difference is that she probably is dealing with another zero to her salary. It’s also unlikely that she will have any salary increase given that she is likely at the upper end of her earnings at this point in her career. The biggest variable that Dr. X can control is her expenses.

Children

Dr. X is currently paying for her children’s education but she doesn’t have to. The youngest child is currently in private school while the older kids attend private colleges. There is financial aid for college students, even though Dr. X is a high-income professional. It is unlikely that they would qualify for need-based grants, but current federal student loans can be obtained for a jaw-dropping 6.8% interest-rate! Top tier private college tuition in 2018 is nearly $60,000, with total education packages estimated to be in the $75,000 range. Dr. X does not have the career longevity to put two kids through private college…unless her kids become entrepreneurs at an early age to fund their parents’ retirement.

Room service macarons will add another year to your working career!

If either of the children’s cars are not paid off, then Dr. X should reassess what options she has to reduce operating costs. Can Dr. X sell the cars and pick up a beater for the kids? Or should they rid of the excess gas/electric/money guzzlers unless the children can afford the cars themselves?

Lifestyle habits and other expenses

Dr. X should break out the credit card and bank statements do perform a thorough exam. Expenses should be scrutinized to the level of a twenty-some year old medical student or resident who has a negative net worth to her name. Cable bills, grocery and restaurant bills, and all other recurrent big-ticket items need to be assessed. This includes mega heating bills in the winter or four-figure monthly cooling bills in the summer. Major vacations for the family need to be reconsidered until a set financial plan that can get Dr. X into retirement can be made.

The greater amount that can be moved out of the fixed household expenses, the greater that one can shift towards a retirement savings bucket. Is her husband working? If so, the husband needs to perform a physical examination of his wallet.

Retirement savings

At age 55 with only $90k of 401k to her name, Dr. X doesn’t have much leeway in the tax-advantaged buckets. Assuming a capped catch-up contribution of $24,500 in 401k per year, Dr. X ought to be able to put in close to another $250,000 by age 65.

So starting with $90,000 in the 401k, with monthly investments of $1875 and annual growth conservatively of 4%, Dr. X would have around $403,000 in 10 years. This would only support an annual expenditure of $16,120 with a safe-withdrawal rate of 4%. Tack on roughly $20,000 of social security benefits at age 65, and that adds up to less than $40,000 a year to spend on living expenses. Doable? Absolutely. Most American households aren’t going to have even that, but that’s a far cry from Dr. X’s current expenditures.

The conclusion? I still think that Dr. X can retire, but she will have to make tough decisions to curb her spending, stay healthy throughout her career, and make the most of the situation.

How to become a healthy doctor Part 1 – Don’t sweat the small stuff

Posted on January 28, 2018January 30, 2021 by SmartMoneyMD

All of us have obsessive compulsive tendencies, whether or not they’re pathological. In a way, attention to detail is critical to our career success. It is also the achilles heel to our interactions with friends and family. I see this in my patients all the time. We all have our stories of taking care of unreasonable (read: crazy) patients. When I encounter crazy patients with crazy spouses or family members (read: folie a deux), I just want to run out of the exam room screaming. We’ve all encountered these situations.

But the name of the game in having a financially successful medical career is also to have some insight on what your flaws are. That’s the only way you can figure out what tendencies are not compatible with happiness of those around you and your own happiness. Case in point: I know a guy who always kept his office desk messy. The spouse was always neat and organized. They are no longer together. It would be short-sighted to assume that differing views on organization resulted in incompatibility, but correlation and causation are murky relationships.

What constitutes the small stuff?

We’ve all read arguments about how daily coffees from your local fancy barista will cost you thousands of dollars in additional annual expenses, and when invested appropriately in financial-blogger-approved funds you’d shave off a few years from your working career.

The math on the savings is clear, but how is the duration of your working career impacted if you are earning $200,000 a year?

What about $60,000?

What about $1.3 million?

Your earning velocity will determine which expenses are going to be considered “small”.

Micromanagement of financially inconsequential circumstances may be detrimental to your health.

I hate overpaying for gas. How many of you live in a place that has gas like this when the rest of the country pays a third less than what you are?

Hey, we’ve got it better than the folks in Europe.

Prices like these entice me to search for a Costco or Sam’s Club to fill up. Lines at the pump typically also go three to four cars deep on weekdays, and even ten back on busy weekends. Whether you drive an extra five miles, wait an extra 20 minutes, and save 40 cents a gallon ultimately depends on a huge number of factors:

How much time do you have to spend in a day
How often you fill up your car
How much you save per fill-up
If you drive a Hummer H2 with a 32 gallon tank

This is the small stuff that is frankly unhealthy to have to decide. I know a surgeon who goes out of her way to save on gas fill-ups for a very fancy car. I think that over the course of a career, she’d probably save a few months of work by saving on gas. But is it worth it?

I used to struggle with minutiae, but I’ve slowly let the reins loose as life gets busier and as I strengthen my financial plan. It’s unhealthy to have to make these decisions, and the goal is not to get yourself in a situation to need to deal with them in the first place.

For the gas savings scenario: if going out of my way to save at the pump is going to make a significant impact in my financial situation, then I’d better unload that Hummer and figure out my commute problem instead.

How much do you guys sweat the small stuff?

Should you use a tax accountant?

Posted on January 21, 2018January 30, 2021 by SmartMoneyMD

Since tax season is but a few months away, the topic of accountants ought to be discussed. How useful are they, and is there some merit to having them do your taxes even if you can very well do it yourself?

In full disclosure, I was late in the game in figuring out anything about money other than spending it. My parents had a tax accountant who helped them out (read: ripped them off) for years, and this same accountant even did my taxes the first two years I filed them in internship and residency. Both years, I was fined by Uncle Sam because my accountant left out a critical form for my state and city. Since the accountant didn’t live in either of the places I worked, he probably never had to file out of state taxes. I think he charged us an extra $70 plus some state tax filings charges for probably an hour of work–I’d do the same too if I were an accountant and my clients asked me to add on another filing.

Fortunately (or unfortunately) by the third year I had to file taxes, my parents accountant was undergoing chemotherapy and no longer was able to work. I ended up filing my taxes using TurboTax, and have done so ever since then.

We all fall under one of three categories of tax filers:

DIY, either software assisted, or manually
Full service accountant hire
“I know how to file taxes, but I’d rather hire someone else”

DIY Tax Filers

With the advent of computer-based tax software, it’s gotten significantly easier to file taxes. The competition for online tax software is so great that we see television advertisements promoting these services. This has been good for the average consumer; if you have a simple W2 salary with minimal investments you can easily file online without paying a dime.

Most financial bloggers fall into this category. They are clearly numbers oriented, nerdy, or had some social shortcomings (okay, I exaggerate). Some of these guys (mostly are guys) are quite skillful with spreadsheets and numbers. Reading mundane tax laws and being able to beat the system is a challenge that they are all willing to take, and they do it well. I learn so much from these guys.

Medical residents ought to file their own taxes too. This is the time in your career where you will have the simplest tax forms, and probably the least amount of investment accounts to keep track of. This was the time I learned about student loan deductions, and realized that there was a dismal phase-out pretty much once I became an attending. How was that even fair? Just because you start making some money means that you can’t benefit from taking out loans for your education? I was pretty angry afterward when I once went an entire year of residency without repaying any student loans only to realize that I essentially lost my chance to deduct student loan interest. It hurts when you actually fall into the 25% federal marginal tax bracket living in a HCOL area with crazy city and state taxes. I probably could have “saved” $800+ of taxes had I repaid some student loan interest.

Full service accountant on retainer

Most doctors likely fall into this category. Maybe they never learned how taxes are filed. Maybe their accountants kept them in the dark. Most of us are likely too busy to be bothered. When my work schedule started picking up, I ended up forgetting to pay credit card bills. Most of us would rather play with our kids, shop, or even vegetate on the couch than to go through learning something new. Some of us have complex business structures in our practices in addition to our own taxes, so it’d be easier to have your tax account do your personal taxes along with the business’s taxes. Some of us also have irreparably broad investment interests in multiple states, all of which require individual state taxes. In these cases, it might actually be cheaper to go through an accountant if you have a longstanding relationship with them.

“I know how to file taxes, but I’d rather hire someone else.”

Fair enough. You’re a 1099 contractor or even a W2 employee with minimal outside investment or financial holdings, but you’re still too busy. Maybe after ten years of filing your own taxes and kicking butt in your medical practice, you are financially loaded. Who cares if you pay your account $2550 to file your taxes?

I think that the majority of physicians and busy professionals will fall into this category. There is only so much time in the day, and many of us didn’t realize that there are medical specialties that allow shift-based work rather than dedicating our lives to the career (ahoy vascular and neurosurgeons!) Eventually I expect to fall into this category, whether due to astounding success in my career or simply the need to carve out more time for the family.

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Regrets or Resolutions? Reflections from 2017

Posted on January 7, 2018January 30, 2021 by SmartMoneyMD

There are plenty of uplifting points with transitioning into a new calendar year—new 401k contributions, new Roth IRA contributions, and simply a clean start to targeting life goals that perhaps we fell short on from the previous year. A new digit on the calendar can surprisingly impact us psychologically more than we realize.

Just as how we should establish a financial checklist, having concrete reflections on life goals provides us a mechanism to stay focused. The following are five goals for 2018 that all doctors should consider reassessing:

Increase your savings rate.

We all should know by now that our expenses should never exceed our income. The greater the difference between income and expense, the greater firepower you will have to build net worth. Most people are going to be limited by their incomes, so it is important to adapt our expenses accordingly.

As I mentioned previously, 2017 was a rocky year for medical income for me. I’m sure that some of you have experienced similar struggles or will experience them at some point. I’m also sure that most of us who went into medicine weren’t planning to live as if we kept a five-figure salary for our entire careers either. But how much you prepare for a rainy day can certainly help you weather what you can’t predict. The stock market in 2017 went on a tear, and perhaps it’s getting to the point that even the local departmental store clerks are talking about investing (hint, hint: these are the modern shoe shiners). Don’t expect it to continue indefinitely. I know some people out there save 50% to even 70% of their incomes, but we should fine-tune our own savings rate. Find your comfortable savings rate, and try to top it. You might be pleasantly surprised.

Time management and organization.

Time management is obviously critical for all physicians, but it is ironic that I know plenty of physicians who are derelict on their own time. This includes time at work and outside of work. The doctor who stays to chart notes in the electronic health system after signing out is the common scene at the hospital. Likewise, I know physicians who fiddle around on their free time tinkering with home maintenance that would actually be better managed by outside help. I am guilty of this myself. You only live once. Only you can dictate the value of your time.

Improve your health.

Monetary wealth is useless without physical and mental health. This is why disability insurance exists. We can become injured even if we live in a bubble. However, there are factors that we can control in our own health. Decades ago, we saw doctors discouraging their patients from smoking yet are puffing on their own cancer sticks. Today, I see some doctors preaching the virtues of weight loss and diet yet are overweight or obese themselves. Lead by example.

What is interesting is that I often see discipline correlate with health. Many of the superstars in medical school were also marathon runners or triathletes. Coincidence? Maybe there is a correlation between efficient use of time, health, and success.

Job Satisfaction

Even though the satisfaction of bringing back life every day at work justifies your career doesn’t mean that you are happy with your job. Regulations, compliance, and insurance mandates are the factors that make doctoring unpleasant. It doesn’t hurt to reassess your job satisfaction and determine whether any of the active issues are deal breakers in your job situation. If they are, you’d better strive to fix them.

Career longevity

Life does not go on forever. How many years do you have left in your career? Are there any health issues that might curtail your working years? One can go into a deep philosophical treatise on your career, but look at things practically: do you have enough savings to live off of? Are you able to put your kids through school? What do you plan to do with your time if you call it quits? This is where you decide whether your financial plan is sufficient to secure your future based on the existing trajectory. If not, then you’d better figure out an alternative.

What situations do you plan to reassess into the New Year?

Correlating expenditures with happiness

Posted on December 17, 2017January 30, 2021 by SmartMoneyMD

One of the goals of establishing financial security is to have an adequate net worth to sustain our living. In order to get there, we invest in vehicles to grow what we have saved. If we choose (and most doctors don’t really have to), we can also establish streams of passive income (shout out to @PassiveIncomeMD) as a means of cash flow. For most of us, getting to that gratifying number will take time and effort. As physicians, we no strangers of delayed gratification. It is no fun.

The journey to financial security will likely span much of our younger years, so it is important not to lose sight of the present. Amidst the stresses of healthcare changes, we should focus on what we can control. Doctors need to be able to control our happiness while we are building our financial security. This starts the moment we commit ourselves to a financial strategy. A simple strategy to approach happiness is to stay ahead of the curve. We did it all through college and medical school. In finance, we can view this in two ways:

Expenses as a Percentage of Net Worth

Aspirational early retirees rejoice! This is the same formula that we use to determine when we reach financial independence. If you use the oft-butchered 3-4% safe-withdrawal rate as a reference, you can roughly determine your financial progress.

For instance if you spend $10,000 a year, save $10,000 a year, and have $100,000 in net worth, you should be able to reach a 4% safe withdrawal goal rate ($250,000) within 15 years. How happy would you be if it’ll take you 15 years to reach your financial goals?

The longer it will take to reach your goals, the less happy you will likely be. For the mathematically inclined:

Happiness ∝ 1 / (Number of years to FI)

If you throw expenses and percentage of net worth into the mix, you can make some more equations:

Happiness ∝ Net worth / Expenses

If you don’t care much for distilling life into a core set of math equations, just realize that the more your expenses dig into your net worth, the less happy you will be. As you are building your net worth, stay happy by watching your expenses.

Expenses as a Percentage of Income

I find that tracking expenses as a percentage of net income a more manageable approach to happiness. As long as you can keep that ratio low, you know that you are working towards your financial goals.

Another way to look at this method is simply your savings rate—the higher your savings rate, the sooner you ought to be reaching your financial goals. Most financial professionals that I speak to strongly recommend saving at least 20% of your income. (Pretax or post tax, no one ever specifies!) This also means spending 80% of your income. As I have progressed throughout my career, I’ve discovered that percentage of income spent has translated to increased happiness. There was a minimum threshold that I needed to exceed, which was anything beyond my residency and fellowship income. Afterward, the closer I became to a net zero net worth (repayment of student loans) the happier I became. Setting realistic goals and achieving them allowed me to sustain my financial happiness. As each one of my mini-goals was reached, I’ve found that lowering my expenses as a percentage of my net income has helped remind me that I was succeeding in reaching financial independence.

Can you achieve happiness with a milk stout?

That caveat is that this method is going to look a whole lot better for people with high incomes. The key is that each one of us is going to have a different savings velocity. The key in happiness is not to treat our earnings and savings as an arms race with others—as long as we are progressing according to our means, we are doing well and living a healthy lifestyle in the process.

How do you track your happiness?

Why I’m Dollar Cost Averaging through the Bull Market

Posted on December 10, 2017January 30, 2021 by SmartMoneyMD

Seasoned investors know that market timing has historically been little more than a gambling move—try buying some Bitcoin right now in Q4 2017 and see where that takes you. You might still win big, but history has to have losers. But it’s human nature to want to be above average. This is especially true in finance. Everyone wants to have some alpha in the game. After all, you spend your free time reading finance literature, swear off the financial advisors, and even try to educate your colleagues.

I’ve certainly inadvertently “timed” the market when I bought shares of Berkshire B stock in residency. It was at a 52-week high at the time, and by market timing criteria it was too expensive to buy. Guess what? It’s grown by more than a five-fold since then (maybe more).

I came across an interesting article with infographics by Wes Moss (http://clark.com/personal-finance-credit/stock-market-record-high-invest-now/). He breaks down the effects of investing in the stock market at highs and lows. It seems like even if you invest right before a significant market correction, you still come out ahead over time. I remember William Bernstein in his e-pamphlet If You Can commenting about stocks:

“How risky are stocks? You’ve no idea. During the Great Depression, stocks lost, on average, around 90 percent of their value; during the recent financial crisis, they lost almost 60 percent.”

We all have to realize that not everyone can be above average, yet alone beat the market. For a brief while years ago I thought that I could do it, but then realized that I had no time or interest in delving into the financial world while I was inundated in the medical field. That is still the case for me.

Okay kid, are you picking the fruit bar because it’s healthier than Mickey or less expensive?

I am still in the growth and investment phase of my career. Most of my passive investments are still going towards stocks and bonds while I decide how to diversify my earnings further. I still am working full-time in my medical career and have little time to hold my earnings in cash until the next big investment. Dollar cost averaging works for me, even though the market is perhaps at its relative high.

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Diversifying with Managed Futures

Posted on December 3, 2017January 30, 2021 by SmartMoneyMD

The following is a guest post by Don Wieczorek, who is the president of Purple Valley Capital. Don is a sponsor for this website. The views expressed in this article are solely his own.

In my opinion, if there is one subject in finance that everyone agrees on, it is that diversification can increase returns while also decreasing volatility and limit portfolio-wide drawdowns. Many investors think they are diversified because they own equities in different industries or countries, some bonds, and perhaps even have exposure to real estate, but true diversification should reach well beyond this standard portfolio. True diversification includes not only spreading capital across different asset classes, but time frames and methods of investing as well.

Some investors look to the industry known as “managed futures” to help fill this void. Managed futures is made up of professional money managers who are known as “Commodity Trading Advisors” (CTAs). CTAs are required to become registered with the U.S. government’s Commodity Futures Trading Commission before they can offer themselves to the public as money managers. The industry is large, with over 1,000 registered CTAs, cumulatively managing well over $100 billion.

CTAs generally manage their clients’ assets using a proprietary systematic trading system or discretionary method that may involve going long or short various futures contracts in areas such as metals (gold, silver, copper), energies (crude oil, natural gas), grains (corn, wheat, soybeans), equity indexes (S&P500, Nikkei 225), food//soft commodities (coffee, sugar, cotton, cocoa) as well as foreign currency and U.S. government bond futures. The majority of CTAs employ a trend following approach, which aims to capture the large trends, both up and down, in the various futures markets. By entering markets when they break out to either the upside or downside, systematically cutting losing trades very quickly, and holding onto winners, trend followers aim to skew returns and volatility to the upside. When market prices trend, often the result of trending fundamentals that are accentuated by the various psychological biases of market participants, trend following CTAs can perform well, but when markets are flat and choppy, they will perform poorly. The main advantage of allocating to a CTA is that it can implement all three pillars of true diversification: different asset classes, different holding periods, and different method of attempting to make money.

Although allocating to a CTA can be a fantastic diversifier if used properly, there certainly are risks in getting involved, and the use of such a strategy is not for everyone. First and foremost, CTAs buy and sell futures contracts, which are inherently leveraged products and carry with them a risk of large potential loss. Because trend following CTAs, almost by definition, aim to be positioned in the hottest markets (those hitting new highs or new lows), performance can be volatile and have deep drawdowns as well. Psychologically, this type of investment can be very difficult, because it can produce frequent small losses in exchange for infrequent but large gains. Drawdowns can be lengthy. Although this strategy can perform well during periods of trending markets (i.e. strong economic growth, crises, inflation, etc…), it performs poorly when markets are range-bound and flat. For example, the last couple of years have been meager for the trend following CTA industry due to zero interest rate policies (thus few large currency moves), subdued economic growth, and no inflation. Fortunately for the industry, this is finally starting to change, and many markets have started to trend again, however there is no telling if, or how long, it will last. Managers simply follow the market action and attempt to manage risk at all times. Success in futures trading requires an immense amount of psychological fortitude, discipline, and patience.

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In full disclosure, I own and operate Purple Valley Capital, Inc., a CTA that has traded client (and my own) capital for over nine years, having started it in 2008 during my senior year of college. I originally just traded my own capital but became legally registered and incorporated when my family, friends, and outside investors began showing interest in my strategy in order to help them achieve further diversification within their portfolios. I built my trend following strategy from the ground up, and have seen, along with my investors, the benefits and risks of such a managed futures strategy. Whether it is with managed futures, or some other investment strategy, the idea of trying to achieve true diversification is an extremely important matter. Again, there are many ways to diversify, and CTAs are simply one way to try and go about doing so. Hopefully this article will help others think about diversification slightly differently than they had in the past, and perhaps stimulate an interest in looking for a diversifier that spans different asset classes, time frames and method of trading, whether it be with a CTA, or some other vehicle.

Regards,

Don Wieczorek

President

Purple Valley Capital, Inc.

www.purplevalleycapital.com

FUTURES TRADING IS SPECULATIVE & INVOLVES A HIGH DEGREE OF RISK. IT IS NOT SUITABLE FOR EVERYONE. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS