Frugality does not guarantee financial independence

Medicine is a humbling profession in that no matter how advanced healthcare becomes, we are far from guaranteeing a particular result.  Fate, as one might say, is fate.  Financial temperament, on the other hand, fortunately has a more manageable learning curve.  Investments really don’t have guaranteed returns, but if we invest enough relative to our income and expenses, the math inevitably works in our favor.  We are all not doomed!

Ego is the enemy

What we don’t know can actually hurt us.  We all are guilty of overestimating our own abilities at some point in our lives.  Sometimes we pay the price.  For many doctors, believing that we have more earning power than we actually do serves as our downfall.  There are plenty of smart people in medicine who simply don’t acknowledge that small expenses in great numbers can overtake even the biggest of salaries. Two fancy car leases? $1600/month. Restaurant nights several times a week? $1000/month. Take-out meals for the family? Another $1000. Each one of these purchases is achievable alone, but together can whittle away a solid physician salary.

Put aside the ego, and you can get far in life.

Life can deal you the worst of hands

Sometimes even with judicious financial planning, you can even come up short.  My heart aches when I hear about these unfortunate stories, but we can all learn from others.  This is the case of Doctor D, who conglomeration of several of my colleagues’ financial situations.  Doctor D, despite having sound fundamental financial sense, will likely protracted medical career beyond her control. Let’s delve into the details:

Doctor D, an anesthesiologist, enjoys a relatively high physician income with shorter work hours than the average physician. Her husband, armed with a business degree from a top 5 institution, commands an income after bonuses in the mid-$300k range.  Along with prudent real estate ventures, their combined pretax income will hover around $700,000.  They live in an expensive part of California, and will roughly have a net state and federal effective tax rate of 45%. For most people, $385,000 is a generous annual fund to work with.

Keep on hustling, and maybe you’ll get your lucky break.

Doctor D has two children, one of whom requires lifelong extensive healthcare expenses.  She also has aging parents with recurring medical and lifestyle expenses that require financial support. These two factors alone will erode most of their savings:

Therapy and cognitive classes – $120,000/yr, 50% of which is covered by health insurance.

Senior living and healthcare expenses – $100,000/yr

Rough Total: $160,000

Fortunately, her parents do have some savings that offset some of the senior care needs, but if you add the rest of their expenses, there is really nothing much left to invest:

Property tax – $30,000/yr

Mortgage – $60,000/yr

Nanny – $3000/month – $36,000/yr

Food – $3000/month – $36,000/yr

Household/misc – $2000/month – $24,000/yr

Total: $186,000

Finding the escape plan

I have been wondering how one can escape from this vicious cycle.  When you have fixed health expenses consuming roughly 50% of your post-tax income, you are already starting the race with one foot.  Let’s look at several options that might be palatable:

Geographical Arbitrage

Those who practice geographical arbitrage swear by it.  The fact is that not everyone will be able to adjust their interests to a particular region, no matter how financially advantageous living in Wisconsin is (sorry Badgers!). Doctor D would do well packing up from the OC and reducing taxes, mortgages, and essentially all other food costs.  A recent article by @HiringLab shows just what you can account for with geographical arbitrage.  Even if there is a comparable region-adjusted salary for Doctor D and her family, it may be tough to pick up the family and move.

Running lean on what you already have

This is the strategy that we should all employ if we need to work with what we have. Perhaps one could find a more economical nanny, groceries, or recurring daily expenses.  Doctor D is in a predicament because her recurring expenses really aren’t necessarily the problem.  Running leaner on these expenses may only make the family less happy without significant savings.

Find an employer who can front the medical bills

This is an interesting option.  Big players in the tech industry are often known to offer generous benefits to its employees.  There may be options in the healthcare industry that have similar arrangements.  Large public hospitals and the Veterans Affairs are two options that come to mind. Perhaps there are options for their employees to purchase healthcare benefits that will cover the high cost of healthcare for Doctor D.  In exchange, Doctor D will accept the lower salaries or perhaps more inefficient medical practice.

The bottom line

I feel badly for Doctor D.  But her situation is more common than we realize.  She may not be able to retire by 45, but there is still light at the end of the tunnel.

What alternatives would you suggest she take? 

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