A lot of my posts dive deep into one particular topic. That can make it tough for someone without a general financial literacy to get much out of my blogging, at least until they've read a lot of it. Since those are the people I am most interested in reaching, I try to pause every once in a while and do something a little different. This post is a collection of thoughts and observations I have had over the last 5+ years as I have worked with literally thousands and thousands of doctors and their trainees across the country. I'm going to simply post the list, without much commentary, as most of the observations will speak for themselves. I hope you like the post.
- There are very few physician financial issues that cannot be prevented and solved eventually by the purchase of a few reasonably priced insurance policies and living a middle class lifestyle (i.e. like a resident) while earning at attending levels.
- Most physicians can have anything they want but not everything they want.
- You only have so much ability to tell yourself “No” when it comes to your budget. Use it where it can make the biggest difference.
- If you cannot stomach the amount of investment volatility that you need to in order to reach your investing goals, it might be easier to “get a grip” than to change your investment goals, but you must do one or the other.
- Just because you are a doctor or your children deserve a nice house in a safe neighborhood, a safe car, and “the best” when it comes to their education doesn't mean you can actually afford to give them those things. Those are generally excuses for overspending.
- Very few people need life insurance for their whole life so it is silly to pay for that unneeded insurance, especially given how much it costs to have that coverage in later decades.
- By the time you know enough to recognize high quality investment management, there is a good chance you are now capable of managing your investments yourself.
- Like health care, financial advice is expensive stuff. Only consume what is truly necessary.
- Sharing experiences with people you care about is likely to make you happier than any material item you can purchase.
- If a stock investor can manage to capture market returns, keep his costs low, and avoid selling out at market bottoms, he will be successful.
- Retirement accounts are the tax break and asset protection plan you have been looking for.
- Mistaking a commissioned salesman for a financial advisor is a common error. Consider yourself lucky if you have never done it.
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Crossing a “silo” in a slot canyon can be terrifying
Combining a physician income, a decent savings rate, and a reasonable investment plan is a sure path to wealth after 2-3 decades. If that is not fast enough for you, I would suggest adding an entrepreneurial pursuit on the side to that plan.
- The sooner you figure out how much “enough” is, the happier you will be.
- Perhaps the best use of your money is to purchase your time.
- Learning to be content with a simple portfolio has great value.
- The only asset protection plan most physicians will ever need involves treating people nicely, buying professional and personal liability insurance, and maxing out their retirement accounts.
- Estate planning is to make sure your money and minor children go where you want, to avoid probate, and to avoid estate taxes. Most doctors won't have to worry about estate taxes at all.
- Credit cards are not for credit, they're for convenience. If you've ever paid interest on them, you probably shouldn't use them. You also should not use them if it is hard for you to save 20% of your gross income, because you almost surely spend more using credit cards than you would using cash, even if you include the rewards. You are not immune to this effect just as you are not immune to drug rep advertising.
- The more I learn about investing successfully, the more I realize it is mostly just risk and cost management. If you focus on risks and costs, you will eventually reach your goals.
- Few doctors have read their 401(k) document and most doctors do not know about the Backdoor Roth IRA or the unique tax advantages of HSAs.
- It isn't lifestyle creep you have to avoid, it is the lifestyle explosion that usually occurs upon finishing training.
- Financial independence means having about 25 times the amount you spend each year.
- If cycling seems expensive, try home improvements. If home improvements seem expensive, try boating. If boating seems expensive, try private school. Before long you'll be living paycheck to paycheck on $400,000 per year. Learning to be content with cheap hobbies can go a long way.
- The first few good financial books you read may be worth millions. Go read that $2 Million book.
What do you think? What other pearls would you give to thousands of doctors if you could? Which of these do you agree with or disagree with? Comment below!
26. The question of whether to fully fund your 401(k), save for a down payment, or pay off your student loans is a false one. You have enough money to do all three.
not a bad one, although I don’t entirely agree with it. Many in primary care would have a significant issue doing all three….
my loans are rather small but I still pay $500 a month. Most family docs I know have loan payments closer to $1500 a month. Fully funding a 401K would run you $1500 a month. Add in a mortgage (or rental plus saving for a down payment) would be at least another $2,000.
Primary care starting salary is around $150K, or $130K after taxes. Doing just the three things above would be half your monthly income. Its doable, but very difficult if you have a family.
Still a good principle idea though.
#25 was my key to success. The Book is Random Walk Down Wall Street as well as Bogle’s books
They will teach you the right way to invest and how uneven a playing field is WALL STREET!
Mine was The Coffeehouse Investor….Wish I would have read that book 5 years earlier!
“The Millionaire Teacher” opened my eyes to indexing. I recommend it often.
Love it!
I would add to this: watch out for student loans, understand how much you are borrowing and how much they will cost you in the long run. Research your repayment options, consolidate and refi as soon as you can, no reason to pay the banks more in interest than you have to. Losing the albatross of student loan debt puts you in an entirely different place, financially and psychologically.
Remember that your coworkers might think you’re weird and laugh now, but when you retire at 40 and they’re still working 18 shifts a month overnight and on holidays at age 65, they won’t be laughing quite as hard.
Nice column; I like reading through a bunch of bullet points like this.
I think the key for me has been staying put in my first home.
Controlling housing and vehicle costs until you’ve got some breathing room goes a long way.
The most important missed pearl is knowing where your money goes. Whatever you use (Excel, Mint, YNAB, envelopes, adding up account summaries, etc) you cannot get ahead unless you keep track. You don’t have to put your finances on a continuous monitor (though personally I like it that way), but checking now and then will let you know if your spending aligns with your goals.
Put a name on every dollar before the month begins!
I’d like to emphasize #16: “Learning to be content with a simple portfolio has great value.”
This is too often overlooked. Highlighting complex portfolios can intimidate potential DIY investors and push them toward costly financial advice (i.e. AUM advisors). Just because the WCI has a complex portfolio, doesn’t mean you have (or need) to!! Keep things simple while you are learning the ropes.
You’re just 340 pearls away from creating the Page-a-Day WCI calendar!
Loved these two:
14. The sooner you figure out how much “enough” is, the happier you will be.
15. Perhaps the best use of your money is to purchase your time.
I’ll add one.
26. If you can live comfortably on half your take-home pay, you can be financially independent within 2 decades. Leverage your financial independence to create your ideal work / play balance and a happier or more fulfilled life.
I like your “live on half” philosophy. Might start borrowing it. It applies not just to your income, but also to your stuff.
Amazing things can happen when you Live on Half. http://www.physicianonfire.com/half/
“Save at least 20%” isn’t bad advice, but I think the Live on Half challenge is a better path to improved quality of life. In terms of stuff, it’s been a month or so since I donated exactly half of the clothing in my closet. I have had zero regrets, and a much easier time finding what I want to wear.
Borrow #liveonhalf all you want. It’s a great message!
-PoF
A variation: If you both work for money, live on one person’s salary (or even part of one’s salary) and save the other person’s salary.
Also – If one of you is a full time homemaker/parent/caretaker, then OWN that – become awesome at it. Maybe learn to cook so well you don’t often eat out; make the necessary shopping into a sport you can win; perhaps learn to sew clothes or mend clothes; master the “hand-me-down” concepts. Stay -at-home spouses can contribute financially in VERY powerful ways. (In addition to all the other ways – nurturing, managing, etc.)
Well, the truth is the 15-20% gross that gets thrown around is a minimum savings rate, not a maximum. Some awesome things can happen when you live on half, but there’s definitely a cost there. If you’re paying 30% in taxes, half of your net is only a 35% savings rate.
Good point – but like you have already pointed out – for many of us docs, our marginal tax rate may be 30 or 33%, but our “real” tax rate is much lower. (And for those in the military in a high cost of living area, your nontaxable allowances are a significant chunk of your income. Add in a combat zone tax exclusion during a deployment and your tax bill may only be 12-15% of your total annual compensation.)
Hmmm … so for a big picture abstract road map maybe it should be 1/3 to taxes, 1/3 to spend, and 1/3 to sock away for future spending. And that is the same as Live on Half.
I just started 6 weeks ago and I’ve gotten 2 check for a total of $2,200…this is the best decision I made in a long time! “Thank you for giving me this extraordinary opportunity to make extra money from home. This extra cash has changed my life in so many ways, thank you!
27. A car is a way to drive to work. Not a fashion statement.
28. Don’t get divorced.
(As someone who is still single partially for this reason, I think we need a guest post about this.)
Or with even better hindsight: Don’t get married to someone from whom you might get divorced 😉
Divorce is usually worth it, no matter the cost.
Don’t fall for the trap of using mortgage interest tax deduction as an excuse for keeping a high balance mortgage. Why would I pay someone $1 to get $0.39 back? Paying off my mortgage (which was the last step of mine to become totally debt free) was one of the greatest feelings I had. Knowing that every blade of grass is yours on your property rather than the banks is a huge satisfaction.
Agree with most of this, but a portfolio equal to 25 times annual expenses (i.e., 4% “safe” withdrawal rate) is unlikely to provide financial security for a lifetime (although it was adequate in the past).
U.S. stock and bond returns are likely to be much lower in the future than the long-term average return. This is just math.
Returns depend on current yield (whether measured as dividends, interest, earnings, cash flow), growth in yield, and change in valuation. Current yields are very low (due to high valuations), so unless future growth is much faster than past growth, and unless current valuations do not fall to historic averages, then future returns will be poor.
Curt, that is not math, that is speculation. It may be a pragmatic approach given uncertain global economic times and changing policies, however that is not yet to the level of being a fact.
It is a fact (math) that returns depend on current yield, growth of yield, and change in valuations.
It is also a fact that if future S&P 500 earnings and dividend growth are equal to past growth, and if the S&P 500 valuation (i.e., Shiller PE or Q ratio) returns to its past norm, then future returns will be much lower than historical returns.
It is not a fact that future growth will equal past growth; it might be higher or lower. It is not a fact that the Shiller PE will ever fall to 16 again, it may have reached a “permanently high plateau,” as Irving Fisher once believed (https://en.wikipedia.org/wiki/Irving_Fisher). On the other hand, it may fall to half of its long-term average, as it usually does at the end of secular bear markets.
Based on historical data, it is likely that future returns will be lower than past returns. Our current circumstances are not average.
The average MI patient walks out of the hospital, but the MI patient with cardiogenic shock is not average; his prognosis is much worse. You would adjust your assessment of your patient’s prognosis once he developed cardiogenic shock. It’s appropriate to do the same with the market’s prognosis once valuations are in the top decile of the historical range.
The flaw in the analogy is that determining the prognosis of the MI patient with cardiogenic shock requires making the diagnosis of the MI and of cardiogenic shock, then applying well-established prognostic data based on what is a relatively certain diagnosis.
In the case of the markets, the diagnosis is not certain, and the prognostic data are of somewhat questionable value. To stick with your analogy, in medical terms you are using the equivalent of retrospective data (with its inherent limitations) to determine a prognosis going forward without actually knowing the diagnosis.
I fully agree that we cannot rely solely on past returns and no one can just assume the 8% (or whatever # you want to quote) returns going forward. However I think the variables going into that are far more complex than what you are indicating are almost impossible to predict.
Climate change, longer life spans, and the state of healthcare could determine much of required retirement savings by impacting the global economy, duration we need money to last, and the biggest retirement expenditure. None of those have a model we can predict, though I don’t think the picture looks rosy.
Edit — “and are almost impossible to predict” at end of 3rd paragraph
I understand the effects of lower stock and bond yields and higher valuations on future returns. However, before deciding the 4% rule of thumb is a bad one, several things should be considered:
# 1 On average in the past, a 4% withdrawal rate resulted in the retiree having 2.7X what they retired with after 30 years. That’s average.
# 2 Earning a 0% real return (easily obtainable with TIPS) you have a 100% chance of having your money last 30 years with a 3.33% withdrawal rate.
# 3 In order to run out of money, two bad things need to happen, the probabilities of which must be multiplied: You must live > 30 years and you must have lousy portfolio returns. The likelihood of both happening is quite low. You have to run out of life AND money.
# 4 This idea that future returns must/will be lower never seems to have a term put on it. That’s because it cannot be done. We don’t know if future returns will be lower for 5, 10, 30, or 60 years. The truth is a huge bear market could reset all those valuations in just a few years. At which point a 4% works just fine again.
# 5 The 4% rule worked through two world wars, the great depression, stagflation, LTCM/Asian Flu, tech meltdown, the great recession etc. But somehow it can’t survive whatever is coming? Forgive the skepticism.
# 6 Only a fool would blindly follow a 4% withdrawal rate if the returns in the first 5-10 years suck. He would adjust as he goes, just as most retirees do. Good returns? Loosen the purse strings. Poor returns? Tighten the belt. We’re not automatons and we’re not locked in to a strategy.
# 7 A great strategy is to have guaranteed income (SS, SPIA, Pension etc) to cover needs and use the portfolio to cover wants. Then you have changed the consequences of poor returns, such that you can worry about them less. I recommend this strategy to those who start advocating for ridiculously low withdrawal rates (1-2%).
Here is a (very) brief overview of math and history:
Siegel reported 6.8% total real returns to U.S. stocks from 1871 to 2001. The dividend contribution was 4.6%. Capital appreciation (composed of both growth and rising valuation) contributed 2.1%. (See Stocks for the Long Run, third edition, Table 1-1, p. 13.)
Siegel reported 1.25% real per-share earnings growth from 1871 through 2001. (Same text, Table 6-1, p. 94.) Real dividends grew only 1.09% as payout ratios fell, but we might choose to project 1.25% future growth.
According to Barron’s, the current S&P 500 yield is 2.24% (not 4.6%), so if future growth is 1.25%, and VALUATION NEVER CHANGES (or you have an infinite horizon so that the contribution from valuation change approaches zero), then we’ll earn approximately 3.49% real on the index (not 6.8%).
There is no “term” on this. It is the expected future return (for all periods) given current valuation and 1.25% growth with no change in valuation.
However, if you believe historical behavior is a reasonable predictor of future behavior, then you believe valuation will change (greatly). If valuation returns to the long-term norm, then you can expect future returns equal to past returns (assuming the same growth) from that day forward.
With the S&P at 2085.18, the current Shiller PE10 is about 25.87 (available at http://www.econ.yale.edu/~shiller/data.htm). For the data from 1871-2001, the average was 15.83. So if the market falls about 39% to 1276, it will be reasonable to expect future returns roughly in line with past returns.
However, the market has typically fallen well below its long-term valuation at secular bear market bottoms. The PE10 was 6.64 in 1982, 8.29 in 1974, 9.07 in 1949, 8.51 in 1942, 5.57 in 1932, 4.78 in 1920, etc. The returns between today and the next secular bear market bottom will be much less than historical averages.
See Shiller’s Irrational Exuberance, 1st Edition, Figure 1-3, p. 11, for a graph of the correlation between starting PE10 and future total 10-yr real returns. Here is one pertinent example: The PE10 reached at peak of 24.1 in January 1966. The ensuing 5-, 10-, 15-, and 20-year annualized total real returns were -2.6%, -1.8%, -0.5%, and 1.9%, respectively.
The current yield is a given, but you can make your own projections regarding future growth and valuation. If you choose historical growth rates and historical average valuation, then future expected returns are lower than past returns by a large margin.
Here is my opinion: At some point in the next 10-30 years (probably the former), the market will trade at a single-digit PE10 (just as on so many occasions in the past), and many retirement plans made today will be ruined–too late for some folks to recover.
I agree that all of our problems disappear at death, but that doesn’t comfort me. 🙂
I don’t disagree with any of that. I even think your opinion scenario is one of all possible future outcomes and one I have baked into my own financial plans.
However, I disagree with your assertion that there is something wrong with using the 4% rule as a handy rule of thumb to help people understand about how much they need to retire and about how much they can spend in retirement. It’s a very useful rule of thumb. Its problems become exposed when someone tries to make it into more than that. It’s not gospel, it’s not a crystal ball, and it certainly isn’t a particularly good retirement spending strategy. But when someone asks, “How much do I need to retire?” the answer is clearly not 5X expenses nor 100X expenses. It’s somewhere around 25X expenses. Some might argue 20X expenses is okay, while another may say you need 30 or even 40X expenses. But if you use the rule of thumb, you’ll be in the right ballpark.
That’s a big ballpark, but ok, I see your point about a rough-and-ready rule of thumb.
If the ballpark is too big for your taste/circumstances, buy some SPIAs. Otherwise, you need to be good with either end of the range. But planning for a 2% withdrawal rate is just as stupid as planning for an 8% one.
The other thing worth pointing out is that if returns are going to be so terribly low forever, why not go invest in other stuff. You can pick up cap rate 4-6 properties all over the place. If the property/rents appreciates with inflation, that’s a 4-6% real return without any leverage. I wrote about all this over 3 years ago when people were talking about how terrible future returns were going to be:
https://www.whitecoatinvestor.com/making-different-choices-due-to-low-expected-returns/
Then I enjoyed the 32% returns the stock market produced that year and the 14% returns the year after that. Now obviously those good returns helped lead us to the valuations we are now at, but the opposite also happens. If we see a downward change in valuations, that also means expected future returns improve.
Addendum: The real yield on TIPS is negative at least out to 7 years: https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield.
You can obtain an after-tax real yield >= zero beyond 10 years, but not over shorter term.
From GMO’s Ben Inker:
Executive Summary:
Given today’s low yields and high valuations across almost all asset classes, there are no particularly
good outcomes available for investors. We believe that either valuations will revert to historically
normal levels and near-term returns will be very bad, or valuations will remain elevated relative
to history. If valuations remain elevated indefinitely, near-term returns will be less bad but still
insufficient for investors to achieve their goals. Furthermore, given elevated valuations in the long
term, long-term returns will also be insufficient for investors to achieve their goals. It would be very
handy to know which scenario will play out, as the reversion versus no reversion scenarios have
important implications both for the appropriate portfolio to run today and critical institution-level
decisions that investors will be forced to make in the future. Unfortunately, we believe there is no
certainty as to which scenario will play out. As a result, we believe it is prudent for investors to try to
build portfolios that are robust to either outcome and start contingency planning for the possibility
that long-term returns will be meaningfully lower than what is necessary for their current saving/
contribution and spending plans to be sustainable.
https://www.gmo.com/docs/default-source/public-commentary/gmo-quarterly-letter.pdf?sfvrsn=38
So either the market will go down or it won’t. Brilliant commentary. I don’t understand why you spend your time reading stuff like that, much less reproducing it here. It’s just another person paid to give their opinion like a talking head on CNBC.
I agree that you need a portfolio likely to do well no matter what potential scenario unfolds in the future.
Curt, is it a fact (math) or is it likely? Or is it neither of the two? I have yet to find a time in history when a market predictor has said, “We are living in average times” or “The future will be much rosier than it is today!” It is always more fashionable to be depressed about the future than to be optimistic, such as in the years right after the last bear. Were you predicting we were on the edge of the abyss then, also, and warning people whose portfolios had just been decimated not to get back in the market?
I’m a perma-optimist, believer in the beauty of dull investing, and happy to be out of sync with the mass melancholic mentality.
the reason we might not see 10% equity returns is that dividends are at 50% from the past
bogle says look for 7%
I agree – we might or we might not.
Having a large taxable account changed my ideas on investments. Tax loss harvesting makes “lemonade from lemons” and allows me to stick it to Uncle Sam at tax time. Also great cure for loss aversion; the investor’s greatest enemy.
Great thought! Well explained the financial life of physicians. Thank you for sharing this thoughts.