By Dr. Jim Dahle, WCI FounderAs I write this, I have just returned from talking to about 150 rheumatology fellows with a few residents and attendings sprinkled in at the Coalition of State Rheumatology Organizations (CSRO) Fellows conference. I've been going there for about a decade, and I think I've spoken at this conference more than any other. I've taken my wife and all four of the kids to this conference at one point or another.
While the attendees are different every year, it's fun to see the staff and board members of the organization and renew old acquaintances. It's also been a great way to keep a handle on what young doctors are thinking and worrying about. It's a one-day conference, and I'm usually slated to speak just after lunch to try to keep people awake. After my talk, I usually spend about two hours out in the hallway answering questions from the fellows before I run to catch a plane. Some of the questions are the same every year, but new questions and concerns do trend over the years.
Here are the ones I was most commonly asked this time around.
Do You Still Practice Medicine?
I find this one odd, but it is, by far, the most common question I was asked at the conference. I'm not sure if it is because I look older now and they think I should retire or if it's because they assume I'm just too busy with WCI to practice. Maybe it's that they think it's weird for someone who doesn't have to practice medicine (whether because I'm FI or because WCI makes enough to support me) to still bother practicing.
I don't know. It might not be logical, but I still view medicine as my job and WCI as my side gig—much to the occasional chagrin of WCI staff members who work full-time, have a 401(k), and get their health insurance from WCI.
More information here:
Financial Independence Is Not the Holy Grail
Life After Financial Independence: Two Perspectives
How Can I Buy a House in a High Cost of Living Area?
I knew this one was coming, given the increase in interest rates without a corresponding decrease in housing prices after the run-up over the last five years. I talked to two docs, one who HAS to go back to California and one who HAS to stay in Manhattan. These are rheumatology fellows who expect to sign for jobs paying something like $300,000 (probably less in those two cities). The median home price in San Francisco is $1.2 million. It's $1.36 million in Manhattan. But these are doctors. If they can't have a home better than the median, who can?
The problem is they don't get a pass on math. The principal and interest alone on a 30-year, $1.2 million mortgage at 7% is $97,000 per year. In New York, you could expect to pay at least another $20,000 in property taxes and insurance. But if a rheumatologist makes $275,000, pays $75,000 in income tax, pays $120,000 in mortgage-related expenses, and saves my recommended 20% for retirement, that only leaves $25,000 on which to live. In Manhattan. It's not going to happen.
What are they to do? There are three reasonable choices:
#1 Move
I'm still amazed that there are doctors in New York and Manhattan given that, unlike many other professions, docs get paid less there than elsewhere and their expenses are so dramatically higher. But I guess we should all be grateful that someone is willing to practice in HCOL areas despite the financial disincentives. It is so much easier to build wealth and create “the good life” elsewhere; you and yours had better be darn sure it is worth all that sacrifice to stay in the HCOL area.
#2 Be a Lifelong Renter
It's amazing that you can sometimes rent a house for $7,000 a month that would have a mortgage of $15,000 a month. I can't explain it. It doesn't make logical sense unless you assume that the house is going to appreciate long-term at a very high rate and you want to bet on that happening. But there's no requirement that you save up a big chunk of your net worth in the form of home equity. You can invest your money in Roth IRAs and 401(k)s and taxable brokerage accounts. Heck, you can even own real estate . . . elsewhere. There's nothing that says you can't rent a townhome in San Francisco while also owning a 50-door real estate empire in Iowa. You could even rent forever.
#3 Make Housing a Huge Part of Your Financial Life
The other option is to have your house be a huge part of your financial life. Instead of paying off your student loans upfront and instead of putting some money toward retirement early in your career, you instead save a whole bunch of money for a down payment. Maybe you get it up to $400,000 over a few years. Then, you get a mortgage that is more than my 2X gross income guidelines. Maybe 3X. Then you stretch and maybe buy a house that is median or even a little less in your area.
Maybe you buy a $1.4 million house with a $400,000 down payment and have a $1 million mortgage on an income of $275,000. You'll need to work longer, keep your kids in public schools and state universities, drive a beater, and vacation in Reno instead of Machu Pichu. But it can be done. You've decided to prioritize living in San Francisco (or Manhattan), and you must sacrifice elsewhere.
I don't envy young doctors facing these difficult decisions.
Should I Go 100% Stocks?
Over the last 15 years, US stocks have returned nearly 14% a year. Meanwhile, US bonds have returned less than 2.5% a year. It's not hard to understand why someone might think that there is no point in having bonds in a portfolio, especially if they are young and most of their “life capital” still has yet to be earned. Young people logically should invest more aggressively. However, there are a few reasons to at least still consider having bonds in your portfolio as a young investor.
- Bonds MIGHT outperform stocks over very long periods, including your entire investment horizon. It's unlikely but not impossible.
- Young investors don't really know their risk tolerance. Not selling low in a nasty bear market is critical to investing success. It's far better to have an 80/20 portfolio for two or three years before going through your first bear (at which point you can ramp up the risk if it was no big deal for you) than to find out you exceeded your risk tolerance and have now scared yourself away from the stock market for the next 10-30 years.
- Get used to bonds and learn how they work and affect a portfolio.
More information here:
Best Investment Portfolios — 150+ Portfolios Better Than Yours
Is My Employer's Disability and Life Coverage Fine?
I tell young docs to go buy an individual disability insurance policy that is portable and non-cancelable and that has a strong, specialty-specific definition of disability—and if anyone else depends on their income, they also need to get a big fat seven-figure term life insurance policy. However, many of them already have some insurance provided by their employer. The most important thing with disability and life insurance, of course, is to have something in place (assuming you need the insurance at all).
However, I think these financial catastrophes should be insured well. Even if you have a halfway decent and inexpensive employer disability policy, you probably still want some of your coverage in the form of an individual policy. Employer-provided life insurance is generally completely inadequate for your needs. The amounts are just too low. You don't need $50,000 or $200,000 or 2X your salary or whatever these companies are providing. If you need life insurance, your heirs probably need $1 million-$5 million.
Should I Pay Extra on My Loans?
The student loan questions these days are so hard given the generosity and complexity of the federal student loan income driven repayment and forgiveness programs to now go along with the semi-known goals of the current presidential administration. That's why we started StudentLoanAdvice.com. But there are still people planning to pay their student loans back themselves who do not qualify for forgiveness.
Yes, it can still make sense to pay extra on your student loans! Yes, it can still make sense to refinance them to a lower rate! Paying off a 6%-8% student loan still provides a guaranteed 6%-8% return, and very few doctors are happy about still having student loans five years out of training.
Why Not Real Estate?
There are always one or two of these questions. Most of the audience doesn't know about financial independence and they couldn't define an appropriate savings rate or explain how a Roth IRA works, but there are one or two people in the audience who object to the general advice to build a portfolio primarily composed of index funds.
“It seems like if I build a real estate empire, I could do better than I would with index funds,” they say.
My response? Absolutely you could. But don't do it half-arsed. Take a professional approach, put in the time to learn and to do it right, use a reasonable amount of leverage, and still make sure you include a fair amount of stocks via index funds in your portfolio. The next question, of course, is how they can learn how to do it. If only someone had created a course for that . . .
More information here:
Do’s and Don’ts for Docs: Real Estate By the Decade
Roth or Tax-Deferred?
This is a common question, but one that most people think is far simpler than it actually is. I could spend an entire hour on this topic alone. I'm usually forced to give the almost inadequate rule of thumb and call it good. Here it is:
“Use tax-deferred accounts in your peak earnings years and Roth accounts in all other years, unless you're playing games with your student loan payments to try to maximize the amount forgiven.”
It's fun to get out in the “real world” and talk to “real docs” about what's going on in their financial lives. Sometimes we get in a little bubble here in the WCI community and forget how important it is to get the basics of personal finance and investing into the hands of all the doctors.
What do you think? What are young doctors worried about these days? How can we reach more of them?
The not so hidden secret to the answer to how to buy a house (ahem, apartment) in a high cost of living area is to have rich parents who buy it for you as every young professional trying to figure out how their friends bought an apartment in New York City has learned in the last couple of decades.
https://www.nytimes.com/2011/06/19/realestate/more-parents-buying-apartments-for-their-children.html
Real estate agents even have guides for how to do it https://www.thevictoriashtainerteam.com/blog/guide-to-parents-buying-homes-for-their-children-in-nyc-millennial-home-buying-tips
So true. As I wonder how my kids will ever buy a house in my area, I realize the only way is for me to buy it for them, at least a big chunk of it.
One of the other ways to buy in a HCOL area would be to increase your income in some other way – more call, seeing more patients in clinic, telemed work after hours or on weekends. I’m not sure of the intraspecialty spread of income for rheumatology, but you have given lots of examples of that broad spread in other specialties (though some of that spread often involves geographic arbitrage.
Of course, this issue also becomes easier if you happen to marry another high earner, but I would never recommend marrying anyone solely to boost income or buying power. You still only need one place to live even with 2 incomes.
Ha me and my wife did the second way 🙂 It is easier financially to marry another doc to afford a large house and excellent lifestyle living in NJ. But that made financial literacy even more important.
Kudos to WCI for the free books to 1st year med students- I think that has reached so many students, including my alma mater at Rutgers and the current med school I teach at Hackensack. I think it is also up to us to should financially literacy at the top of our lungs and the rooftops. Every Hackensack student I teach I encourage to pick their copy of the free book.
Yes, it helps to boost income, but you better be cognizant of burnout when your method of boosting income is just working harder. I mean, do you really want to sign up to do that for 30 years?
Interesting article relevant to this in the economist 2/27/25 about how housing has gotten so expensive that work doesn’t pay off like it used to. The top 10% of salary doesn’t allow you to live in the top 10% of housing in certain areas. They give the example of houses in London once owned by taxis drivers are getting into bidding wars by current investment bankers.
If you don’t have inherited wealth, you can’t compete even with a high paying job. Fortunately the entire U.S. isn’t like that but seems like New York and San Francisco are that way. Fortunately there are many places in the U.S. you can still do great with a rheumatologist level salary but not everywhere.
Work still pays, but you’re right that inherited wealth or a very long period of time saving may be required now in many HCOLAs. I mean, even a doctor making $400K can’t afford a typical mortgage on a $4 million house. Imagine a $3.2 million, 30 year mortgage at 6.5%. The payments are $245K a year. It’s not that hard to find $4 million houses in the Bay Area or Manhattan that aren’t all that impressive.
Banks don’t advertise but there are interest only mortgage options. With 20% down, we have a 30 yr loan where the first 10 yrs are interest only (fixed rate). Our monthly loan payment plus property taxes is less than market rent, though actual outlays are a little more due to ongoing maintenance for an older home. Kids will complete public school within 8 years and then we can decide to sell, refinance, or start paying principal. Our retirement accounts are funded and additional savings go to taxable that could be used to pay down the loan if we decide to stay.
The problem with an IO mortgage is precisely the benefit of an IO mortgage. You can pay on it for 30 years and you still haven’t made any progress so you’re really banking on appreciation. But it works for some people.
Do you ever wonder if your broadband of followers alone provides some hedge to stock market fluctuations? It may some far-fetched to even wonder, but given the sheer volume of high-income professionals who follow principals here, including not selling during market turns (staying the course), it seems to possibly benefit all. By *it* I mean this community and making smart choices which might provide some stability to the market.
Most trades are made by traders. A very tiny percentage by buy and hold investors like most WCIers hopefully are. So no, I don’t think we move the market much.
So let’s do the math. How much would you say a household has to make to buy housing in Manhattan and still retire comfortably after a 30 year career
Depends on the housing and how “comfortably” is defined and how much that career paid. Define all those and the math is just math.
In your example,
“The principal and interest alone on a 30-year, $1.2 million mortgage at 7% is $97,000 per year. In New York, you could expect to pay at least another $20,000 in property taxes and insurance.”
Now let’s say the household income is $400,000 and pays $120K in mortgage-related expenses, $120K in income taxes and saves your recommended 20% ($80K) for retirement. That leaves $80K on which to live. Tight but doable.
At $500K, can live on $130K
At $600K, can live on $180K
I think the reasonable minimum (for most) to make owning in NYC comfortable is $400K. Otherwise probably pays to move/rent like you said. Wild thought/math experiment
Seems like a fair calculation.
This math is totally consistent with my own experience. I’ve lived in NYC for more than 20 years, 10 years as a renter, and 10 as a homeowner. It must be said, NYC is much, much larger than Manhattan!!! People who live elsewhere seem to forget this, maybe because there are fewer tourist destinations in other parts of the city? (But the Brooklyn Museum is really awesome, as is the Brooklyn Botanical Garden right next to it). Look beyond Manhattan and housing is a lot less expensive. My first Brooklyn rental was the same per month as my last Manhattan rental, but 50% more square footage. Although, I do much prefer the lower density outside Manhattan, so it’s also a lifestyle thing for me – it’s more like other U.S. cities where I am.
If someone is living in NYC for the first time, I recommend strongly against buying right away in any case. Neighborhoods and boroughs are SO different from each other and you don’t know what your tolerance for a commute on public transit will be – I found that I am totally fine with a pretty long subway commute (45 minutes) where I would have found that time driving a car intolerable. It’s different when you don’t have to drive the vehicle.
Nuance often gets lost in these discussions. Thanks for sharing your experience.
You must still like practicing medicine, FI or not!