Stanley and Danko, in their classic The Millionaire Next Door, discussed a rule of thumb to determine if you were an average accumulator of wealth, an under-accumulator of wealth, or a prodigious accumulator of wealth.
The Millionaire Next Door Net Worth Formula
Expected Net Worth = Age X 0.1 X Gross Income
A prodigious accumulator of wealth (PAW) has a net worth over 2 times as large as the expected net worth (ENW), and an underaccumulator of wealth (UAW) has a net worth of less than half of the ENW.
It's only a rule of thumb, so you can't expect too much from it. (In fact, they revised it in The Millionaire Mind to ENW = Age X 0.112 X Gross Income). This formula has been criticized as being particularly inaccurate for young people early in their career. It is completely useless to a typical physician. For example, despite saving over 20% of my income and having no significant non-mortgage debt since getting out of medical school 8 years ago I've barely got more than half of my apparent expected net worth.
Doctor Net Worth Calculation
I think it might be useful to doctors to have a good rule of thumb designed just for them. You could make a complicated formula using average indebtedness coming out of school and age and prior careers and inheritances etc, but part of the benefit of a rule of thumb is that it is simple and easy to use. Here's what I suggest:
Expected Net Worth of a Doctor (ENWD) = Average Post-Residency Income X Years Since Training X 0.25
Using this formula, a family doctor averaging $150,000 a year for 10 years since leaving residency should have a net worth of $188,000-$750,000. An orthopedist averaging $500,000 for 5 years since leaving residency should have a net worth of $313,000-$1.25 Million. Using this formula, I actually qualify as a PAW (which seems reasonable to me). Run your numbers and see how you stack up. Can you think of a better (simple) rule of thumb for doctors?
Some of you called me out on the fact that my physician net worth rule wasn't based on any actual data, just what I thought docs ought to have.
Well, there's not much data out there. I did manage to find one survey from Medical Economics based on 2004 data that was interesting however. It included 2 interesting figures which I will reproduce below:
Well that's interesting, but really not that helpful, since it includes everyone from the brand spanking new attending with a negative net worth to the 75 year old that has been retired for a decade already. This next one, however, is much more enlightening.
Much more interesting here. There are several things I find interesting about this chart. First, even among physicians, the value of their home is still a major part of their net worth. In my experience, the wealthier you are the less of a difference the value of your home should make. That's because in many ways a home is generally more of a liability than an asset. I also find it strange that the survey would ask about “retirement plan” separately from “stocks” and “bonds.” I wonder if that confused any of the respondents. It seems to me that most investors, including physicians, would own most of their stocks and bonds WITHIN a retirement plan.
I'm also surprised there's no category for debt. Some of it just doesn't make any sense either. Look at the under 35 category. $64K outside of retirement plans but only $13K inside retirement plans? There's something not right there. At any rate, let's adjust the data for inflation and see what it looks like. From 2004 to 2011, inflation has been a total of 20%. Let's increase the values accordingly.
Average Doctor Net Worth
I wonder how my formula stacks up using ACTUAL physician net worth data. The average physician salary in 2004 was $200,000. Of course, my formula uses the physician's average salary since residency, so just using his current salary will likely overestimate his expected net worth by a certain amount. But assuming the doc got out of training at age 30, let's see how well my formula predicts his expected net worth.
First, for the under 35 category, we'll use a doctor averaging $200K who is 3 years out of residency.
$200K * 3 * 0.25 = $150K A little high, but so far so good.
Now, for the 35-39 category.
$200K * 7 * 0.25 = $350K, a little low for the actual data, but the actual data is certainly within the range of $175K-$700K that I've used for the expected net worth of a doctor.
The 40-49 category gives us this data:
$200K * 15 * 0.25 = $750K. Again, essentially right on target.
$200K * 25 * 0.25 = $1.25 Million. Right on.
Over 60 category:
Let's use a doctor 35 years out of residency, so,
$200K * 35 * 0.25 = $1.75M Right on target. Of course, as we get further out from residency, the effect of using this year's salary instead of the average salary becomes larger. But it looks to me that the data fits pretty well just using this year's salary, so let's just use that in my formula from now on. Huge salary increases tend to be relatively rare for established attendings anyway.
Looks to me like my Physician Net Worth Formula fits the only available data on physician net worth mighty well.
Expected Net Worth of Doctor = Salary X Years since Training X 0.25
If you have less than 50% of your ENW, you are an underaccumulator of wealth. If you have more than 200% of your ENW, you are a prodigious accumulator of wealth.
Just by way of comparison, here's a chart showing the net worth of the average American. Docs, as you might imagine, are still doing pretty good relatively.