[Editor's Note: The following is an article written for one of my regular columns at MDMagazine and is aimed squarely at mid-career physicians and some of the issues they face. The original article can be found here.]
There are plenty of financial articles out there for doctors who are just getting started with their investing careers. There are also many articles discussing what to do as you approach retirement. However, for those in between these two stages (mostly 40 to 50 years old), there is an absolute dearth of information available on the internet and in bookstores. Part of the reason for this is that the mid-career physician’s finances are truly a tale of two cities.
In the first city are those who became financially literate early in their careers, paid off their student loans, saved a significant percentage of their income, invested it wisely, and – while not yet financially independent – are already millionaires and expect to reach financial independence early enough to allow early retirement. In the second city are doctors who don’t particularly enjoy reading about finances, are probably paying an overpriced advisor for bad advice (or not getting any advice at all), have made a few significant financial mistakes (whether they know it or not), still have student loans, and have not yet built any significant net worth. Obviously, doctors in each of these two camps should have different focuses at this time, but there are still similarities among all doctors at this stage.
6 Considerations for Mid-Career Physicians
1. Correct Your Financial Mistakes
It is a rare physician who has not made a significant financial mistake by mid-career. Perhaps it was purchasing a whole life insurance policy that he did not understand. Maybe it was taking advice from a commissioned salesman masquerading as a financial advisor. It might be not having enough disability or life insurance or not understanding how the retirement accounts offered by the employer actually work. Maybe it was an investment related mistake, such as market timing, picking individual stocks, or investing in a taxable account before maxing out all your retirement accounts – including Health Savings Accounts and Backdoor Roth IRAs. Whatever it was, it’s best to correct it earlier rather than later. That might involve paying an hourly advisor to get a second opinion or some assistance, but it is generally money well-spent, and the sooner you fix the issue, the more benefit you will see from doing so.
2. Make a Plan to Pay Off the Mortgage
While there is considerable debate in the financial community, most people want to go into retirement with their mortgage paid off and, given the choice, would prefer to have it paid off long before then. It isn’t that people don’t understand that borrowing money at 3% from the mortgage company and earning 6% or more on it in their investment accounts can be a winning proposition, it is that people simply don’t do that – they spend the difference instead of investing it. But by mid-career, you have probably been in your house for a few years already, know about what to expect as far as earnings the rest of your career, and can plan out a date to have the house paid off. If you purchased it at age 35, having it paid off by 50 is a very reasonable plan fulfillable simply by making all the payments on a 15-year mortgage. Making double payments would turn a 15 year 3% mortgage into a 6 ½ year mortgage. Having the mortgage paid off early allows you to boost retirement savings, cash flow college costs, or even increase your spending for items like automobiles and vacations.
3. Saving For Your Children's College
When you first start investing, hopefully during or shortly after residency, your children are likely young and college is a long way off. You have probably been putting some money toward this goal, but now is the time to really firm up the plan. Take a look at how much you have, how long until you will need it, how much college really costs these days, and how much of it you are going to pay for. At this point you can make decisions about how much of the cost you can pay for with 529 savings and how much you can cash flow from current earnings. You should also have a pretty good idea as to whether you can only afford State U, or whether you wish to splurge on some of the really expensive private schools out there. At any rate, the time to pay for college is going to come well before the time to retire. In many respects, this is a test run of your ability to develop a financial plan, stick with it, fund it, and reach your goal. The children of most physicians, born around the time of residency completion, are usually going to hit college about the time the physician reaches age 50. If you find yourself miserably prepared to assist with college, you are likely to find yourself in the same situation with respect to retirement a decade later unless you make drastic changes.
4. Reevaluate Your Career Decisions
Mid-career is also a great time to evaluate your career decisions. If you have done a nice job with your finances, you have lots of options available to you. These may include early retirement, working less, taking a more enjoyable but less profitable job, changing careers, dropping call or even eliminating night shifts. If you have not done such a fine job, you may wish to consider moving to an area with a lower cost of living, including income tax burden, taking a higher paying job, sending a spouse to work, taking a job with better retirement benefits, or even developing passive income sources on the side such as real estate investments. By mid-career, you are probably not as excited about the practice of medicine as you were a decade earlier, but by this point you have likely discovered what you like and don’t like about your practice. This is a good time to make those changes that will promote a long, enjoyable career. There is nothing that can make up for previously poor financial decisions quite as well as working longer (more years to save, more time for investments to compound, fewer years to save for, higher Social Security payments), and it is far easier to work longer in a practice you actually enjoy.
5. Reevaluate Your Advisory Decision
If you are in the “second city” and realize you’re not very happy to be there, perhaps it is time to take a deep introspective look and try to determine how you ended up there. It might be that you neglected your second job as your own personal retirement fund manager. It might also be that you simply spend too much money. However, some doctors discover it is at least partially because they are getting bad financial advice or paying too much for good advice. Financial advisory costs, like taxes, have a drag on your returns. This has a lesser effect in your early career, when asset under management fees are applied to a smaller portfolio. In late career, those fees can add up quickly into the tens of thousands of dollars a year. Obviously, there is no price too low for bad advice, but mid-career is a good time to take a look at your earlier advisory decisions. Do you need a new advisor? Do you need to renegotiate your advisory fees? Do you have sufficient interest and discipline to be your own financial planner and investment manager? If you are happy with where you are at and how you arrived at that point, there is no need to make any changes. But mid-career with a blossoming portfolio is a key time to make sure you are either getting good advice at a fair price or capable of managing this aspect of your life yourself.
6. Evaluate Spending Patterns
Mid-career is also a great time to take a look at your spending. Most importantly, are you saving enough money? If you are not putting at least 20% of your gross income toward retirement each year, then you probably need to make some changes. Write down where you spend your money and make sure it aligns with what you value most. If you get the most happiness from taking international trips and don’t consider yourself a “car guy” then why did you only go on one trip last year and find yourself driving a luxury auto? Fixing any disconnects is likely to improve your financial situation and boost your happiness. While it is always difficult to cut back on your lifestyle, careful budgeting can free up significant amounts of money to invest without requiring you to cut back on anything you really care that much about.
In summary, mid-career is the time to correct mistakes, evaluate progress toward goals, and make those changes that will bring you financial success and personal happiness.
Did I get it right? What other financial issues do mid-career docs need to address? Comment below!
I’d add to the list that mid-career is a good time to start taking a look at your tax diversification among retirement accounts. Have you only been contributing to a 401(k) because that was on automatic? Did you think you were being conservative early in your career by not contributing to a 401(k) because of some overblown fear of having to pay the 10% withdrawal penalty such that your 401(k) balance is lower than you’d like while you have a fairly large taxable account? Mid-career would be a good time to start anticipating how you plan to withdraw from the various sources to fund your retirement and making any tweaks necessary to ensure you have a diversified balance of accounts to pull from.
WCI, I think you largely nailed it. I am 51, mid-career by age but late career by cicrcumstance and choice, and you covered most of my current financial issues and concerns.
One area that has financial consequences that might deserve some attention is the upstream generation–the parents of the doc. A physician around the age of 50 will likely have one or more parents to consider (given a spouse and divorce rates, it could easily be four or more). Most people I know will either inherit money from a parent or find themselves in a situation where they will need to support a parent, with money and time–or both. How this plays out can have significant implications toward meeting personal and financial goals.
Good post. I think the readership skews young so you may not get lots of comments but this is an important topic. Everyone at some point needs to start running their own numbers. Examining personal spending patterns is also very important. To me at 59 the biggest unknown is health insurance. I am afraid of what the rates on the ACA will be for 60-65 year olds with no subsidy. This fear is keeping me working but only 3 days per week.
My situation is very similar to Hatton1. My husband and I have worked diligently on learning about finances and saving and investing ever since we started working. But at age 53 and 52 we’re most concerned about healthcare once we retire. We live in Texas and the available ACA health insurance here is very limited (I think there’s only one option now.) We’ve been able to negotiate good work schedules mid career (benefits of financial independence gives leverage in negotiation) but within a couple years we’d like to not work at all or only work very sporadically to allow more travel. I’m concerned what health care options we’ll have at that point. Part time work in semi retirement will allow us to at least deduct the cost of the health insurance prior to Medicare at age 65. But we’re concerned if we’ll even be able to purchase good health insurance at our age. We’ve researched using only our taxable brokerage account until Medicare age and drawing off the money in such a way that the taxable income would appear to be low enough to qualify us for subsidies. Even though we’ve paid huge amounts of income tax over the years, I still feel guilty about taking subsidies when we have savings and feel like I’m gaming the system.
I wouldn’t feel bad about that. If you are living on less, take the subsidy. Although, having looked into it for curiousity sake only, the subsidies don’t seem that exciting.
If you can figure a way to get your passive income low enough for a subsidy I would do it. I believe that muni bond interest is counted as income similar to social security taxes. If you have significant assets in a taxable account I foresee a problem. Non dividend paying stocks would help here but I am not going down that road. I plan to look at the rates this year. My state is also down to one option.
I thought it would be best to use the taxable account until I turn 65 to try keep my income appearing low to qualify for healthcare subsidies, rather than the use 401k. Drawing on the 401k, I’d have taxable income approximately on the amount taken out of the 401k. So if I take $100,000 per year out of the 401k, that would be my approximate taxable income for the year (minus exceptions and standard deductions) and I wouldn’t qualify for subsidies. If I take $100,000 per year out of the taxable account until age 65, my “income” would only be on the gains, not the amount I contributed since contributions were after taxes. I’ve used tax gain harvesting over the years to try to update and raise the cost basis in the taxable account. I think I could probably take about $100,000 per year out of the taxable account and depending on the stock or mutual fund chosen, might only have a taxable income of $20,000 to $30,000 per year. After deducting exemptions and standard deductions, my ” taxable income” would be pretty low. According to what I’ve read on Root of Good and Go Curry Cracker blogs, I think that low amount of taxable income would qualify my husband and I for health care subsidies. I still have to do more research though! Still, I feel like a cheater trying to get subsidies when we have investments. But we have paid several million in taxes over the years too!
Go Curry Cracker has some great info. I think the new numbers for the ACA are available on 11/1 so I plan to look at them to assess retirement this year or not. My taxable account is throwing off too much income to qualify for a subsidy I think. I need to compAre the premiums to capital gains taxes to realign some stuff. I am probably better off just paying the crappy premium.
And doing Roth conversions. If your taxable income is low enough that you may qualify for a subsidy it would be a good idea to look into doing some conversions over the next few years.
Yes, we plan to do some Roth conversions once we stop or signifantly decrease our work income. It sure becomes a mathematical challenge doing spread sheets to figure out how much Roth conversions we can do and which stocks or mutual funds we can take out of our taxable account to limit taxable gains and still try to get health care subsidies in retirement. I get a headache when I read GoCurryCracker’s calculations.
Well the high income from your taxable account is a good problem to have, so you’ve done well! You probably don’t want to sacrifice good dividend paying stocks in your taxable account just to get health care subsidies. My big concern is that the future health care premiums for us older doctors are unpredictable. So far, it’s been a big enough concern that it’s kept me working beyond financial independence.
Agree with health care insurance premiums being the unknown devil. So I am working to make sure we have the insurance for my family.
Also, I would get bored sitting at home and I suspect that Alzheimer’s may run in my family So I want to keep my mind active by constantly reading and practicing medicine. I love travel but I think I would be bored if it becomes too accessible or constant. Same with other hobbies. I love interacting with my patients.
Also, I don’t think my daughter or wife are keen on any round the world trips. As children grow up their interests become different than what yours are. You might want the famous road trip with your family and all they want is to be with their friends.
It always reminds me of the Harry Chapin song – Cats in the Cradle
Agreed with the health insurance uknowns from the age of FI/ERetirement to age 67.
Moneywise you might be OK ( at least by FIRECalc ), but health insurance premiums say, 10 years from now when you have to have a private insurance is a ??.
So what, have a “almost” no show job somewhere with minimum salary just for health insurance?
I guess I don’t see this as a big deal, but I’ve been buying my own health insurance on the open market for 5 years already. It’s not some crazy boogeyman in the closet to me, it’s an actual bill with an actual price on it that I actually pay every month. So it’s easy to work it into my budget. Will it go higher? Almost surely. Just like my property taxes, food bill, and gasoline bill. That’s not going to keep me in a job I don’t want to do though any more than my gas bill (which thanks to that boat and two Sequoias is often higher than my health insurance! Don’t tell MMM I’m ruining the planet singlehandedly.)
Do you buy a group health insurance or an individual (or a family)?
Maybe you can share with your readers what the ballpark is for a a healthy 40 yr old with 2 kids +wife in Colorado on the open market with no subsidies : premiums, deductibles (it’s a high deductible no doubt), max. out-of-pocket expenses, the breadth of coverage (HMO style narrow panel of providers or any provider, can you use it somewhere in California? )
I have no idea about Colorado, although I hear there is a double digit increase this year. I can tell you I’m paying about $1K/month in Utah for a family of six, including dental.
That’s right, you’re in Utah! Forgive the East Coaster he he…:)
So for an early retiree (or 2 ) in er… Utah, it would be what 15-18k/year? It was a minimum wage annual salary not that long ago…
I have been buying health insurance for myself and my employees since 1992. The premiums are increasing dramatically based on age since health status can no longer be factored in. It worries me because I am unsure of the ceiling. I am actually looking forward to being Medicare eligible.
Great post – right on target. I paid 1% for good financial advice right after residency, and that was not at all expensive at the time. As my portfolio and continuing financial education grew, 1% became uncomfortable. Surprisingly, it was not hard to negotiate down to 0.6% – just mentioned that managing a portfolio seems relatively easy compared to what I do every day, asked how much harder is a 1+ million portfolio to manage than a 10K portfolio, and that I’ve been reading some good books. If you still want financial advice at mid-career, it doesn’t hurt a bit to ask about reducing your fee – may well save you thousands every year. Eventually I took over the portfolio entirely and my overall cost is about 0.2%. I get a warm fuzzy feeling about that.
Good post. I think the “big squeeze” is real for many of us. We are trying to afford our increasingly expensive life (due to lifestyle creep). Our kids are increasingly expensive and then head off to even more expensive colleges. Our aging parents are ill prepared for their own futures and need help. Doctors make a lot of money but not enough to support three generations of family. Doctors in that position need to set realistic limits of what they can do with their time and money to help those in need.
I had some emailers mention the parental issues as well.
I think now is a good time for the 40-50 year old MD top start attacking their mortgage/s. Insert the usual disclaimer about swearing off market timing, BUT with high equity valuations after a long bull market, and low yields from bonds & CDs, taking a guaranteed 2-3% return by accelerating principal paydown or refinancing into a 15 year mortgage (if you haven’t done so already!) seems a wise choice for the mid-career doc right, assuming all other higher priorities have been checked off. If you can’t stomach a full commitment to it, just split your disposable monthly income (after maxing all retirement accounts and other priorities) in half between your brokerage account and your mortgage.
Funny you mention that. We just sent in a check for half of what’s left of our mortgage last week. Couldn’t quite justify selling the taxable mutual funds still with short term gains to pay the rest off. They’ll all be LTCGs come February. Maybe then. Maybe not.
A decision I am sure you won’t regret.
I’ll bet if you look at the net worth of mid-career physicians, you would see quite a range, but I wouldn’t be surprised to see a bimodal distribution. You’ll have some doctors living it up with a zero to low 6-figure net worth. On the other end of the spectrum, you’ll have those with a 7-figure net worth who have the freedom to contemplate how to best take advantage of their enviable position. WCI readers will skew to the right, no doubt.
Mid-career also happens to be the point where burnout can rear its ugly head. Family life is often at its most hectic. Studies have shown happiness levels bottoming out in the forties. All good reasons to save your money and be prepared to deal with issues that may arise mid-career.
I’d love to see the studies, any links? I’m headed there and love what I do, but am finding I love a lot of other things also….
@Ricky
The U-shaped curve of happiness is well-described and documented:
http://www.theatlantic.com/magazine/archive/2014/12/the-real-roots-of-midlife-crisis/382235/
https://www.theguardian.com/science/head-quarters/2015/jun/24/life-happiness-curve-u-shaped-ageing
http://www.economist.com/node/17722567
https://www.washingtonpost.com/opinions/robert-samuelson-the-happiness-curve/2014/12/07/3b7b359a-7ca3-11e4-b821-503cc7efed9e_story.html?utm_term=.d1056b6ce355
Thanks Vagabond MD, got my reading cut out for the day now.
That is really a superb mountain top image. Cudos to the photographer.
don’t send your kids to expensive private universities
Just a point of reference, my mom is 64 and pays for her own health insurance. It is about $650/month and it is not a high deductible plan. Next year it is expected to increase 20%.
Saving for healthcare needs is a priority for me as well before I call it complete quites from work.
EnjoyIt,
I would be incredibly happy with $650 a month for health insurance at age 64. What state is your mom in and what plan does she have? Is your mom getting subsidies?
Yes I would be happy with $650/month. I think it is going to be higher than that.
She is in New York State and not on any subsidies. I do not know what her deductible is, but I suspect it is not a high deductible account since they do not have an HSA option. As stated her premiums will increase to about $780/month for 2017 and I suspect will continue to rise.
There must be some health insurance cost threshold where premiums are too high for the market to sustain and we should reach equilibrium, but what that figure is I have no idea. $780/month is a ton of money already considering there is a yearly deductible. If considering a family of 2 that comes out to almost $20k/yr and that does not even include the deductible. This family would need $500k extra to be able to draw 4% or $20k every year just to cover health insurance in early retirement.
I sold my practice, maintained my PA(corporation), and worked 1.5 days
The income went into the corporate account to pay health ins premiums and I kept wife on the payroll to keep small group premiums
THEN OBAMACARE terminated these mom and pop policies and forced me into a NJ BC/BS plan with no out of network coverage
Luckily my Cardiac surgery in NYC was 6 months later and I was on medicare
I was thinking about something similar. Any requirements on how much to work, or does simply working enough to cover the premiums suffice? I think I could work for a week or 2 if it let me deduct the premiums.
If you’re self-employed, you can deduct the premiums. I’m not even sure you have to have more income than the premiums. The premiums get deducted on line 29 and can be deducted against even unearned income like rents or dividends or Social Security. Not very hard to get $50 of “self-employed” income. Do a survey on Sermo or something.
noted. however, for those of us paying AMT income taxes, there is no health insurance deductibility.