By Dr. James M. Dahle, WCI Founder
Just as diversification in your portfolio is valuable, so is receiving income from uncorrelated, multiple streams of income. Physicians, unfortunately, might be some of the worst players when it comes to diversifying income. Some streams are more passive than others, but they are all useful, especially in times when something happens to an individual doctor's income or, as we saw in 2020, all doctors' incomes.
8 Risks of Relying on a Single Physician Income
Instead of developing multiple streams of income, the typical doctor spends 1-2 decades developing a single income source. It might be the equivalent of the Amazon River, but even so, it can dry up surprisingly rapidly. Think about all the things that could put an end to your professional income. Keep in mind that some of these can be insured against, but many cannot. Here's just a brief list off the top of my head:
#1 Physical Disability
At least you can insure against disability. Far too many docs aren't insured against this, or more commonly, are underinsured. The insurance is also quite pricey.
#2 Mental Disability
Although they seem to be getting better, many of us carry disability policies where mental illness is only covered for 2 years. After that, you're hosed.
You always think it can't happen to you, but how many of us aren't aware of a physician or nurse we have worked with who had a drinking problem, a narcotic diversion problem, or a similar issue.
Depending on specialty, most of us can expect to be involved with a malpractice suit at least once in our career. But what if you had 3 cases in the same year? It is likely that you wouldn't be able to continue to get malpractice coverage. Or, if your malpractice is through a group, the insurance company may insist you be thrown out of the group or else the whole group's rates will go up. I know of at least one doc who was recently let go partly at the insistence of the malpractice insurance company. Think your disability policy will cover this? Think again.
#5 Loss of Medical Staff Membership
I don't know about your contract, but for many docs, (including me) losing credentials/privileges at a hospital are grounds for termination of the employment contract and, thus, a physician's single greatest stream of income.
#6 Inappropriate Relationships
Claims of sexual harassment or abuse of a patient, whether true or not, could terminate your income in a hurry. Even if eventually proven false, do you think your employer will let you work while they're being investigated? If you're self-employed, how many of your patients will leave the practice when your mug shot shows up on the front page?
#7 Disruptive Physician Accusation
You might have thought throwing that instrument across the O.R. or chewing out that respiratory therapist didn't bother anyone, but, nowadays, it could rapidly lead to a loss of your job.
#8 Decreasing Reimbursement
Imagine a family doctor who sees a lot of Medicare patients. Now imagine the 29% reimbursement cut actually going through. What kind of a private practice would actually survive a 29% cut in revenue? Nobody is going to practice for long for a negative income.
7 Benefits of Multiple Streams of Income
Besides being available to support you and your family in the event of one of the above financial catastrophes, the development of multiple streams of income provides seven other benefits:
#1 Higher Income
Who couldn't use a few more bucks every month? Even if you don't need it to fuel your lifestyle, it could accelerate your path to financial independence or allow you to cut back on hours worked.
#2 Lower Insurance Needs
If you have streams of passive income that will provide for your loved ones in the event of your death, or you, in the event of disability, you can spend less money by dumping life and disability insurance.
#3 Walkaway Money
Loss of your job as a physician often means an expensive relocation to another city due to non-compete agreements. It may also mean 6 months without income as you get a medical license, a DEA license, and/or go through the credentialing/privileging process. You may have to sell your house at a loss or even liquidate investments in a down market to tide you over through a period of lost income. Because of this, employers have an advantage over you in negotiations. But if you have multiple streams of income, you don't have to play by their rules and you retain negotiating advantage. This is your F-You money because it allows you to say “F-You” to the employer and walk away from the job. You know there will still be money coming in every month even without your main job.
#4 Tax Advantages
Many streams of income are taxed at a lower rate than the income from your main job. Many types of investments and real estate offer advantages this way. A side business may also allow you tax deductions such as “business” trips, travel costs, and a home office.
Additional income not only provides peace of mind, but it also means you need less money to retire on. If your side business provides you $3000 a month, and you need $7000 a month to live on in retirement, you may be able to retire 5 or 10 years earlier than you otherwise might. Instead of a $2.1 Million portfolio, you may only need $1.2 Million. This, of course, assumes you're willing to keep running the side business.
#6 Professional Enjoyment and Development
The best additional streams of income are those that you enjoy. A hobby leveraged into an income may provide a welcome break from the daily grind of medical practice. Your medical knowledge and training may be valuable in more ways than just practicing medicine.
#7 Opportunity to Be with Spouse, Children, or Friends
Many people find it rewarding to have a business where they can work with family, or teach their children the value of work. Many streams of income can be cultivated from home, where you can watch young children, or be interrupted frequently by them, while still earning money.
Alternative Streams of Income for Doctors
The sky is the limit, but some alternative income ideas are better than others. Stanley and Danko in The Millionaire Next Door are quick to point out that millionaires allocate their time, energy, and money efficiently, in ways conducive to building wealth. That means that a millionaire is much more likely to spend Saturday mornings checking on his rental property rather than cruising garage sales looking to add to his garden gnome collection. Robert Kiyosaki of Rich Dad Poor Dad fame likes to emphasize the benefits of a passive income. The books aren't exactly a prescription for wealth, but he makes two excellent points. The first is that a stream of income that provides money when you're sleeping is preferable to one that requires you to work. The second is that passive income often enjoys much better tax treatment than the income from your professional work. Here are some income streams that are fairly common among physicians:
A second job with another employer could provide income or be leveraged into a full-time job in the event of loss of your mainstream income. A clinic-based internist might pick up shifts as a hospitalist, for instance. Opening a cosmetic procedure clinic one day a week, like one of my partners did, might also provide a valuable all-cash stream of income.
#2 Endorsing Products or Supplements
You've all seen the doctors who recommend various products out there. You don't really think they're doing that for free, do you?
#3 Speaking and Teaching Opportunities
Developing your reputation and skills as a speaker may allow you to give CME seminars for pay, or at least a cheap vacation. Look at those brochures you get in the mail for various CME conferences. It's the same two dozen speakers at all the conferences in your specialty. Become one of them.
#4 Book Royalties
While most physician authors recommend against writing books purely for money, it can provide an additional small stream of income as the royalties come in year after year. Even quick articles for throw-away journals can provide significant income.
#5 Online Entrepreneurship
I obviously know a thing or two about this one. The White Coat Investor was a business from its first week. My initial financial goal was to be making $1,000 a month within 2 years of starting. I barely made it, which is better than most blogs ever do. Now it provides partial or complete financial support to 10 other families and has helped build the businesses of hundreds of the “good guys” in the financial services industry. Blogging, podcasting, and videocasting all have potential to create a stream of income. I guarantee it won't be very passive, but the sky is the limit when a medium can infinitely scale. Many doctors have found success teaching online courses, coaching, or consulting. Online entrepreneurs make money by selling ads, selling their own products, selling the products of others, and selling their time as speakers, writers, consultants, or coaches.
#6 Your Portfolio
Stocks, bonds, and mutual funds provide dividends and interest on a regular basis. While these are generally reinvested, they are still an additional source of income you could use if you needed to. Dividends and long-term capital gains are taxed at 15% in a taxable account and not at all in a tax-protected account. The best part about portfolio income is that it is very, very passive.
#7 Investment Real Estate
There are a plethora of tax write-offs available to real estate investors. They aren't quite so generous for those with a high clinical income, but they still exist. As a general rule, rental income tends to be a lot more stable than many kinds of income, and sometimes properties even appreciate, allowing for significant capital gains. Just remember that, compared to a stock/bond portfolio, rental real estate tends to be more of a second job than an investment, even if a property manager is involved. But the more of that work that is outsourced, the more passive the income becomes until, eventually, it is like your portfolio income.
#8 Expert Witness
Both the prosecution and the defense in a malpractice trial need expert witnesses. These guys often make several times more per hour testifying than they do practicing medicine. Even just reviewing potential cases may earn you income. Don't forget your ethical standards when engaging in this type of work. I suggest you stick to your own specialty and do defense work only. We've got enough docs out there already willing to sell out their colleagues for a few bucks.
#9 Consulting Work
One of my partners is the medical expert at a business. No one else at the medically-related business has a medical background, so he is the go-to guy when they actually need expertise.
#10 Medical Equipment
Another of my partners has owned a very profitable medical equipment company. Most of the products are his own inventions.
#11 Pharmaceutical Trials
Part of the reason drugs are so expensive is the drug companies have to prove to the FDA that they work. They have to pay people to run these trials. You could be one of those people.
#12 Recreation Physician
Camps, ski resorts, cruise ships, airlines, expeditions, etc all may have need for part-time or full-time medical expertise. Part of the compensation may be taxable income, or it may simply be opportunities. For example, I work at a ski resort a few days each winter. I ski and a P.A. sees the patients. If the P.A. needs me, I can be there in 5 or 10 minutes. If they don't, I get a free day of skiing in for my family and friends. At the end of the day, I sign 4 or 5 charts. Sure, it's not much money (perhaps the equivalent of $100-200 a day in lift tickets and meal discounts), but it's still an income. When engaging in this type of work, look carefully at the liability issues.
#13 Buy a Surgical or Imaging Center
Be careful with this one. Many doctors list this as one of the dumbest financial moves they ever made while others consider it their greatest investment.
Selling stuff you're not even using on eBay or Amazon can be surprisingly profitable. Not only do you get tax-free income, but you can spend less on housing and utilities because you don't have to store all that stuff anymore. Many people that start out selling on the internet just to get rid of their junk find it is so easy they open a side business doing it.
#15 Spouse's Job
Okay, seems a little strange. But it might be the most important alternative stream of income in your arsenal, and it is completely passive to you!
I'm sure there are many more streams of income out there developed by other physicians. Your only limit is your own creativity. But as reimbursement continues to decrease in the future, you would be well-advised to develop a few of these along the way. There's nothing out there that says your main job has to be your only job.
What do you think? What kind of alternative income ideas have helped you diversify? Do you have other ideas to help docs diversify their income?