[Editor’s Note: This guest post came out of an email discussion I had with a hospitalist who wishes to remain anonymous. He took exception to many of the posts on the blog that advocate frugality and taking the attitude that physicians should consider themselves upper middle class or HENRYs (High Earners, Not Rich Yet.) As part of the discussion, I posted a poll on Sermo, which I will summarize in our next post as a bit of a “Pro/Con” on this question. Truthfully, after reading his submitted post, our disagreements are fairly minimal and our “argument” was mostly just he and I talking past each other. The writer and I have no financial relationship.]
Many of us at one point in our lives glanced at the television while an episode of “Lifestyles of the Rich and Famous” gave us a whirlwind tour of opulent mansions and extravagant lifestyles. Today we hear about executives and Wall Street financial professionals of the top 0.1% that make approximately two million dollars a year, many of whom have millions in assets. Physicians entering their first years as attendings, exhausted from grueling hours in unforgiving residencies and fellowships while nursing enormous student loans, know one thing: Their lives are completely different than that, and people who lump them together with the ultra-rich simply don’t understand.
Doctors Aren’t Super-Rich
Physicians are not what most Americans would consider the “super-rich”, those with financial holdings valued in the millions and an annual income over a million. Furthermore, many physicians in academic positions or primary care make less than half what many specialists are paid and fit in more with upper middle class professionals such as engineers, attorneys at small firms, and pharmacists.
The Average Doc Is Rich
But what about the majority of physicians whom are specialists and surgeons? Let’s skip the higher paid surgeons and focus on specialists: the most recent surveys point to about seventeen specialties averaging about $250,000 a year in income plus or minus approximately $40,000. A physician’s income of $289,680 is in the top two percent of incomes in the wealthiest country on Earth, an income of $236,000 is in the top three percent. So while they aren’t super-rich, are they rich? I believe that they are for the reasons listed below, and I believe they should be proud about their financial success rather than trying to convince everyone they are middle class.
Comparing Disposable and Discretionary Income
Let’s start with a Middle Class family of four which we will define as one with the national median household income ($52,726), living in a house of the median national value ($186,200). They will be compared with a physician’s family of four which will live in the same value house and receive $250,000 of income per annum, as most non-family medicine/non-pediatrics/non-academic positions pay in that range (of course some make much more). To try and make it even fairer to the physician, we will put them both in a state with a progressive state income tax. Also both families will each put $5,000 a year into their 401k/403b for employer matching funds. I used EFile and Paycheck City online calculators and assumed New Jersey residency to arrive at the following figures:
- The Middle Class family would pay $4,036 in federal payroll taxes, approximately $1,300 in state income tax, and no federal income tax. This leaves them with $42,390 after their income taxes and the $5000 tax deferred retirement contribution.
- The Physician’s family would pay $11,124 in federal payroll taxes, approximately $14,500 in state income tax, and $44,143 in federal income tax. This leaves them with $175,233 after their income taxes and the $5,000 in tax deferred retirement contributions.
The point becomes even clearer when one examines the difference in discretionary income instead of disposable income. As both have the same family size and same house, they’ll both need $1,400 for mortgage payments (including property tax and insurance), $350 for utilities, $150 for gas, $100 for phone/internet/television, and $500 for basic groceries. A total of $30,000 in necessary expenses, which does not even include items such as cell phones, auto loans, undergraduate student loans, child care, basic life insurance or any other increasingly standard American family expenses.
- The median income middle class family has only $12,390 in discretionary income for the entire year.
- If we include an additional $15,000 a year in medical school loans, that increases the necessary costs for the physician’s family to $45,000 a year. Yet, the physician’s family still has $130,233 in discretionary income.
Doctors Have A Lot More Discretionary Income
Here we arrive at the heart of the issue: After both breadwinners give their families a solid middle class life, that median American would have a few thousand dollars to spare for all the other family expenses. On the other hand, the physician has enormous sums of money to spend however he wishes, the cautious and responsible physician will set up a lavish retirement account, expensive disability insurance plans to cover every reasonable contingency, win acclaims through generous charitable contributions, and take many family vacations, any of which the middle class families would love to imitate. A more adventurous physician could use that sum to easily afford a million dollar home, new luxury cars, private tutors, and regular international travel. Either path is well above the middle class family experience in the United States.
Compare Assets AND Income, Not Just Assets
While I sympathize with physicians who hate it when people ignore all the time you’ve put in, how long the path has been, and how much debt you have from the whole process, it would be an overreaction to try and claim that low or even temporarily negative net worth pushes you all the way into middle class territory.
Assets are not indestructible units of value and a physician’s career income is not some wildly fluctuating sum based on luck. First, assets lose value on a regular basis and are sometimes completely lost. Which would you rather be, someone who just put their inheritance of millions into a diverse investment package with Bernie Madoff, or a radiologist fresh out of fellowship with several offers? Second, American physicians live in a country that pays their profession better than any other in the world, there is currently a doctor shortage with an aging population and expanding insurance rolls, and not only is this country incredibly wealthy but also the most stable in the world. There is a reason places like Bank of America have a special mortgage option just for American physicians to skip all the down-payment and debt-to-income ratio requirements of every other profession, even when the physician has hundreds of thousands of dollars in debt, yet receiving only a paltry residents salary: Financial experts know being a physician in America is a virtually certain guarantee of being rich.
So what would be an accurate measurement? Take your reasonably projected career income and minus the student loan debts you accrued in medical school, and compare the adjusted number to other reasonably projected middle class career incomes. You will still find a wide disparity in the physician’s favor, which should cheer you up: you picked a great career.
Other Physician-Specific Factors Are Much Less Relevant
Physicians do have a serious issue with educational debt, and this is a legitimate concern in any discussion to the financial health of physicians. However once you get past that issue, other physician-specific issues have little to do with determining one’s wealth:
- Loss of economic opportunity or income potential through medical education, residency and fellowship: In this context such terms usually deal with someone forced off their career path, such as a salesman who is bed-ridden for years or an accountant with multiple lengthy maternity leaves. One wouldn’t say a Harvard MBA had such issues because he started his career after school at 24 instead of out of high school at 18, as it is simply part of the required training to achieve the position.
- Expensive disability insurance plans, tax shelters and retirement plans: As physicians are keenly aware, medical tragedies happen to everyone, and every middle class family would love to have that security, but having the guarantee of a high income even if you become disabled is a luxury, not a middle class feature. In the 21st century most middle class families have to make due with Social Security and a small 401k.
- Physicians are charged more by sellers who assume they can afford it: Oddly enough hospitals engage in a similar practice of using charge master prices for those it assumes are wealthy foreign nationals. The point being that overcharging anyone as much as you can is a problem everyone faces.
- Physicians do not start out with “Cadillac health insurance plans” and do not receive pensions: The vast majority of Americans do not receive such benefits, healthcare reforms are reducing the practicality of such plans and pensions are even being ended for public servants. Both sets of benefits are in their twilight.
- Many specialties are very demanding and easily lead to burnout, so I can’t compile my lifetime income: Yes you can, you just go from today until you are 65. Significantly changing your chosen career for less stress and less money is not an option for most middle class families. Throwing away millions in income for a happier existence is not that different from a millionaire giving away most of his estate he hated managing. Misery does not preclude one from being rich. Just because a rich person purposefully damages his finances for non-financial goals does not mean that person was never rich.
Definition Of “Rich”
The origin of the word “rich” is from many centuries ago that more accurately meant “powerful, mighty, ruler, royalty”. In the original sense it would not strictly apply to millionaire hedge fund managers who are simply highly compensated professionals without the power of sovereign lands, title or regional influence. Many terms describing wealth do not perfectly fit physicians because they originate before the rise of professionals in a modern economy.
However, in the informal conventions of everyday speech, people are talking about someone with significant financial success who is well above middle class.
Physicians should embrace being rich
Perhaps you think embracing being rich would have negative social ramifications. But quite the opposite, denying that you are rich and telling your friends and family that you are still part of the middle class is the position that can actually cause resentment.
If being a financially successful person in the middle class means having ten times their discretionary income, what does that make them? Even if you try to explain that your children’s college will be expensive, you put a lot of it into retirement, or that you spend a lot on things such as different comprehensive insurance policies, you are in all cases simply reminding them that they cannot afford a comfortable retirement, they have no choice but to sign up their children for massive student loans, and that they have to worry about a tragic event destroying their finances.
Even worse, some may take it as passive gloating. Such as a medical school classmate who laments he “only” got into Stanford Medical when he really wanted to go to Johns Hopkins. Don’t risk projecting yourself as arrogant or detached from reality. It’s sensible to temper people’s speculation by saying you have a lot of medical school debt, professional expenses and pay a lot of taxes, so you aren’t that rich. Own your success but clarify it.
You worked very hard to get where you are, enjoy the financial rewards.
Stay tuned for the next post, where some minor rebuttal is in order. Or sound off below in the comments section!