By Dr. James M. Dahle, WCI Founder
And The White Coat Investor went up into the Mount and out of the burning bush came a finger which engraved on the stone tablets the following:
10 Commandments for Financial Independence
#1 Thou Shalt Realize Thou Hast a Second Job
Most doctors won't have any kind of a pension, so if you want to retire on more than Social Security will provide then you'll need to learn how to implement and maintain a retirement plan and fund it appropriately. Putting this off leads to failure. Trusting it all to your “money guy” will likely lead to disappointment. Just like rotating through gynecology or psychiatry, this has to be done no matter how painful you find it. Pretending you don't have to do this is simply denial. Not realizing you have to do this is simply ignorance.
#2 Thou Shalt Do Continuing Financial Education
Everybody, no matter whether they choose to rely heavily on a financial advisor or not, needs to do some initial financial education such as reading 3 or 4 good books on personal finance and investing. I then recommend you read at least one good financial book a year. Just like CME, you need a few hours of CFE for your second job each year. Following this blog, or getting involved in the WCI Forum, Facebook group or subreddit are other great ways to get your CFE.
#3 Thou Shalt Save 20% of Your Income for Retirement Beginning the Day You Leave Residency
Many companies and municipalities have underfunded their pension plans. The reason why is that they have an unrealistic expectation of ridiculously high future investment returns (and they like to spend their money on other stuff). Individuals are no different. The “personal pension plans” of most Americans are almost all underfunded with a median 401(k) balance of just $23,000. [Editor's Update: In 2022 the median was $33,472. Not much has changed.] Now, granted, many people have an IRA or a taxable investing account on the side, but even if it were half as big as the 401(k). . .you're still a long way from what I would view as a comfortable retirement.
Doctors, by virtue of their late start, high loan burden, and future changes in medicine, need to save 20% of their income each year just for retirement. If you assume a 30 year career, 5% after-inflation returns, and a 4% safe withdrawal rate in retirement, this savings rate will provide a portfolio that will replace approximately 56% of your pre-retirement income. When combined with Social Security this should provide a nice, comfortable retirement with the ability to travel, leave money to your children, and donate to charity. You may even be able to retire a little bit early. But if you wait 10 years to start, and only save 10% of your income, your retirement nest egg will only replace 14% of your income. Alpo here you come.
#4 Thou Shalt Insure Against Catastrophe
There are lots of bad financial things that can happen to you in life. Most of these are minor, like your washing machine breaking. You don't need to insure against these, you simply need an emergency fund of 3-6 months worth of expenses so you don't have to go into debt when bad things happen. Some bad financial things are major, but you can't insure against them. These include losing your income due to sexual harassment claims, multiple malpractice suits, or the loss of an important contract. However, there are five major financial risks that you can and should insure against: death, disability, illness, liability, and property loss.
#5 Thou Shalt Not Mix Insurance and Investing
Life insurance protects your family against the financial consequences of your death. A large 20-30 year level premium term insurance policy will likely do the trick until your portfolio becomes large enough that you can self-insure against this risk. Disability insurance protects you and your family from the financial consequences of your disability. A good individual disability policy is expensive but worth it. As a physician, it doesn't take long to understand the value of comprehensive life insurance. You should also carry high limits on your auto and homeowner's insurance policies. In addition, you need to have an “umbrella” policy above and beyond these policies. These policies not only protect you against natural and man-made disasters, but against something that can cost you far more than a car wreck or a fire- a lawsuit. Just as a malpractice policy protects you from work-related liability, so an umbrella policy protects you from liability in everything else in life.
Insurance is an important aspect of your financial life, but it should not be an important part of your investments. There are many insurance-related investment products such as cash-value life insurance and annuities which allow you to transfer investing risks to the insurance company in return for some guarantees. Unfortunately, when you transfer the risk, you also transfer the lion's share of the returns. These products tend to be complex and that complexity favors the insurance company and its agents. The company doesn't invest in any magic investments you can't invest in yourself, but once the agent gets his commissions, the company pays its expenses and profits, and you pay for the costs of the insurance part of the policy, is there any surprise that the “investment” can't keep up with more traditional investments? Even considering the tax advantages of these products, these are investments designed to be sold, not bought.
#6 Thou Shalt Favor a Passive Investing Approach
The academic literature is quite clear—active management is a loser’s game. Stock pickers and market timers simply cannot outperform by more than it costs to do so. Proponents of active management like to point to Warren Buffett’s record and say, “Look, it can be done.” But Warren says, “A low-cost index fund is the most sensible equity investment for the great majority of investors. My mentor, Ben Graham, took this position many years ago, and everything I have seen since convinces me of its truth.” Humble yourself and realize that yes, you are part of that “great majority of investors.” I am too, and that’s okay. I don’t invest competitively, I invest to meet my financial goals while taking the lowest possible amount of risk.
#7 Thou Shalt Hire Only Competent Advisors
It’s okay to do your own financial planning, manage your own investments, and do your own taxes. With minimal input and assistance from appropriate attorneys you can even design and implement an adequate estate plan and asset protection plan. You do need to put in some effort up front to educate yourself, but these subjects are far easier to understand than a nephron or an action potential. Developing an interest in financial subjects is far easier when you realize just how much of a difference it can make in your finances.
High level credentials such as one or more of the following: CFP, CFA, ChFC, or a CPA/PFSIt is also okay to rely heavily on an advisor. This doesn’t excuse you from your need to learn about finance and investing and to do your CFE each year, but many doctors simply don’t have the interest, time, or disposition to manage their own money. However, there are legions of financial professionals out there whose business is transferring money from your pocket to theirs, not necessarily helping you to reach your financial goals. In many ways, by the time you know enough to select a good financial advisor you know enough to do it yourself.
When choosing a financial advisor you should look for the following:
Reasonable Fees
Avoid commissioned salesmen by sticking with a fee-only advisor. Annual fees should be less than $5000 per year. These might be payable as an hourly rate, as a percentage of assets under management, or as an annual retainer. There are advisors out there who will work for $100-200 per hour, for 0.15-0.5% of assets under management, or for an annual fee of as low as $1000 per year. If you’re paying more than this, realize that every dollar you pay in fees is a dollar you don’t have working for your retirement.
A Fiduciary
Many financial advisors select investments for you based on a lower “suitability standard.” If the investment is suitable for you, he can sell it to you. You want someone who is willing to sign a pledge to act as a fiduciary, meaning he is obligated to do what’s best for you, no matter what it costs him.
A Cloudy Crystal Ball
You want an advisor who knows that neither you nor he can predict the future, and who will design and maintain a plan that has a high likelihood of success no matter what happens in the financial markets over the next month, year, or decade.
A Bias Toward Low-Cost, Passive Investments
As mentioned above, active management is a loser’s game. If your advisor isn’t aware of this, it reflects a serious ignorance of the academic investment literature and you should look elsewhere.
#8 Thou Shalt Minimize Expenses and Taxes
Every dollar you spend on investment expenses, fees and commissions, or that you send to Uncle Sam, is a dollar that isn’t working toward your retirement. Studies show that the best predictor of future mutual fund returns is the cost of the mutual fund management. The lower, the better. Despite frequent claims to the contrary, a buy and hold strategy is still the best way to invest not only because it helps you avoid buying high and selling low, but also because it minimizes expenses AND taxes. A wise physician also maximizes tax-protected investing accounts such as 401Ks, cash balance plans, and backdoor Roth IRAs. When investing in taxable accounts, use only tax-efficient investments, and take advantages of opportunities to tax-loss harvest.
#9 Thou Shalt Minimize Debt and Manage Necessary Debt Well
Credits cards are not for credit. Buy your automobiles, recreational vehicles, furniture, and vacations with cash. Don’t ever have a mortgage more than twice as big as your salary. Minimize your mortgage interest by putting 20% down, refinancing when rates drop, and using a 15 year mortgage instead of a 30. Prioritize paying off high-interest student loans. If you have sizable student loans, become an expert on the IBR and PSLF programs. Refinance your loans as soon as you know you won't be going for forgiveness. Live like a resident until saving 20% of your income toward retirement is easy and your only remaining mortgage or student loans are at ridiculously low rates.
#10 Thou Shalt Protect Thy Assets, Plan Thy Estate and Stay the Course
Most importantly, don’t sell out at market bottoms. You will pass through 3-6 serious bear markets during your investing career. Don’t invest so aggressively that you cannot sleep at night when things turn South, as we know they will. Buying high and selling low can add 5-10 years to your career that you might have preferred to spend doing something else. Your investment plan should be like an oil tanker, not a speedboat. Any changes in direction should occur over a long time period. Be aware of the simple strategies to protect your exposed assets from malpractice and personal lawsuits. Consider implementing some of the more complex strategies. Get a will and a trust. If your assets begin to approach the estate tax exemption limits, see an attorney to draw up a more complex estate plan.
This is the financial and investing philosophy of The White Coat Investor. You may not agree with all of it, but if you follow these commandments, financial success is guaranteed.
Do you agree that by following these 10 steps you can achieve financial independence? Why or why not? What would you add or take away from the list? Sound off below!
This is similar to my last post – eleven-golden-rules-of-wealth-for-young-doctors
About high limits on your auto and homeowner’s insurance policy, I would agree on having high limits on liability. However, if you’ve saved enough, you can self insure when it comes to damage to your vehicle.
I disagree strongly with your comments about annuities. Some physicians may not need them, but some do. Annuities are a form of fixed income, which if you’re 75 or older, provide a greater return than any other form of fixed income. That’s due to mortality credits. Most physicians, if male, should wait to 75 to buy one; females should wait longer.
When you buy an annuity, you’re buying a pension. If you don’t have a pension, one has to worry about whether one will outlive one’s savings. That may mean underspending in retirement.
I’m not saying that annuities don’t have their problems or that they’re for everyone. But annuities are another form of fixed income (bonds, preferred shares) that don’t receive the attention they deserve. And annuities definitely are not an asset class that deserve to be dismissed in 10 financial commandments to physicians.
I would suggest reading Moshe Milevsky as some CFE.
I think you are confusing immediate annuities (income annuities) and deferred annuities (at least i hope you are for your sake). Id be in agreement that a SPIA (single premium immediate annuity) is a good choice for older people like age 75 as a form of longevity insurance for basic needs. Hopefully when i reach that age, the interest rates have improved but if not then still worth buying at an older age.
Deferred annuities as a way to grow your money during your working years is a bad idea and definitely deserves to be in the commandments to avoid.
Totally disagree. And not sure why you generalize this way. I’m 59 and have had a annuity for 10 years, this has a guaranteed 6 percent step up yearly. From approximately 150K invested it is worth over $289,000 with a guarantee payout for the rest of my life.
Should have invested more, no?
That’s like someone crowing about how they have a 30 year treasury paying 9%….bought in 1990, without a surrender fee like your annuity. And that’s assuming you actually know what you’re talking about, which may or may not be true as displayed by this example:
http://www.financialfinesse.com/2015/06/18/is-a-6-guaranteed-return-good-to-be-true/
Please post a link to an annuity prospectus currently available for purchase with a guaranteed 6% return. I’m interested and I bet so are many others.
Wow. Not sure why you decided that it was necessary to get so rude and snarky. However it is easy to see you don’t know what you are talking about.
First I said it was a 6% guaranteed step up not a 6% return. Second, advisors use the word Annuity like it is just one product, there are numerous types of Annuities and this one is a income Annuity with a GMIB. Third it is stated, REX Comment, that Income Annuities are immediate and deferred are something else, deferred is and income annuity also. And last you call them insurance, they are investments in to funds. I was just making the statement that there maybe other products out there to check out and yes it maybe an annuity! Can you still get the GMIB, don’t know but at least ask. Isn’t that what this site is about, providing information and not allowing one persons opinion to be fact.
https://www.metlife.com/individual/investment-products/annuities/income-annuities.html#overview
1) Sounds like an annuity salesman using words like “step-up.”
3) Rex was saying a deferred annuity is different from a SPIA.
4) Annuities are insurance products sold by insurance agents and designed by insurance companies.
That link isn’t to a prospectus, but since it’s now clear you’re not saying there is annuity with a 6% guaranteed return, I’m not sure anyone is interested anyway.
At any rate, if you love your annuity, I’m glad for you. For others considering annuities, I would recommend reading this book first:
https://www.whitecoatinvestor.com/the-truth-about-buying-annuities-a-review/ I generally recommend keeping your investing and insurance separate.
I exclude SPIAs, especially for older people, from my general comments above as I wrote in this article:
SPIAs- The Good Annuity
in case i wasnt clear, i wasnt talling to WC but to Doug
I don’t think any of us are in substantial disagreement. About the age at which you buy an annuity. Moshe Milevksy has a chapter on it in his book “Money Logic”. He also has a later book “Pensionize Your Nestegg”, which I haven’t read, and he may have changed his mind in the later book. Nevertheless, in the earlier book, he makes a case for holding off buying an SPIA until age 75. Basically, you’ll do better selfinsuring until age 75. A very important point is that the book is directed to Canadians; whether it is relevant to Americans may be debatable.
“Just like rotating through gynecology or psychiatry, this has to be done no matter how painful you find it.” LOL
Agreed, definitely deserves an “LOL” – because we can all relate to it :))
Hello! This is kind of off topic but I need some advice from an established blog.
Is it very hard to set up your own blog? I’m not very techincal but I can figure things out pretty fast. I’m thinking about making
my own but I’m not sure where to start. Do you have any points or suggestions? With thanks
Try this AT https://www.bloggingbasics101.com/how-do-i-start-a-blog/
I found it fairly easy as well as found someone on fiverr.com to help set it up.
Hi. I’m reading “doctors eyes only” and just finished the scary asset protection chapter. If hubby is a brand new doctor and has a ton of debt and we get an umbrella insurance policy of say $3M won’t that make us a deep pockets target?
You’re viewed as a deep pockets target whether you have that policy or not. Who are you planning on telling you have that policy? While I don’t doubt that a good attorney/private investigator can find out, most of your neighbors won’t be able to.
When you save 20% towards retirement, are you supposed to be saving 20% of your gross or net income?
Thanks
Gross. But the point is it’s a rule of thumb. You need to be in the neighborhood. 5% isn’t enough.
Solid article and recap of a lot of the great information on your site. Personally, I save 50-60% of my income and hope to be financially independent before I’m 40. I think I need to work more on commandment #10 soon of protecting assets. Thanks for the good information!
Disagree with the 9th commandment also. Since 1980 I have paid off my credit debt monthly and have taken advantage of cash back bonuses, hotel and airline points etc. This recommendation is normally made for people who cannot control there credit card use. If you use the rule to only buy things when you have the money to pay for it then buy all means charge it.
So you agree that credit cards aren’t for credit since you don’t carry a balance on them? Sounds to me like you agree with # 9.
The rest of the commandment says “Buy your automobiles, recreational vehicles, furniture, and vacations with CASH.” So I was responding to the CASH comment, and saying there is a better way. And technically when you use your credit card, even if you pay it off, you are being extended credit from the time you purchase until the time it is paid off. You just do not incur a finance charge.
I think you have a stricter definition of cash than I do.
Tim, I’m curious where u are able to buy automobiles and most larger recreational vehicles with a credit card? In my opinion, if you are paying off your credit card every month, you are paying with cash. Clearly the point of commandment #9 is that you shouldn’t finance purchases with credit card.
So Christian I guess you are saying that you pay CASH for automobiles, like what it says to do. And yes I have used my credit card to pay for furniture, and my cash continued to earn income until I needed it for payment of the furniture a month later. So i just floated my money for a month at not charge to me. And I also have accumulated enough points year after year to fly and stay free on vacations. A better commandment t is if you use credit cards make sure you can pay them off a the end of the month. If you can’t DON’T BUY THE ITEM. All I can say is absorb what you can from this site but get second and third opinions from other financial sources. Just because these are Dr. Dahle opinions does not make them facts.
Man, why so rude and snarky? 🙂
I do the same thing. I purchase large items with my credit card to get points. If I needed a new car, I’d probably try to use the card, too, and pay off the balance later that month.
Hmm… I wonder how many airlines miles that would get me?
Good luck. They usually won’t let you do that, at least not more than a few thousand. I’ve tried with every car purchase I’ve done.
Is the 20% to be saved separately from investment towards retirement. Thanks
20% is FOR retirement. Any other savings goals (college, next car, house downpayment, boat etc) is in addition.
Hi there, if you’re saving 20% of gross income just for retirement as a new physician what percentage are you supposed to save towards a house downpayment and other stuff?
How fast do you want to get back to a net worth of zero (or get a house downpayment, or pay for other stuff etc)? Instead of asking how much do you have to save, why not ask, “How much can I save?”
I think someone coming out of residency ought to be using half or more of their gross income for building wealth – paying down student loans, saving up a down payment, maxing out retirement accounts (which lowers the tax bill too) etc. Which goals take priority for you will depend on your financial life.
After 2-5 years of “living like a resident” you can grow into your income a bit more and maybe cut back to a 20% savings rate.
But if you find you’re already at or near your peak income and only using 5-10% of it to build wealth, then do all you can to increase that number. The higher the better, at least within reason. But going from 5% to even 15% will make a huge difference in your life, and getting into the 20-30% range will give you options you never dreamed of.
Thanks! Also, I’m having a bit of confusion with the regular Roth IRA (for incomes under $132,000) and SEP IRA.
I’m filing as a sole proprietor making in the ballpark of $120k in 2016.
I am able to contribute to a normal Roth as well as as much as possible to my SEP IRA (max $30,000; 25% of 120k), correct? I don’t have to worry about backdoor Roth accounts?
No, the SEP-IRA is totally separate from the Roth IRA. If you can contribute directly to a Roth IRA (i.e. don’t make enough to have to use the backdoor), then a SEP is fine to use. But a 401(k) is still better because you can put more in it at that income. You can put $18K + 20% of $120K instead of 20% of $120K. (It’s not 25%, it’s 20% for a sole proprietor BTW.)
Oh that’s good to know, would that be the Solo 401k? Is the deadline for contribution also 4/18th? Also for Solo 401k and Sep IRA is that based off your net 1099 earnings? Part of my income is as a W2 and part of it is as a 1099, as a result, I have a hard time figuring out what I can contribute.
*also I have no options for retirement through my w2 employers. I just trying to figure out how to maximize saving for retirement
Yes a Solo 401(k) and an individual 401(k) is the same thing. The deadline to establish the account is Dec 31st (already passed), but you can make contributions after that until tax day. So you’re probably stuck with a SEP-IRA for 2016 tax year but can open an individual 401(k) this year.
Yes, your contributions are based on your self-employment earnings net of any business expenses including the employer half of payroll taxes. W-2 income is NOT self-employment income. You can only use your self-employment income to calculate your max contributions.
Just another clarification. Does paying a mortgage on my medical office condo count as part of the 20% of one’s income towards ‘retirement investments’ or do you mean just IRAs, 401ks, stealth IRA etc? Thanks!
I might count extra payments, but not the regular payment. It’s really up to you. 20% is just a rule of thumb. If you’re at 5% without that payment, that’s probably not enough. But if you’re at 19% without it, sure, count it.
This post reminds me of the wisdom of knowing your risk tolerance in the current times of recession, but (!) it’s a good time to buy if you have cash.