The Physician Net Worth Rule Part 2
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. Remember my rule is this:
Expected Net Worth of a Doctor (ENWD) = Average Post-Residency Income X Years Since Training X 0.25
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.
Age | Net Worth |
<35 | $144,000 |
35-39 | $480,000 |
40-49 | $840,000 |
50-59 | $1,440,000 |
60+ | $1,952,400 |
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.
50-59 category:
$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.
Addendum: 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.
I like that this is generalizable to all the other folk with a late start to accumulation – like PhD/postdocs with accumulation phase starting in mid-30s. Of course expected salaries for non-physician-high-education professions are lower, but percentage-based formulas compensate to some extent.
I read this in 2013 and felt pretty good since at 40 my net worth was at the highest end. This is despite major hurdles that cost me income for many years, mitigating full academics for all my education costs before these hurdles arose.
Regardless, I thought then as now, this data is simply wrong and the survey must have been silly, like the garbage income surveys. I know few MDs in their 40s who are not over 1M. I have only once (almost, sigh) broke out of the 6 figure mold, yet it is almost as hard to fall off the bottom end, that is make 5 figures, if you are make any effort.
The answer must be on the spending side, if there is truth to low figures. Any thoughts?
Last, how/when do you intend to transition from saving/investing/earning to spending/splurging/enjoying? I actually enjoy being frugal, learning tax code, yet travel all over the US. One fun expensive thing I decided to do was earn a law degree for example. I have a feeling once I just buy a beach house my discipline may go out the window and I may join these docs in these lower brackets.
You may like this piece if you missed it the first time. https://www.whitecoatinvestor.com/loosening-the-purse-strings/
The issue with docs is that many of them do have a spending problem, but some also have an income problem. And of course, many have a student loan problem. Combine them in any way and you’ll meet A LOT of docs in their 40s with less than $1M in net worth.
The one issue I have with this is that in order to have a safe withdrawal rate (at 4%) in retirement equal to 50% of your income you would have to work for 50 years (not even taking it into account that some of that is house)!
With the current model:
Net worth = (years in practice/4)*salary
Safe withdrawal rate = 4%
Safe withdrawal amount= 4% * net worth
Safe withdrawal amount = 4% * (years in practice/4) * salary
Safe withdrawal amount = (years in practice) % * salary
Shouldn’t we instead aim to replace 50% of our earnings with retirement withdrawals?
Thus if the time frame is 30 years in practice the goal should be:
Net worth = (5/12) years in practice * salary ?
Net worth (at 30 years)= 12.5 * salary
Safe withdrawal amount = 0.04*12.5* salary = 0.5 * salary
You do not need to replace 50% of your income for retirement.
You only need the 4% rule to replace your expenses! The lower your expenses the smaller your nest egg needs to be!
Check out Mr. Money Mustache’s https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/ and prepare to have your head exploded.
Hi,
I throughly enjoyed reading your book.
As an IMG (international Med graduate)retraining in North America in residency and expect post fellowship[if I do one] starting at age 47 years. With a 2014 net worth of 400,000$ I have managed to use interest accrued/dividends etc to live comfortably and prioritize time over money saved by staying in a downtown area close to hospital hub. I avoided buying a car and walk/bike a lot. Whenever I revisit owning a apartment/ townhouse, I have procrastinated and deferred it. I have churned credit cards, always looked at value over a brand name and swagger but also realizing that time is something I don’t have. I rather would save time by spending money.
I churn cards and have done some travelling to few places through deals with great value for money. I have got 15-20% annualized returns through self taught investing in a mixture of direct equity, mutual funds/ ETF and commodities. After making some mistakes early on, I think I have got a few things right- disability insurance, a good term life insurance and stop listening to finance “gurus”.
.
My first post here. I wish I knew this before I took a leap of faith and relocated. Please comment
Questions:
1. With about 15 years of full practice and a gross salary of 150000/year, my ENW at age 65 would be ~562,500. Is this correct?
2. Relocating to a area with reasonable real estate valuation is an inevitable step.
3. I had always wanted to have enough money with returns that I would never have to work for money but only for my interest/ hobby/ goals. I guess that is never going to happen or might happen only after 55 ish.
4. Lastly I wanted to setup one big charity with some definite ideas and am saving money in a account dedicated to this. I need to revisit the viability and feasibility of that.
Estimated net worth of only $562K seems awfully low after 15 years of attending level salary, especially if you can make 15-20% returns consistently (which you probably can’t, but if you can you should be running a hedge fund not practicing medicine).
Not enough info in this post to provide much help, but you don’t really have any questions anyway I don’t think. You might register for the WCI forum, I bet you’d find it helpful.