By Dr. James M. Dahle, WCI Founder
There are many roads to Dublin. There are many pathways to reaching your financial goals and becoming wealthy. However, financially successful doctors generally take one of three pathways to success. I'm going to discuss them from the easiest and most frequently used to the most difficult and least frequently used.
Before we get into them, however, you need to realize that a great deal of the arguments in physician financial forums and Facebook groups are simply disagreements between people who are on different pathways. One pathway is not necessarily better than others, but there are significant differences between them. Like with most things in life, FIT MATTERS. You need to find the pathway that fits you best.
#1 The Standard Physician Wealth Pathway
For lack of a better term, we'll call the first one “The Standard Pathway.” It is the pathway I discussed in my first book, The White Coat Investor: A Doctor's Guide to Personal Finance and Investing. In fact, it was the pathway my wife and I were on for at least the first six years out of residency.
The path is very simple. First, you live like a resident for 2-5 years out of training. This allows you to get your net worth back to zero and beyond very quickly. You pay off your student loans, catch up to your college roommates with regards to retirement savings, and save up a down payment for your dream house. After that point, you make sure 20%+ of your gross income is going toward retirement savings, and you invest it into a straightforward, broadly-diversified, low-cost, blend of index funds in retirement accounts when possible—and in a taxable account when not possible.
This pathway is so easy it is almost laughable. While there are no guarantees in life, this is about as close as you can come. Combining a physician's income with an adequate savings rate and a reasonable investing plan should ensure that every doctor retires a multi-millionaire.
Katie and I became millionaires seven years out of residency doing nothing but this. Seriously. That's all we did. Any doctor can do what we did. The first million was primarily brute force savings, although there were some minor contributions from debt paydown, property appreciation, and investment gains. I have no doubt whatsoever that, if we had simply stayed on this pathway, we would now be multimillionaires and on track for financial independence by about 50.
#2 The Real Estate Pathway to Wealth
There are a lot of docs that are into real estate. The majority on this pathway prefer being active investors, owning their own properties directly, but it is also possible to do it with passive investments—including private syndications, funds, and REITs. This is generally a faster pathway to financial independence than “The Standard Physician Wealth Pathway” for four reasons:
- You put more work into it, and you are compensated for that work.
- You are more likely to use leveraged investments, which usually boosts returns if used in moderation.
- You are more likely to take on additional risks, which usually boosts returns.
- Real estate receives some pretty sweet tax deductions (primarily depreciation), ESPECIALLY if you or your spouse can qualify for Real Estate Professional (REP) status.
Going down this pathway doesn't excuse you from living like a resident or not maintaining a high savings rate. It is also going to require you to acquire a more complicated body of knowledge and new skills. But lots of docs who have gone this route have realized that if you put the same amount of intelligence, work, and effort into a financial services or real estate career that you put into medicine, you are likely to make a lot more money.
I don't blame doctors for entering this pathway. It's tough to know at 22 who you would be and what you would want from life at 32, much less 42. We all change, and medicine is worse than most careers at locking you into something for decades. But let's not kid ourselves—many of those who qualify for REP status probably made a mistake choosing to go to medical school. However, there is a continuum, and with good systems or passive investments, you can limit the amount of time or effort that goes into this second career.
Many readers don't know that I had plans to build a local real estate empire if The White Coat Investor didn't work out financially. I'm serious about that. I'm not going to do it now (it turns out that I don't really like being a landlord and I'm not all that good at it), but there's nothing wrong with the pathway.
#3 The Entrepreneurial Pathway
While real estate is somewhat entrepreneurial, there are so many properties in the world that you don't need to recreate the wheel. You can simply learn from others and copy what they did and expect to be about as successful in the long run. People are always going to need somewhere to live, and somebody is always going to need to own those apartment buildings. The pathway is very reproducible, at least over decades.
That's not the case for many other types of entrepreneurial pursuits. A few doctors take this pathway to wealth, developing a product or service that becomes a rapidly growing and profitable business. It can happen very quickly, but more likely, they worked for years to become an overnight success. There is a huge bias here, too, that makes this appear easier than it is. You know a few docs who developed an implantable device company that sold for millions. But you've never heard of the dozens who tried and failed.
People look at successful online businesses like The White Coat Investor and see that it started out as a blog and, well, blogging just doesn't look that hard. They look around at other blogs they read and see that they're all pretty successful. What they don't realize is that there are dozens of blogs they never saw that were not successful. People see YouTube influencers, and it doesn't look that hard. But they never saw the ones who quit before they ever had 1,000 subscribers.
All that aside, if you do find yourself on this pathway, it can be a pretty amazing ride, opening up doors you never thought possible. Perhaps you will reach rapid financial independence. Perhaps you will give away more money than you ever spend. Who knows? The sky is the limit. I can remember running the numbers back in 2010 or 2011 and I could basically predict the ceiling on my wealth from being a physician. I found the existence of that ceiling a little bit depressing, even though it was likely more than I would ever spend. If you do, too, perhaps this pathway is right for you.
Which Pathway Do You Take?
Now it's your turn. You get to decide what pathway to put yourself on. In fact, there's nothing keeping you from being on two or even three pathways all at once. It's your life, your money, and your decision. But let's put some numbers to it. What percentage of docs do you think are on each pathway? I'd guess it looks about like this:
- Not on a pathway at all: 50% of doctors
- On The Standard Pathway: 45% of doctors
- On The Real Estate Pathway: 4.5% of doctors
- On the Entrepreneurial Pathway: 0.5% of doctors
I'd be happy if I could get that 50% of doctors that aren't on a pathway toward building wealth onto a pathway, any pathway. In fact, it has become part of my life's work. But which pathway? I really don't care. Put yourself on the one that's right for you.
What do you think? Agree? Disagree? What pathway(s) are you on? Which do you think is best? Why? Sound off below!
Pathway one might not work for the average pcp who makes <300 k a year. Saving 20 % of gross income leaves very little after taxes for a family with stay home wife. That’s why 50 % don’t bother.
I have to disagree with this. If saving 20% with a salary of $200k+ is too difficult, there is likely a spending problem rather than an income problem. It’s all about priorities and ensuring your finances are in order can take priority over buying more toys (taking on car debt, credit debt, etc.). If you do buy things, focus on assets not liabilities. If you want to buy a new car, maybe take that money and buy a rental property. Save the cash flow and buy the new car in a few years. Then you have the new car and an asset that keeps putting money in your pocket.
http://www.prudentplasticsurgeon.com
PCP here with a stay at home spouse, reporting in to say it can be done.
However, you will probably not be able to afford a “doctor lifestyle:” private school for multiple children, 2 nice new cars, big house, fancy vacations, AND lots of luxuries.
Many people live happy lives without all of those things, and at least you can relax as you get older, secure in knowing that you are provided for if you decide to cut back on work.
Have to disagree. My wife and I combined make under $300k (I’m an Army ER doc, she’s a civilian NP) and we manage to put 20% away, 10% to charity, three (soon four) kids in a private school, a $500k house, and a live-in disabled mother, all in a relatively higher cost of living area (near Seattle).
It’s all about priorities and making choices. Notice in there I don’t talk about new / luxury cars, or travel, or going out to bars, or season tickets to sporting events, or any of a dozen other “doctor life” things. Outside those big expenses, we live very simply/frugally, holding on for two-ish more years until I can either get out and make civilian money, or stay in and get a raise / worry a little less about retirement since part of it would be handled by Uncle Sam.
ditto the above- If you cant live on the equivalent of a 240,000/ yr salary (took the 60k or 20% from 300,000) you have a spending problem, not a “i cant save enough bc life costs too much” problem. If you only make 200,000/yr, then its the equivalent of 160,000 dollar salary after the 20% cut. Same analysis. Sorry for the tough love, but you have 2-3x the average american family’s salary AFTER your 20% savings cut in the above examples.
Even 150K is a lot of money. Most people in America do not make 150k. Live like a resident and pay off your students loan. Paid off high interest student loans first then low interest student loan. Actually, it’s better to consolidate your loan with a lower rate using companies like SOFI, EARNEST, etc. You’ll save thousands in that process. Then pay off your house if the mortgage rate is higher than market return. Then start saving money. I am a strong proponent that you should buy a modest house once you leave residency, I do not belive in renting. That’s me. I believe houses appreciate while renting is like dashing your money away.
You can’t wait until you pay off the student loans and the house to start saving money. The asset protection and tax savings of investing in qualified funds are too good to give up. You also should put money into a back door Roth for you and your spouse before investing a dime in taxable.
After finishing residency or fellowship, you need to save at least 20% of gross income as well as paying off student loans in five years or less. Reasonable minds differ on how soon to buy a house, but about half of new associates leave their first job within two years. This strongly suggests you should rent for the first 1.5 – 2 years as an attending.
Julius, you make a great point that most patients are getting by on far, far less than 80% of a family practice doc’s salary. Some of those folks even manage to save for retirement and pay off a mortgage. Live like them, at least until the student loans are retired.
I’m fascinated to hear doctors say that $300K – $60K (savings) – $75K (taxes) = $165K is “very little.” Pretty out of touch with the fact that the average household income in the United States is ~$60K. Your take home AFTER putting away their entire salary is almost 3 times that but you consider it “very little.”
At $200K it is still $110K a year, or $9K/month to spend on whatever you like.
I’m going to go out on a limb and suggest that you do not actually have any sort of written spending plan, do you?
40 year old on pathway 1, on track for financial independence by 50 as you said (thanks in no small part to this blog). Jumping into pathway 2 to see if we can get there a little faster, but also leave a bigger legacy for our family.
Really enjoyed this post and couldn’t agree more. I just graduating fellowship and developed my financial plan which is a hybrid of #1 and #2.
I chose to supplement #1 with #2 in order to move towards FI a bit quicker and also found a great interest in it. I love surgery but want to work on my terms.
I write about my ongoing journey (inspired by WCI!) at my blog:
http://www.prudentplasticsurgeon.com
All of the above please.
I used path one but with better investing and less spending than those minimums.
That was the primary path but was supplemented with REITs, commercial real estate, & side gigs (eg medico-legal consulting).
I wasn’t on a fixed path or timeline. But I paid off student loans in 2-3 years, mortgage in 5-6. $1M soon after. FI in 15-17 years.
Lot’s of people say it can’t be done now. It can. I know plenty who have done it in the last 5 years.
I took the standard path.
Once I realized I had achieved some reasonable level of wealth (Financial Independence), I felt more comfortable going down some new paths, and I’ve branched out a bit into both entrepreneurship and real estate. But wealth from a high-paying job came first and paved the way.
Cheers!
-PoF
I see pathway 2 as an extension of pathway 1, because you still have to earn a lot, save a lot, etc… then it’s a decision of where to allocate your surplus (i.e. into real estate vs. index funds vs. both). In fact, once you secure pathway 1 by sorting out your financial life and develop a reasonable plan, it seems fairly straightforward to venture into pathway 2 as an extension. If your asset allocation includes a significant slice towards active real estate (> 10-20%) I’d say you’re walking on pathways 1 & 2.
I’m lazy- I’m taking Pathway #1 to Dublin. Seems to be Pathway 2 and 3 would be shorter roads to Dublin, but god bless you guys that take them, are much rougher and bumpier. Also to a certain extent I don’t love those other pathways enough to take away my dedication from neurology as well as spending time with family. Props to you guys using these other paths.
Please don’t quit neurology. There are already way too few of you as it is. Wish supply and demand worked better in medicine, you would be making a killing.
I will give you a different perspective since I am not a physician but I am a veterinarian. I used a combination of #1 and #2 by paying off all my debts including student loans, all practice debt, and my primary residence. I also purchased the real estate my practice is in. I have been very fortunate and thankful for all of my financial success but it has come with a huge toll on my mental health as well. I hope to make adjustments in my schedule so that I can have a more balanced life in the near future.
Pathway 2&3
Went full throttle into Pathway 2 2 years ago selling all my stocks.
In 24 months have purchased 12 units slated to close on 14 more in the coming month.
Wrapping up taxes – made 40k on properties and paid $0.00 tax due to deductions + depreciation. I’m 40 now – by 50 should have ~200 units netting 750k after tax. At least that’s the plan.
There are deals in every market don’t be convinced otherwise. I am buying a property for 200 and its worth 240+ – seller just wants a quick close and accepted my cash offer with no contingencies (I’m inspecting it but promised to not ask for any reductions after my inspection). And why would he take such a deal? He mismanaged the property – rents were 15% below market for 3 years and one tenant beat up the property costing him 12k in repairs. He hasn’t turned a profit in 5 years and just wants the headache gone. I negotiated that since my offer I could manage property – relocated the tenants and have vetted 2 new sets that are perfect. I’ll put down 60k and clear 10k in year one or I could flip it for 240k. Study your market and you will find the deals – oh and this was an off market deal too!
I have 65k in med school loans at 0.5 % because the rate floats – paying bare min – might get them expunged based on congressional conversations these days, but can pay them off if I had to.
Path 3 – med legal work + patent + angel investments
Happy Investing
JustSayin’
I’d like to make some comments about the three pathways. First of all, there is only so much time. A full time physician, who wants to provide high quality care to her/his patients, won’t have a lot of time after that. The three pathways that you mention will take time, with the time commitment escalating as you go from one to three. And I wouldn’t underestimate the amount of time that pathway one takes. Although time spent learning about security selection and market timing hasn’t been as productive as I would like, it still has been useful. However, the considerable amount of time spent learning about tax has been productive. When you go down pathway two, there is a greater time commitment. You’ve decided to invest in private markets, as opposed to the public market investing of pathway one. I doubt that private markets can outperform public markets in the long term. In private market investing, it’s not possible to obtain market returns through passive investing. You have to use active management. The history of individual investors using active management in the public markets isn’t good. I don’t see a reason why it would be better in the private markets. Swensen at Yale has done well using active management in private markets, but he tries to dissuade individual investors from imitating him. A good case can be made that local private markets, such as real estate, can offer alpha opportunities to individual investors that aren’t available in the public markets. With such markets, you’re on a much more level playing field, when it comes to competing for alpha. Still, to obtain that ability to generate alpha from others, you’re going to have learn a lot. You’ll be a PT real estate investor, competing against those who have been doing it for years FT. Will those experienced FT investors generate alpha from you? In pathway three, you ‘re an entrepreneur. An entrepreneur is an active manager; you can’t delegate active management to others, as in pathways one and two. IMO, the time and knowledge required increases more yet. And consider the quote below:
https://www.fundera.com/blog/what-percentage-of-small-businesses-fail#:~:text=20%25%20of%20small%20businesses%20fail,their%2010th%20year%20in%20business.
“20% of small businesses fail in their first year, 30% of small business fail in their second year, and 50% of small businesses fail after five years in business. Finally, 70% of small business owners fail in their 10th year in business.”
In pathways one and two, as long as you’re careful with leverage, it’s unlikely that you’ll lose all of the money that you’ve invested. But depending on what you do in pathway three, it’s possible.
I can’t help but think that for the vast majority of physicians, stick to pathway one. You might do better with pathway two or three, but the risk adjusted return will likely be worse. Instead of trying to increase return with pathways two or three, spend more doing clinical work, especially early in your career. Spend more time learning about investing in the public markets. Some might say that after reading a few books on index investing, you don’t need to learn much more about investing. That’s not been my experience.
It really depends on time/priorities. Working 60+ hour work weeks and trying to be a parent provides little time to focus on investing. Those physicians I’ve met who have been successful in accumulating wealth have either had little to no debt (family money) + easy practices + discipline + luck or a combination of 3/4.
One route down pathway three is to use the knowledge gained in pathway one to set up a business. From what I can see, the knowledge used in pathway one increases your ability to provide financial advice. Bill Bernstein has done this.
One way to provide financial advice is to set up a blog, which WCI has done. WCI, much of your success in pathway three has been due to yourself. But part of it is due to timing. When it came to physician focused blogs, you were a pioneer. If you started your blog now, instead of 2011, it would be more difficult as the number of physician focused blogs has increased.
A blog isn’t the only way to provide financial advice. But it may be more scalable than other forms of providing financial advice. Whether other forms of providing financial advice would result in increased return, relative to clinical work, is open to debate.
Another way to use the knowledge gained in pathway one is to become an active manager in the public markets. There are a few who have done that, although it would not be easy.
I can’t think of a way to use the knowledge gained from pathway one to go down pathway two. The one exception would be if you had devoted a considerable amount of time to public REIT investing. If you’re presently using pathway one, but thinking about using pathway two, it’s probably a good idea to spent time learning about public REIT investing.
Scalability is important, and it’s why pathways two and three can provide increased return relative to pathways one. There are significant limitations, when it comes to scalability of clinical work.
OTOH, pathways two and three will result in less diversification and decreased liquidity. Will you get adequate return for those increased risks? Much of the increased risk you assume will be idiosyncratic risk, which could be diversified away in the public markets. So you shouldn’t expected increased return for that. One would assume that there should be increased expected return for increased liquidity risk. But I’m not certain that assumption can be taken for granted.
Finally, some of the increased return in pathways 2 and 3 may come from the use of leverage. Would you be better off just using leverage in the public markets? I have heard the argument made that if you had modestly levered SCV, you could have gotten comparable returns to what David Swensen has obtained. But it would have taken much less time.
You’re right that I would not start a WCI blog in 2020. What would be the point? It wouldn’t make money and it wouldn’t help very many people. Beats me why people keep starting similar blogs but such is life. I’ve been watching physician financial blogs over the last decade. I’ll bet I’ve seen 100. I know of three that have made six figures in a year so far. This is with DOCTORS investing serious quantities of time and energy mind you. I think there are a couple of others who will make it as well, but their revenue will not be primarily from blogging.
If you are going to compare the risk adjusted returns of pathway 1 to pathways 2 and 3, it’s important to make it an apples to apples comparison, not an apples to oranges comparison. Pathways two and three involve investing in equity, albeit private equity. One can make the case that some of the increased expected return from pathway two is from the small premium. As mentioned previously, leverage may play a role in pathways 2 and 3. So to make it an apples to apples comparison, the portfolio generated from pathway 1 should probably be 100% stocks with tilting and leverage. This will result in investment exposure in pathway 1 that is more similar to that of pathways 2 and 3.
If a greater expected return is desired than such a pathway 1 portfolio will generate, consider pathways 2 and 3. However, that increased expected return is far from guaranteed, and the risk adjusted return will likely be worse. Finally, the time and knowledge required to be successful using a pathway 2 or 3 strategy will likely be more than that required for the portfolio mentioned in the preceding paragraph.
Fair criticisms. But this isn’t a “small premium” it would be like an ultra microtastic premium. I mean, microcaps only go down to $50 Million in market cap. There’s no doubt there is a lot more risk in pathways two and three and I hope the post made that evident.
About pathway three, liquidity is an issue. Let’s assume the entrepreneur in pathway three has been successful. Bill Bernstein, with Efficient Frontier Advisors, is an example. But eventually, he’ll stop being an advisor. What will the resale value of the business be? A similar question could be asked of yourself, WCI. This is much less of an issue with pathway two and is not an issue with pathway one.
How about divisibility? If I suddenly need money, I can easily sell part of my portfolio in pathway one. It’s more of an issue with pathway two. And it can be a very major issue with pathway three.
What about transaction costs? The returns from pathway two might be greater than those of pathway one, but is that before transaction costs? I can trade VTI for the cost of the bid ask spread, which is miniscule. It would be rare for the transactions costs in pathway two to be described as miniscule.
When it comes to accumulation of wealth, there is much more limitation in pathway one than pathways two or three. I think that’s primarily due to differences in scalability.
But if you truly want to take advantage of that scalability, whether you can practice medicine and follow pathways two and three is debatable. That’s not an issue with pathway one.
I’ve been quite critical of pathways two and three in my posts. So I’d like to emphasize that I thank WCI for bringing up this topic. But hopefully my posts help others realize the strengths and weaknesses of each pathway.
Absolutely liquidity is a huge issue and one my business and family spend a great deal of time trying to solve.
Transaction costs are also much higher in real estate investing than anything in the public markets.
I agree that any doctor can become wealthy following pathway one. In fact, that’s how I (and as mentioned above The Physician on FIRE) became wealthy. So I have no problem with it whatsoever.
I mentioned apples to apples comparisons. Those who go down pathways two and three can use leverage. But whether you want leverage or not in pathway one, you get it.
https://www.evidenceinvestor.com/what-will-the-recession-mean-for-small-cap-stocks/
The aggregate debt to assets ratio for US stocks is about 0.65; see Exhibit 1 in the link above.
https://www.quora.com/What-would-happen-to-REITs-which-cannot-meet-their-margin-calls
An alternative to pathway two is investing in publicly traded REITs. Please see Chart 4 in Aaron Brown’s respo;nse in the link above . The average debt to market assets ratio for REITs is over 35%.
Some might perceive the lack of choice, when it comes to leverage, as a disadvantage. But companies can often get better terms on their debt than individuals. And for stockowners, such corporate debt is nonrecourse in nature. That’s important in retirement.
About pathway two, will the returns of private real estate be greater than those possible in pathway one? Once again, apples to apples comparisons are important.
https://joi.pm-research.com/content/27/1/109
In the above paper, the author applies the Fama French 5 factor model to both REITs and private real estate.
“The author decomposes real estate investment trust returns into their factor betas to show that real estate is a hybrid asset class, with returns explained by a rich mix of compensated risk factors plus uncompensated sector risk. He shows that the same is true for private real estate, but with the additional contribution to risk from misappraisals.”
When one applies the factor model, you’re getting an apples to apples comparison. And when you make such a comparison, you find that real estate isn’t adding anything, that you can’t get with publicly traded stocks and bonds. The one exception is that with real estate, you take on uncompensated sector risk .
FWIW, the data supporting utilties as a diversifier to a stock/bond portfolio is stronger than that for publicly traded REITs.
Fresh out of residency, thankful for articles and guidance like this as well as examples of physicians saying this CAN be done. The one conundrum I am facing right now is paying off my loans vs. PSLF. I have a few years already under my belt from payments during residency. Do I tackle my $200k worth of loans right away or continue making minimum payments for 7 more years in order to save money in the long run IF the PSLF program works out? Certainly will dictate a majority of my financial decisions the next few years.
If your job qualifies, go for PSLF and build a PSLF Side Fund:
https://www.whitecoatinvestor.com/pslf-side-fund/
Pathway two is about private real estate. For many physicians, the following option would probably be a better choice. Take the allocation that you’re going to invest in private real estate and invest in a REIT index fund. Then apply some leverage to that REIT investment.
The advantages are lower costs, better liquidity, greater diversification and less work. You’ll give up the possibility of outperformance. But to get outperformance , you’ll have to either rely on active management or be able to DIY. There are significant agency issues with active management, which are well documented in the public markets. I don’t see why private real estate would be different. About a DIY approach, that involves being able to value real estate. Or more accurately, being able to value real estate better than others. That’s a skill that would take some time to acquire. IF you have that skill, you can generate alpha from other investors. But many physicians, at least initially, would be a source of alpha for other investors.
Does private real estate outperform public real estate? I haven’t seen research comparing the two. There is research comparing private equity to public equity., and since real estate ownership is a variant of that, I think it’s relevant. When you look at risk adjusted returns, which takes into account leverage, private equity doesn’t outperform public equity.
At least in theory, you should get a liquidity risk premium with private real estate. I’m not confident of my ability to obtain that premium with active management. That leaves the DIY real estate strategy, and I don’t think that I can do that. I can increase my tilt to small stocks. I can maximize the use of tax advantaged accounts, with their associated illiqudity. If I want to try to obtain more of the liquidity risk premium, I can stock pick. At least for myself, I think I’d be better at stock picking than private real estate.
Can you please expound on how the income ceiling of more than you can spend is depressing? How could making more than you would ever spend ever be depressing?
The depressing thing to me was having a cap on my lifetime earnings that I could calculate in my early 30s. Not necessarily what the cap was.
But if you think I can’t figure out a way to spend and/or give away the net amount left on a salary of $225K you should swing by sometime. Heck, the new wakeboats are going for $150-200K these days. And a truck to pull it is $60K more.
The “Live like a resident” phase is not supposed to last the whole career! As long as people are taking care of business, I don’t have a problem with them spending money so long as they are buying things that they can afford.