As a group, doctors are among the most highly paid professionals. But while they’re at the top in income-earning ability, their wealth-building skills may be in need of urgent care. Thomas Stanley and William Danko, authors of The Millionaire Next Door, studied households with net worths exceeding $1 million and concluded that out of all high-income professions, physicians sometimes struggle to accumulate substantial wealth.
A number of factors contribute to this “affliction.” They get a later start – coming out of their residencies and fellowships in their 30s, often with a great deal of debt. They have more pressure to live a luxury lifestyle, and they lack time to devote to managing their finances.
Having worked extensively with physicians, I’ve seen first-hand the challenges posed to their financial health, and I prescribe the following:
Align Your Financial Practices With your Medical Practice
Owning a medical practice can be your greatest strength … and greatest liability. Having a significant portion of your net worth tied to the same business that provides your income stream is inherently risky – regardless of what industry you’re in. The risk is magnified when you work in an industry whose profitability could be slashed by one stroke of Congress’ pen or a cut in reimbursement rates by insurance companies.
To minimize the risks of owning a medical practice, you should diversify your stock portfolios by avoiding investing too heavily in health-care stocks or the stocks of companies in related industries that are tied to similar risks. For many doctors, this is hard advice to follow; after all, it’s only natural to want to invest in a sector where you’re the expert. But your singular focus will cost you dearly if the health-care sector declines.
Another way to reduce your risk profile is to adopt an asset allocation strategy that is more conservative than would normally be suggested for an investor in your age group.
Don’t Drown in Liquidity
Liquidity is a great confidence builder, and physicians tend to keep healthy amounts of cash on hand. After all, you never know when you may need a new x-ray machine or incur an unexpected personal expense. But in today’s environment, liquidity yields are virtually nothing, and with the threat of inflation on the horizon, you need to invest in growth-oriented securities to keep your purchasing power from eroding. Which begs the question: How liquid should your portfolio be?
The answer has both emotional and financial components. The emotional part revolves around having enough liquidity to feel confident that you can handle the hurdles in your life or practice. The financial part means making sure you invest in enough growth-oriented and dividend-building securities so that you’ll have a large enough nest egg to be able to enjoy your later years.
Yes, interest rates are significantly lower than their historical averages, but attractive yield opportunities are out there, if you know where to look. Commodities are a particularly intriguing area of diversification, especially in light of concerns over Europe’s ability to manage the debt crisis. Selected investments, such as energy-based and commodity-based master limited partnerships, intermediate corporate bonds and preferred stocks (which have hybrid characteristics of both corporate bonds and common stocks) are yielding in the range of 5 to 8%. These investments are especially attractive as alternatives to money markets and other short-term investments, which are paying less than 1%.
Take a Scalpel to Those Mortgage Payments
For most people, their mortgage payment is the single largest monthly personal expense. Refinancing now to a lower rate can result in huge annual savings and add substantially to your net worth over time.
Rates for mortgages are at an all time low. Whether you are refinancing in a conforming mortgage or a jumbo, rates in many areas in the US are at approximately 4% for a traditional 30-year mortgage. Fifteen-year mortgages are between 3 and 3.5%. For the more affluent with a shorter time horizon, rates for seven-year, interest-only, jumbo mortgages are down around 4.1%. This last choice has its advantages. It is useful to those who want a low rate for seven years and prefer to invest the principal portion in more attractive investment opportunities; and during an economic recovery there are plenty of chances to be strategically aggressive in the market. Plus, the interest expense associated with the mortgage may be tax-deductible, depending on your situation.
An altruistic slant on the mortgage market would be to consider opportunities to invest in a loved one’s future while securing a steady income stream for yourself. For example, refinancing your child’s mortgage through an intra-family loan, underwritten by the First National Bank of Mom & Dad, can provide a win-win for both the older and younger generations. The younger generation benefits by getting to lock in today’s low interest rates. And the older generation benefits by getting paid an interest rate that’s significantly higher than what CDs or money-markets are yielding. (To avoid being considered a gift, the interest rate of an intra-family loan must exceed the applicable federal rate, which is 2.95% for October 2011.)
Give Your Savings a Booster Shot
Most physicians I work with live within their means, but proportionately, they save far less than other affluent clients. As a consequence, they lose the benefits of compounding interest, which even Albert Einstein considered, “The most powerful force in the universe.” When it comes to building a nest egg, time is your greatest asset, but due to medical school, internships, residencies and fellowships, most physicians’ time horizons for wealth-building can be 10 years shorter than the rest of the population. This means they need to save more than their high-earning counterparts to make up for getting a late start.
Leverage Your MD
Often physicians think that the only way to make more money is by taking on more patients. Get creative about finding new revenue streams. Identify a niche where you have the deepest experience and aggressively market yourself as a thought-leader in that field. These efforts can lead to lucrative consulting or corporate contracts, board memberships, book deals, radio shows and speaking engagements.
See a Specialist
If you have fewer than three hours a week to devote to managing your portfolio or simply don’t have the interest or inclination, consider referring your financial practice to a specialist. That way you can focus on building your nest egg by doing what you do best. When choosing an advisor, do your research. Pick an advisor the way you’d choose a health care provider. Check their credentials and/or get a referral. All registered investment advisors (RIA) and financial planners are not created equal. For example, RIAs and Certified Financial Planners (CFP®) must be registered with the appropriate agencies. This gives you the opportunity to check their background and reputation. Uncovering this information up-front will help you make an educated and well-informed decision.
Furthermore, find someone who is experienced working with physicians and the wide variety of financial challenges they face, including wealth management, tax planning and mitigation, insurance evaluation, as well as setting up corporate structures that enhance your flexibility and protect your assets. Most importantly, work with someone with whom you can establish a partnership-type relationship.
Running a financial practice is not as difficult as, say, performing brain surgery, but it does require planning, knowledge and discipline. With income tax rates poised to rise and health-care reform creating an environment of uncertainty, it’s more important than ever to have a healthy financial strategy in place.
This information in this article is general in nature and may not apply to your own financial situation. Please consult your own professional tax, and/or financial advisor regarding this information and your own personal financial needs. For a complete disclosure statement, please see my biography.