While there are other important financial and nonfinancial goals, the greatest financial task of your life is to build a nest egg that will allow you to live a comfortable retirement over multiple decades after you no longer can or wish to work. For most physicians, this will require an accumulation period of 10 to 30 years of hard work, methodical saving, and disciplined investing.
The greatest wealth building tool for most physicians is their income. While the average household income in America is around $70,000 per year, according to the 2022 Medscape Physician Compensation Report, the average cardiologist is earning $490,000.1 While that sort of an income is accompanied by a large tax bill, there is still plenty of money left after taxes to support a robust investing plan. However, the first challenge for any physician interested in a dignified retirement is to carve out a large chunk of that income and designate it for retirement.
Financial independence or retirement is best thought of as a sum of money, rather than an age. The length of your career from the time you leave training until you are financially independent is most dependent on your savings rate. The bad news about retirement is that it requires a large sum of money, approximately 25 times your annual spending.2 The good news is that over a traditional full career, a reasonable investing plan will ensure your money (and compound interest) do a lot of the heavy lifting of accumulating that large sum. You only need to save about 20% of your gross income, assuming reasonable investment returns. However, if you wish to retire early, a savings rate of more than 20% of your gross income, perhaps as high as 50% of your gross income, is required. The higher the rate, the earlier the retirement.
It would not be unusual for a cardiologist with a mid to high 6 figure income to have an effective tax rate of 25 to 30% of gross. Add a 20% savings rate to that and it quickly becomes clear that spending more than half of your gross income is a bad idea. Thus, the first challenge for graduating cardiology fellows is to avoid ever growing into their full income. In fact, a short period of time (2-5 years) of “living like a resident” after completing training can really jumpstart the process (as well as pay off student loans).
The government and your employer want to encourage you to save more for retirement. They both provide important benefits to you that can boost your after-tax returns and protect your assets from lawsuits, speeding up the process of accumulating a large nest egg. While anyone can save and invest an unlimited amount in a nonqualified, fully taxable brokerage account, retirement accounts are a better way to save for retirement whenever possible. Accounts such as Roth IRAs, 401(k)s, 403(b)s, 457(b)s, cash balance plans, and solo 401(k)s are commonly used by physicians. Each of these accounts allows for tax-protected growth as well as either an upfront tax deduction (traditional, tax-deferred accounts) or tax-free withdrawals (Roth accounts). These accounts also receive substantial asset protection benefits. That means that if you are in the rare position of facing a malpractice judgment above policy limits that is not reduced on appeal and you are forced to declare bankruptcy, you get to keep your retirement account money.
Employers may also offer matching or profit-sharing contributions. Not contributing enough to obtain the full match is the equivalent of leaving part of your salary on the table. It is critical to understand how each of the accounts available to you works in order to maximize your benefits. For instance, many doctors don’t realize they can still contribute to a Roth IRA each year despite their high income; they just have to do it indirectly via a process known as “The Backdoor Roth IRA.” Physicians are also often surprised to learn that they may be able to use more than 1 401(k) if they have 2 unrelated employers or have some self-employment income.3 Most of the investments in these types of accounts are mutual funds, and the data is clear that it is generally best to use low-cost, broadly-diversified index mutual funds when available.
Some physicians have the time, interest, and funds to seek out nontraditional investments. Real estate is a common choice, whether done actively by directly owning rental properties, or passively through private investments such as funds, Real Estate Investment Trusts (REITs), and syndications. Others find an entrepreneurial itch to scratch and open their own small businesses, which may or may not be related to their practice. These sorts of investments not only help to build a nest egg, but can also provide substantial passive income that can be spent along the way instead.
While it is entirely possible (and recommended) for a physician to become financially knowledgeable and disciplined enough to do this themselves, most physicians will benefit from obtaining professional financial planning advice and investment management services. The key is to obtain good advice at a fair price. While good advice can be difficult to recognize without actually being financially knowledgeable enough to do it yourself, a fair price ranges from $5,000 to $15,000 per year for a “full-service” advisor. It is also possible to pay a flat hourly rate to get occasional advice and do a periodic check-in to ensure you’re on track, essentially blending the do-it-yourself and the professional methods. Naturally, there is no price low enough for bad advice, which is unfortunately the vast majority. Most financial professionals calling themselves financial advisors are actually commissioned salespeople masquerading as advisors. Make sure your advisor is an experienced, fee-only fiduciary with a meaningful designation and commitment to the profession such as a Certified Financial Planner (CFP).
Your hospital or group may also offer resources including education or even formal advice. While you should take advantage of these resources, don’t assume they are competent just because they are associated with the employer or your retirement plan. The same conflicts of interest still exist. Take advantage of free resources. There has never been as much high-quality, free educational financial material on the internet as there is today. Physician financial blogs, email newsletters, podcasts, videos, online courses, books, forums, and conferences are now widely available and can be used to supplement or even replace a traditional financial advisor.
Unfortunately, the date of your retirement may not be entirely in your control. Death, disability, illness, burnout, and family factors can shorten a career or otherwise dramatically impact the ability of a physician to earn. Becoming financially independent provides a doctor the option to retire early, but many financially independent doctors continue to practice on their own terms well beyond that point. Financial freedom has many benefits besides the ability to leave paid work at a time of your choosing.
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- Medscape Physician Compensation Report 2022. Published online April 14, 2022. Accessed 5/1/2023. https://www.medscape.com/slideshow/2022-compensation-overview-6015043
- Cooley PL, Hubbard CM, Walz DT. Portfolio success rates: where to draw the line. Journal of Financial Planning. Published online April 2011.
- Dahle J. How to Do a Backdoor Roth IRA. Published online December 4, 2021. Accessed 5/1/2023. https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/