Although estimates differ, the 1% in America can be defined as an income over $400,000 and/or a net worth over $2 Million. At least one author has suggested that although the top half of the 1% is composed of people who build and sell businesses, investment bankers, corporate executives, real estate developers and a handful of other careers, the bottom half of the 1% still has many physicians, attorneys, upper middle management, and small business people. These folks earn less than $500,000 per year, go to work every day, and pay 25-30% of their income each year in federal income taxes.
Physician incomes are declining and there are many threats to that income looming in the background, but it can still be a pathway to the 1%, at least to the bottom half of it. Here are the steps you need to take as a physician to arrive in the reviled 1% category:
1: Choose a lucrative specialty OR marry another highly-paid professional OR both.
According to a recent Medscape survey public of 2011 physician income, the lowest paid specialty, pediatrics, earns $156,000 per year. The highest paid specialties, radiology, orthopedics, and cardiology, average $315,000 per year. Now I’ve never made $315K per year, but I can assure you it is easier to save $100K per year while earning $315K, than it is while earning $156K. For a mere 2-3 years extra training you can essentially double your income. Don’t want to do that much more training? How about dermatology ($283,000 for 4 years of post-med school training) or emergency medicine ($237,000 for 3 years of residency-exactly the same as Peds)?
“But wait,” you say. “None of those specialties average more than $400K per year! It doesn’t look like ANY doctors are in the 1%. Au contraire mon frere. Those are the averages. I assure you there certainly are plenty of orthopedists and radiologists making more than $400K and plenty of emergency physicians making more than $300K. (I know at least one making > $600K) If you’re willing to work hard, go where these jobs are, and have a decent business sense, you too can earn these salaries.
Plus, physicians are well-educated folks who tend to marry well-educated folks. You know, people like doctors, executives, and other professionals. Multiply just about any of those physician incomes by two and you’re well into the 1% category. Really love kids? Fine, be a pediatrician. But marry an ophthalmologist.
2: Save a significant fraction of your earnings from the beginning.
Doctors already get a late start in the earnings game by virtue of spending their entire 20s (and sometimes half their 30s) in school and training. Despite a heavy debt burden, physicians simply must squirrel away 20-30% of their gross post-residency income away if they hope to hit the 1% mark.
But too many doctors, due to a sense of entitlement fueled by years of delayed gratification and a lack of financial education and business sense simply fail to do so. They either immediately grow into their new income, or they fall prey to “financial advisors” who gradually transfer the physicians’ wealth to their own pocket.
3: Minimize your tax burden.
Doctors are absolutely paranoid about taxes. They pile into stupid investments just because someone mentioned there was some kind of a tax break associated with it. Yet most of them don’t know Schedule A from Schedule C nor a 401K from a Roth IRA. A little bit of education goes a long way in this department. Learning about how the tax code really works early on will pay huge dividends.
The biggest tax mistake I see many doctors making is searching for bizarre ways to save a few bucks on taxes when they haven’t even maxed out their 401K! Most physicians should also take advantage of a backdoor roth IRA, an HSA (aka a stealth IRA) and if possible, a defined benefit plan.
4: Develop a sensible, low-cost investment plan.
Just as doctors need to learn about taxes, they should also learn about investing. In this day and age of discount brokers, index funds, and ETFs, it is simply too easy to implement a no-fuss, highly diversified portfolio of stocks, bonds, and alternative asset classes for less than 20 basis points (0.2% per year).
Yet many doctors are paying investment costs of 200 basis points a year, or even more. Occasionally they even get sucked into insurance based investments like variable annuities and whole life insurance with even higher hidden costs.
In investing, you get what you DON’T pay for. That 2% in investment expenses comes straight off your return, and the difference between someone investing $60,000 a year at 8% for 30 years and doing the same at 6% is over $2 Million dollars! Are you sure your investment adviser is worth $2 Million? You’d be amazed how much money you can save by reading a handful of good $15 books.
5: Avoid financial catastrophes (The Four Ds)
There are several financial catastrophes that can beset any professional, but which seem to strike physicians disproportionately. These include death, disability, divorce, and dead-end jobs. It is absolutely critical to get term life insurance (if someone else depends on your income) and specialty-specific disability insurance as soon as you get out of medical school.
Marry the right person, and stay married. Losing half your assets (and then paying alimony and child support for a decade) is a great way to never get ahead financially. If you do get married after you’re already making the big bucks, a pre-nup should be mandatory.
Also, keep in mind that professional divorce can be just as costly as personal divorce. Changing jobs is expensive. The loss of income, costs of buying and selling a home, actual moving costs, loss of investment in the practice, malpractice tail, and required buy-outs all take a financial toll. Pick your last job first, don’t go into business with dishonest narcissists, and be sure you have the contracts reviewed by a competent attorney.
Medicine isn’t what it used to be. The days of hassle-free practice leading to riches are long gone. But medicine can still be a rewarding career, intellectually, emotionally AND financially. Follow these steps and you too can be reviled as a “rich doctor.”