Friday, December 2, 2022
Physicians often make a number of mistakes when it comes to their personal finances and wealth building strategy. We are human after all. Private forums, blogs and podcasts are filled with horror stories of physicians being scammed into buying expensive whole life insurance, having disability insurance that didn't include own-occupation coverage and being steered toward high fee investment vehicles by financial advisors. There are also countless situations such as messy divorces, the risks of doing business with family, and picking the wrong specialty or business partners that can derail our financial life.
It is hard to admit but we’ve all made mistakes. Since I just finished 10 years of clinical practice after residency, I’ve had time to reflect on things I wish I could undo. Alas as Soren Kierkegaard says: "Life can only be understood backwards; but it must be lived forwards."
1/ Not maximizing investment in tax advantaged retirement accounts
While I have always maxed out my employer-sponsored retirement plans like a 401(k) and 403(b), I never bothered to explore what other options I had for tax-advantaged investments. After finishing residency in June 2012, I studied for my boards, did locum tenens work as a hospitalist, volunteered in Haiti, and took some time to travel. I was paid as an independent contractor/1099 during my locums assignments. Everyone talks about a backdoor Roth IRA, but contribution limits are only $6000 in 2022. Had I learned about something like a one-participant 401(k) plan / Solo 401(k) I may have budgeted better. This allows self-employed individuals (or business with no other employee) to contribute 25% of self-employment income/compensation as an employer contribution. The 2022 limit for this employer contribution is a massive $61,000 versus a ‘regular’ 401(k) where your contribution limit as an employee is $20,500. This has two benefits - tax deferred growth of the $61,000 investment, and all contributions you make as the "employer" will be tax-deductible (subject to IRS maximums) and thus decreases your taxable income.
Way back in 2012 I didn’t produce enough 1099 income to max out this employer contribution. With knowledge, planning and budgeting I could have managed to put away $25,000 as an employer contribution. Even doing this just once, compounded over 30 years at a 7% assumed return in a diversified stock market fund, would likely generate a $190,306.38 return that I will never see. If you have the foresight to do this every year with even a portion of your 1099 independent contractor or business income the returns will be enviable.
2/ Having no student loan strategy
My lack of awareness around student loans ultimately increased the amount I owed and the payoff duration. I went into medical school with altruistic goals and as the first physician in my family. My parents were two-time-immigrants who sacrificed and saved and were generous enough to pay for my undergraduate education. In medical school I took out loans and it seemed like Monopoly money at the time. I just assumed that upon becoming an attending my loans would magically take care of themselves with autopayments coming out of my paycheck. I also told myself loan payments were unavoidable like taxes.
During my final year of residency, I entered a loan forbearance. Living in NYC I thought it would be a great idea and give me some well-deserved financial freedom. Forbearance allows the borrower to suspend payments up to one year at a time. I guess I missed that last line when signing the documents: Interest continues to accrue during forbearance! So, my $150000 loan balance went up by about $7000 and this was obviously compounded in subsequent years.
For many years after graduating residency, I continued to make the minimum payments required under my income-based repayment plan (I’m not sure they accounted for my 1099 side gig income so monthly payment amounts seemed a bit low). With interest rates between 2.5 and 4.8% I told myself this was ‘free’ money. I didn’t budget any savings to pay back my loans any faster and experienced lifestyle creep. Besides contributing to my 401K and saving a down payment for a house, I spent my money freely and hence I didn’t invest in any income producing asset.
In 2016 I refinanced my loans from Navient to Sofi and finally started making small extra monthly payments. An email appeared on Wed, Jun 30, 2021 at 12:55 PM saying my loans had been paid in full. The problem overall was that I had 0 strategy in paying off my loans. Public service loan forgiveness wasn’t even on my radar, and to make matters worse I made the mistakes above. Don’t do this. Realize that compound interest is real and have some strategy, so your loans don’t snowball.
3/ Investing in things I didn’t understand
Many physicians make the mistake of jumping into the next big thing. We think that somehow our academic prowess will translate into investment success. There are so many victorious posts from colleagues on social media that it’s easy to forget that a diversified portfolio is usually more reliable and less risky over the long term than individual stocks or speculative investments.
Recently I was listening to a personal finance podcast the other day where a physician talked about gambling away his $2 million nest egg on an investment. It was gut-wrenching to listen to and he was despondent and looking for reassurance he could one day build it back. I imagine more physicians have had similar experiences but are reluctant to discuss them.
My own story is less dramatic, but I do regret that over the past three years I’ve got thousands of dollars of unrealized losses staring at me from decisions I’ve made by investing in single stocks and crypto. While I’m not selling these investments at this time, I expect to get none of this money back. I should have known better. I’ve come to the conclusion that most of us should forget about stock trading or crypto tips from our best friend from high school, our enthusiastic cousin, the crazy money guy yelling at us on midday tv, or from the Reddit r/wallstreetbets group.
I hope that as physicians we can be less shy about sharing our own experiences. Andwise is building non-clinical decision support tools for physicians and with the help of the physician community our technology platform will incorporate these collective experiences into actionable, timely and personalized nudges and reminders to minimize the risk of this happening to others.