These 5 simple steps to investing wisely will get you on track to enjoying your hard work and living fully.
Live like a resident and save big
The earlier you can amass money and let the power of compounding interest work for you, the better. If you start to max out ($18,000/year) your company sponsored retirement plan at age 30 at 8% interest, you will have accumulated $260,758 by age 40. Assuming no other contributions, 8% interest and retirement at age 65 this $260,758 would grow to over $827,168. Alternatively, if you wait until age 40 to begin saving, holding the other factors constant, the result would be just over $488,738 at age 65. Those ten years made a huge difference – you made twice as much and you didn’t have to save a dime more. Your future self will thank you.
Pay off and manage your debt
For new physicians, student debt is a burden that continues to grow. At 7-8% interest, getting it under control is paramount. As a general rule of thumb, the higher interest rate debt takes priority. If you have a 9% loan and a 5% loan, focus on the former. That said, mentally, paying off smaller amounts can be rewarding. Assume you have a loan with a balance of $10,000 and one with a balance of $200,000. Even if the former has a lower interest rate, there is a mental benefit to paying it off – namely, making the $200,000 gorilla seem manageable.
Tip: Manage real estate debt with caution. I recently interviewed a physician for my upcoming book whose enthusiasm for the real estate market was palpable. This same physician bought at the peak of the market in 2006 and got burned. He was also on the brink of retirement.
Here are three red flags to watch out for.
- Leverage works two ways. It feels great when the real estate market is humming along, and when things pull back, just the opposite
- In retirement, you want liquidity. Selling real estate takes time. Selling a mutual fund takes a day.
- Concentrating the majority of your wealth in one asset is risky. Diversification can not only reduce portfolio risk. If done correctly, it can increase your expected return.
Figure out how big of a nest egg you will need
Spending $150,000 per year in retirement and using a 4% annual distribution puts the figure at $3,750,000. Income sources such as Social Security and pensions will impact this figure. Also take into consideration expenses that will be expiring in retirement, such as your mortgage.
Draft and investment policy statement
Your investment policy statement (IPS) should, at minimum, contain the following:
- Asset allocation
- Risk tolerance
- Liquidity requirements
- Portfolio strategy
The IPS is the core of your long-term investment plan. All investment ideas should be filtered through your IPS. If the idea is not congruent with the plan, scrap it.
Life, disability, umbrella and malpractice insurance are a must for physicians. Millions of dollars can vanish in the blink of an eye, and your retirement prospects right along with it, if you are inadequately insured.
Life insurance is particularly important for younger physicians who, in the event of their passing, would need to pay off a mortgage and replace years of lost income for their family. The good news is that a 20-year term life policy will not break the bank.
Disability is important for physicians for all stages of life. Making sure your income stream is protected in the event of a long-term disability is crucial. Your earning power is a huge asset. Typically, physicians are covered in part through work and should consider a supplemental policy. Umbrella policies cover excess liability beyond your home and auto coverage. A two million dollar policy typically costs less than $1,000 per year. This is cost effective coverage that’s status quo for nearly all financial plans. Malpractice insurance is an obvious must for physicians and is self-explanatory.
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Lowell developed a passion for finance in high school, after some hard lessons learned. Now as a Wealth Advisor, he appreciates the opportunity to help his clients articulate, achieve, and expand on their financial and associated life goals. He particularly enjoys working with mid-career technology professionals.
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