Financial Considerations for Mid-Career Physicians

There are plenty of financial articles out there for doctors who are just getting started with their investing careers. There are also many articles discussing what to do as you approach retirement. However, for those in between these two stages (mostly 40 to 50 years old), there is an absolute dearth of information available on the internet and in bookstores. Part of the reason for this is that the mid-career physician’s finances are truly a tale of two cities.

In the first city are those who became financially literate early in their careers, paid off their student loans, saved a significant percentage of their income, invested it wisely, and — while not yet financially independent – are already millionaires and expect to reach financial independence early enough to allow early retirement. In the second city are doctors who don’t particularly enjoy reading about finances, are probably paying an overpriced advisor for bad advice (or not getting any advice at all), have made a few significant financial mistakes (whether they know it or not), still have student loans, and have not yet built any significant net worth. Obviously, doctors in each of these two camps should have different focuses at this time, but there are still similarities among all doctors at this stage.

Correct Financial Mistakes

It is a rare physician who has not made a significant financial mistake by mid-career. Perhaps it was purchasing a whole life insurance policy that he did not understand. Maybe it was taking advice from a commissioned salesman masquerading as a financial advisor. It might be not having enough disability or life insurance or not understanding how the retirement accounts offered by the employer actually work. Maybe it was an investment related mistake, such as market timing, picking individual stocks, or investing in a taxable account before maxing out all your retirement accounts — including Health Savings Accounts and Backdoor Roth IRAs. Whatever it was, it’s best to correct it earlier rather than later. That might involve paying an hourly advisor to get a second opinion or some assistance, but it is generally money well-spent, and the sooner you fix the issue, the more benefit you will see from doing so.

Paying Off the Mortgage

While there is considerable debate in the financial community, most people want to go into retirement with their mortgage paid off and, given the choice, would prefer to have it paid off long before then. It isn’t that people don’t understand that borrowing money at 3% from the mortgage company and earning 6% or more on it in their investment accounts can be a winning proposition, it is that people simply don’t do that — they spend the difference instead of investing it. But by mid-career, you have probably been in your house for a few years already, know about what to expect as far as earnings the rest of your career, and can plan out a date to have the house paid off. If you purchased it at age 35, having it paid off by 50 is a very reasonable plan fulfillable simply by making all the payments on a 15-year mortgage. Making double payments would turn a 15 year 3% mortgage into a 6 ½ year mortgage. Having the mortgage paid off early allows you to boost retirement savings, cash flow college costs, or even increase your spending for items like automobiles and vacations.

Firming Up the College Savings Goal

When you first start investing, hopefully during or shortly after residency, your children are likely young and college is a long way off. You have probably been putting some money toward this goal, but now is the time to really firm up the plan. Take a look at how much you have, how long until you will need it, how much college really costs these days, and how much of it you are going to pay for. At this point you can make decisions about how much of the cost you can pay for with 529 savings and how much you can cash flow from current earnings. You should also have a pretty good idea as to whether you can only afford State U, or whether you wish to splurge on some of the really expensive private schools out there. At any rate, the time to pay for college is going to come well before the time to retire. In many respects, this is a test run of your ability to develop a financial plan, stick with it, fund it, and reach your goal. The children of most physicians, born around the time of residency completion, are usually going to hit college about the time the physician reaches age 50. If you find yourself miserably prepared to assist with college, you are likely to find yourself in the same situation with respect to retirement a decade later unless you make drastic changes.

Reevaluate Your Career Decisions

Mid-career is also a great time to evaluate your career decisions. If you have done a nice job with your finances, you have lots of options available to you. These may include early retirement, working less, taking a more enjoyable but less profitable job, changing careers, dropping call or even eliminating night shifts. If you have not done such a fine job, you may wish to consider moving to an area with a lower cost of living, including income tax burden, taking a higher paying job, sending a spouse to work, taking a job with better retirement benefits, or even developing passive income sources on the side such as real estate investments. By mid-career, you are probably not as excited about the practice of medicine as you were a decade earlier, but by this point you have likely discovered what you like and don’t like about your practice. This is a good time to make those changes that will promote a long, enjoyable career. There is nothing that can make up for previously poor financial decisions quite as well as working longer (more years to save, more time for investments to compound, fewer years to save for, higher Social Security payments), and it is far easier to work longer in a practice you actually enjoy.

Reevaluate Your Advisory Decision

If you are in the “second city” and realize you’re not very happy to be there, perhaps it is time to take a deep introspective look and try to determine how you ended up there. It might be that you neglected your second job as your own personal retirement fund manager. It might also be that you simply spend too much money. However, some doctors discover it is at least partially because they are getting bad financial advice or paying too much for good advice. Financial advisory costs, like taxes, have a drag on your returns. This has a lesser effect in your early career, when asset under management fees are applied to a smaller portfolio. In late career, those fees can add up quickly into the tens of thousands of dollars a year. Obviously, there is no price too low for bad advice, but mid-career is a good time to take a look at your earlier advisory decisions. Do you need a new advisor? Do you need to renegotiate your advisory fees? Do you have sufficient interest and discipline to be your own financial planner and investment manager? If you are happy with where you are at and how you arrived at that point, there is no need to make any changes. But mid-career with a blossoming portfolio is a key time to make sure you are either getting good advice at a fair price or capable of managing this aspect of your life yourself.

Evaluate Spending Patterns

Mid-career is also a great time to take a look at your spending. Most importantly, are you saving enough money? If you are not putting at least 20% of your gross income toward retirement each year, then you probably need to make some changes. Write down where you spend your money and make sure it aligns with what you value most. If you get the most happiness from taking international trips and don’t consider yourself a “car guy” then why did you only go on one trip last year and find yourself driving a luxury auto? Fixing any disconnects is likely to improve your financial situation and boost your happiness. While it is always difficult to cut back on your lifestyle, careful budgeting can free up significant amounts of money to invest without requiring you to cut back on anything you really care that much about.

In summary, mid-career is the time to correct mistakes, evaluate progress toward goals, and make those changes that will bring you financial success and personal happiness.

Dr. Dahle is not an accountant, attorney, insurance agent, or financial advisor. He blogs as The White Coat Investor (link to http://whitecoatinvestor.com) and is the author of the best-selling The White Coat Investor: A Doctor’s Guide to Personal Finance and Investing. (Link to http://www.amazon.com/The-White-Coat-Investor-Investing/dp/0991433106).