1. Not saving enough: To be successful with any savings and investment strategy, you have to live below your means. It is simply impossible to achieve your goals if you don’t have a plan to get there. Saving for these goals is the first step. It is commonly recommended that the average person saves at least 10% of their income. For doctors, that savings rate should be substantially higher for two main reasons:
a. Doctors are high earners and, therefore, usually have higher standards of living. This means more expenses. To maintain those standards of living, they simply have to accumulate higher nest eggs.
b. Doctors don’t start their earning years till their mid-thirties because of many years spent in medical school and residencies, so they essentially have less time to accumulate and compound assets. To counteract starting later in the game, they need to increase their savings rate.
2. Not managing debt adequately. Physicians have to learn how to manage debt from an early age. It starts with college and medical school loans, which can be in the hundreds of thousands of dollars. Then, if they decide to go on to private practice, there are loans associated with leasing, equipment purchases, practice management and business operation. Doctors also often carry high balance mortgages on their primary residences. When you add all of this leverage, doctors have to pay an awful lot of interest. Properly managing this leverage, acquiring the right loans, paying low interest rates and, most importantly, managing cash flow are a key to success. It is important that doctors have ethical, knowledgeable and resourceful bankers, brokers or advisors to help them navigate this debt maze.
3. Not being tax savvy: The higher the earnings, the higher the tax bill. The old adage of a dollar saved is a dollar earned holds a lot of truth in this case. Fortunately, there are many tax shelters and breaks that doctors can take advantage of. However, I too often find doctors who are not maximizing their deductions and simply pay too much in taxes. The savings can run the gamut from simple contributions into IRAs, SEPs or 401-Ks to forming more complex defined benefit or captive plans. I cannot emphasize enough how important it is that doctors work with advisors and CPAs who fully understand their unique situation, are versed in the various tools available, and are thorough in establishing the right plan. Moreover, because of the high tax burden, finding tax efficient investments such as municipal bonds and tax deferred or tax free instruments such as cash value insurance or 529s can further alleviate some of the burdens and improve the overall net earnings after taxes.
4. Not being properly insured. This problem is not exclusive to doctors since most people do not have adequate insurance. For doctors especially, having the right coverage is a must. This includes, but is not limited to, malpractice, liability, disability, life and umbrella insurances. The limits on each one of these policies will differ based on income, assets, area of specialty, and personal situation. Again, consulting with an advisor or an agent who understands your needs is key to securing the right plan.
5. Not picking the right investments. Because doctors generally have ample means, they are often pitched all kinds of exotic investments. I believe it is important to stick to traditionally viable vehicles, such as stocks, bonds and liquid assets. Having a proper investment strategy with adequate diversification and attention to risk tolerance is key to success. Buffett said to always invest in what you know; if you don’t understand a business, then stay away. This rule is frequently true and should almost always be followed. It is not uncommon for doctors to invest in surgery centers or medical ventures. Such investments should never constitute more than a few percentage points (5-10%) of doctor’s net worth, unless they are directly related to the doctor’s day-to-day activities. A surgeon should certainly be an owner of the surgery group or center he’s involved with, but should probably refrain from investing his hard earned money where he can’t monitor the activities and operations.
Doctors should also be mindful of the fees they pay for investment advice; it is common and fair to pay between 1% and 1.5% of the assets being managed, with that number decreasing as the assets grow. Paying more means that giving up more of the return than necessary.
6. Personal and Professional Divorce. Starting over is always expensive. There is nothing a doctor can do that will impact finances as much as a divorce. You can often lose a home, a large chunk of your savings, and any future income stream (to alimony and child support). You can protect yourself from this with a pre-nuptial or post-nuptial agreement (especially if on a second marriage or if marrying after acquiring significant assets or after becoming well-established in your career).
Professional divorce is also expensive. Breaking up with your partners or closing a practice can have a devastating financial impact. You may have lease break fees, buy-out fees, employee costs, malpractice tails, and a temporarily lower income. Go into any business relationship with your eyes wide open, have your contracts reviewed by an experienced health care attorney and put in place the proper buy sell agreements.
7. Loaning Money: Perhaps because of their combined affluence and nurturing nature, they are often approached by friends, parents, siblings and relatives for loans. They’re often looked at as “the rich doctor”. Should you decide to go that route and can afford to help others out, then it is best to make the money you hand to friends and family a gift, with no strings attached. Remember the annual limit is $14,000 per person per year. Anything above that can be considered by the IRS as taxable, and the taxes are levied on the person making the gift at the rate of 40%. In the event you would like to make a loan to a friend or family member, make sure you have proper documentation and a clear interest charge. The IRS requires a minimum interest rate be charged on loans. Otherwise, it could be construed as a gift and, as mentioned, taxable. It is also important to ensure that the party borrowing the money has the earning power to pay back the loan.
Some of these mistakes are not limited to doctors but to all affluent individuals. Doctors are simply too busy, and the demands of their professions are too great, for them to be able to tend to all aspects of their financial lives. Having the proper legal and financial counsel will help them to cover all their bases. When looking for advisors, ask for personal referrals, check with regulatory agencies’ such as FINRA or SEC for properly registered advisors with independence from any particular company’s products. This can be a great start in identifying the right help for you.
Gerber Kawasaki Wealth Management
2716 Ocean Park Blvd #2020
Santa Monica, CA 90405
Securities offered through LPL Financial, member FINRA/SIPC. Investment advisory services and fixed insurance offered through Gerber Kawasaki, Inc., a registered investment advisor and separate entity from LPL Financial.
This material contains forward looking statements and projections. There are no guarantees that these results will be achieved. Investing involves risk including potential loss of principal.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Investing involves risk including loss of principal.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Municipal bonds are subject to availability and change in price. They are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.