It’s a well known fact that most physicians have Type “A” personalities, and it makes sense given the journey they choose to become a physician.
Throughout undergrad to medical school to residency/fellowship, it can be a constant competition to get high marks, volunteer, do research and publish, get good references and be all-rounded in other extracurricular activities to continuously jump over the never-ending hurdles.
Physicians are used to being given learning objectives and being constantly graded therefore we become accustomed (good or bad) to being compared to our peers throughout our training. We have a pretty good idea of how we are doing academically year to year.
However, how does a physician know how well they are doing financially? Are they saving enough? Spending too much? What net worth should they have at a certain age? What net worth should they aim for at retirement? Being competitive by nature (or nurture), I am guessing that most physicians probably want to know how they are doing financially relative to their peers, but talking about money is a taboo subject amongst physicians.
Obviously, there are many factors that will determine how well you are doing financially, such as the size of student loan, income as an attending, single vs dual income, spending, saving, investing etc….
However, at the end of the day, the best indicator of your financial health is your net worth. No matter how noble/altruistic you view your profession, you are essentially trading in your time and life energy for money. How much of that money is converted into net worth is, in my opinion, the most important factor in assessing your financial health.
There are different ways of calculating your net worth, but the most common way is to add up all your assets (financial assets (savings, stocks, bonds, GICs, mutual funds), home value, rental properties, cars, insurance (cancellation cash value) etc… and subtract all your debts (mortgage, student/car/credit loans etc…).
I personally track my net worth monthly. At the very least, you should track your net worth yearly to ensure that your financial health is progressing upwards.
Here are 8 ways to grade your personal financial performance as a physician.
ASK YOUR ACCOUNTANT OR FINANCIAL ADVISOR
Your accountant has detailed knowledge of your income, spending and saving rates, so ask him/her how you are doing financially each year. Every year when we meet up for my corporate year-end taxes, I always ask my accountant for his opinion on how I am doing financially. Try to check in every year with your accountant to get their opinion on your financial health.
Surprisingly, or not surprisingly, my accountant tells me that a large portion of his physician clients is “living pay cheque to pay cheque” and have relatively little savings. Check out this article or this one, if you would like to see how some physicians can struggle with high incomes (basically living at or above their means).
As for your financial advisor (if you use one), ask them how you are doing relative to their other clients. It helps if your financial advisor deals exclusively with physicians, such as with MD Management.
Ask them how much financial assets have their retired physician clients saved up for retirement. The financial assets (excluding primary residence) an advisor from MD Management quoted me were as follows (5 years ago):
Family physicians who retired had on average $2-3 million
Specialists who retired had on average of $3-5 million
(Majority of his clients fell into the above first 2 categories)
“Some, but not all” High-paying Specialists who retired had on average $5-8 million
Physicians with “businesses” (only a handful) retired with average > $10-15 million
4% Withdrawal Rate
Many FIRE (Financial Independence Retire Early) bloggers and financial planners abide by the 4% withdrawal rate for retirement portfolios, which states that you can withdrawal up to 4% of your portfolio when you retire and your portfolio will have a high chance of lasting up to 30 years, assuming 50% stock asset allocation. This 4% rule was based on a 1994 study by William Bengen who tested a variety of withdrawal rates using historical rates of returns for stocks and bonds. (Please note that this 4% rate is debatable and some advocate only a 3% withdrawal rate)
Nevertheless, using the 4% withdrawal rate and knowing how much you need in retirement per year, you can calculate what portfolio size you need to retire with by multiplying 25 times the amount of retirement money needed per year. i.e if you need $100,000/yr to retire with then you need a portfolio size of $2,500,000.
This gives you a general sense of what portfolio size you require in retirement in order to generate a specific retirement income.
Millionaire Next Door Calculation
In the book, “The Millionaire Next Door”, Stanley and Danko describe a formula to determine if you are an under-accumulator of wealth (UAW) or a prodigous accumulator of wealth (PAW).
The formula is:
Expected Net Worth = Age X 0.1 X Gross Income
A prodigious accumulator of wealth (PAW) has a net worth over 2 times as large as the expected net worth (ENW), and an underaccumulator of wealth (UAW) has a net worth of less than half of the ENW.
In the updated book “The Millionaire Mind”, the calculation was revised to:
Expected Net Worth = Age x 0.112 X Gross Income
This calculation gives you a sense of what kind of ballpark net worth people have at certain ages and gross incomes, and whether you are a good saver or not. However, this formula doesn’t work that well for physicians, as we start to earn a high-income at a later age
White Coat Investor Calculation
Jim Dahle, from White Coat Investor, came up with his own version of Expected Net Worth for physicians.
Expected Net Worth of a Doctor (ENWD) = Average Post-Residency Income x Years Since Training x 0.25
This formula works out pretty well. It includes gross income post-residency, so it takes into account a physician’s specific earning power. It’s a pretty good formula for early career physicians, but for mid-late career physicians, it may underestimate due to the magic of compounding with larger portfolios.
Financial Samurai Calculation
Sam, from Financial Samurai, did a detailed post on what he thinks the average Net Worth should be for the above average person, based on many assumptions that he details in his post. He broke it down by age and years work, and added up the expected Tax-Deferred 401 savings (equivalent to our RRSPs), post-tax savings and home equity to get an average Net Worth. Keep in mind that this is for a single earner.
Values are in US dollars.
Medscape Physician Wealth and Debt Report 2017
Annual Medscape survey includes questions about debt and Net Worth. Responses are from more than 19,200 physicians across 27 specialties. This is data from the United States and is in US dollars.
It’s interesting to see that even with a physician’s income, only a minority of physicians will eventually reach the >$5 million Net Worth. Although this is US data, this graph correlates pretty closely with what my advisor described above in his experience at MD Management.
Scott Burn’s Wealth Scoreboard
Scott Burn’s Wealth Scoreboard took data from the 2013 Survey of Consumer Finances (done every 3 years by the Federal Reserve) and he organized the data into his Wealth Scoreboard, to give readers an idea of how you are doing relative to everyone else.
I really like this chart, because it breaks down the percentiles according to each decade of age, and I think that these numbers are similar in Canada. The Top 1% values gives a healthy target for physicians to strive for based on their age. If you compare the Medscape data with Burn’s wealth scoreboard, <1% of physicians will reach the Top 1% in the age 40-49 group. For all you competitive physicians out there, that target is like getting an A+ in Net Worth, as a mid-career physician.
Values are in US dollars.
Lifetime Earnings Wealth Ratio
When I began writing this post, my primary purpose was to introduce readers to a ratio of mine that I have been tracking for the past 4 years. It is a ratio of my Net Worth to career gross earnings. I thought that I was smart and was the first to think of this ratio. However, a quick google search shows that this ratio was first introduced in 2014 by J. Money at budgetsaresexy.com
Oh well! No trademark for me! Kudos to J. Money for coming up with this ratio (Net Worth divided by Total Income Earned) and introducing it to everyone. It was also mentioned in an article in New York Times
He came up with the term “The New Wealth Ratio” and suggested rankings as follows:
- 0%-10% – Meh
- 10%-25% – Now we’re cooking!
- 25-50% – You’re on fire, baby! Give me your number!
- 50-100% – Marry me.
- 100%-1,000% – How do I get into your will?
I think this ratio is the best indicator for a physician to assess their financial health. It takes into account savings rate AND investment growth, and also indirectly takes into account your spending rate. Your ratio should increase every year if you are taking care of your financial health.
One additional ranking that I would like to add to J. Money’s rankings, is a ranking specific to your tax rate.
Calculate your average tax/yr rate as a physician (combined corporate and personal tax rate). This will take a bit of calculation or simply ask your accountant. For me, my overall corporate/personal tax rate has been hovering around 23% per year. Let’s round it up to 25% for simplicity. Subtracting 100% – 25% = 75% of post-tax income my family and I have had to either save or spend over the course of my career.
I’d like to propose that this post-tax income percentage should be a Wealth Ratio that you should strive for. Once you have reached this ratio, then your savings and investments have essentially made back all the money that you and your family have spent over the years. Maybe we can call this ranking “Spending Money Back From Dead” (SMBFD)
My calculated Wealth Ratio is around 0.80 (80%). Therefore, I have surpassed my “SMBFD” ratio of 75%, which tells me that my career savings rate AND my investment growth have been on the right track, such that we have made back our spending money, and that we are now progressing to make back the taxes that I have paid over my career.
The ultimate A+ goal would be to reach 100% Wealth Ratio, which would mean that your savings and investments have made back ALL of your spending money and taxes. You would be left with your original gross earnings as if you have not touched it yet. Wow! Wouldn’t that be a great feeling and accomplishment? All your time and life energy that you have put into medicine would now be 100% converted/stored into your Net Worth. This is a personal goal of mine, and I am hoping that through passive index investing and passive real estate investing, I’ll be able to surpass this ratio someday.
Nobody cares more about your financial health than yourself
Keep track of your Net Worth and Wealth Ratio yearly to make sure it is increasing at a healthy rate
Use the above resources to get a sense of how you are doing relative to others and to set goals for yourself to strive for
Keep in mind that your financial health is a “one-player game”, not a “multiplayer game” where you compete with others
There is no end point or sense of happiness/fulfillment in competing with others when it comes to your financial health and Net Worth
How is your financial health holding up? Any other methods you use to assess your financial health?