Investment and Savings Advice from ACOEP’s New Physicians in Practice
Most of my friends might generously call me a frugal spender. I consider myself fiscally conservative. My wife has gone as far as calling me cheap, but as a family, we have everything we need, and more. The fact is, when she wanted a bigger car to fit the two giant car seats for the kids and a third row that fit adult legs, or wanted to live in a nice area of Southern California with no crime and good schools (as opposed to nearby Compton), we were able to make it work. This does not happen by chance! Money does not buy happiness, but it sure beats the alternative. I have been blessed with a great job and promising career, and a question I often get from residents is, “how should I invest my money?” I am not a financial planner, but here is some wisdom I have learned over the years.
Let’s discuss a little historical perspective. You will have two big swings in pay during your career – when you graduate from medical school and get your first job as a doctor, the average person will go from -$30k to +$50k per year – an $80k difference! Many will add a few dollars here and there through residency via moonlighting, and be careful if this is done as an independent contractor or you will be very surprised with the tax bill you get in April! The next big step is three to four years later when you finish residency and become an attending. This will often result in an additional $200k+ per year (remember to save some cash as there is a gap between that last residency paycheck in June and first attending paycheck often in August). After giving good old Uncle Sam his due, what should you do with all that extra cash? A simple piece of advice I heard was from Dave Scott, MD: pay yourself first.1 If the car you have driven since college barely starts, it is time to get a new set of wheels … but that does not mean a Maserati. If you have accumulated high interest rate credit card debt, then focus on retiring that debt (with your new paycheck, it can often be done easily in a matter of a few months). Look at consolidating any high interest student loans into something more affordable (Megan just authored an article on that last month). If you simply have to have a TV big enough to actually see the home run, or need to upgrade from your iPhone 4, take the opportunity to do so – you deserve a little bonus for all your hard work. After that, let’s get back to investing.
Most hospital plans have some form of match. For instance, mine is a 3% match. So I put $9k in, they match the $9k, and I have capped the IRS allowed $18k elective deferral to a 401k, 403b, or 457 account. In case you were not a math major in college, this is a 100% return on investment. So even if you cannot afford much during residency, you will likely not miss 1-3%, especially if your employer is willing to double it for you! If you can live close to your resident salary for a few years, pay down your debt, and start catching up from the last decade of not saving adequately for retirement, you will thank yourself later. Once you have made it to the big time (ie, that big fat attending paycheck), you need to start putting money away for retirement. With the median EM salary of $260K ($350k when including all benefits), there should be plenty of money to start maximizing your retirement plan.2 With the maximum allowable annual contribution to all accounts of $53k (elective deferrals, employee contributions, employer match, etc), it is incredible that 41% of physicians average <$500k in retirement savings!3 The sooner you start, the more time it has to grow, and you cannot undervalue to power of compounding.
Simple (Expense = 0.18% for fund option, 0.08% for ETF option):
- VTSMX or VTI (50%): essentially encompass all large-, mid-, small-, and micro-cap stocks across the US market
- VTWSX or VT (20%): global portfolio of large-, mid-, and small-cap in 46 countries, including both developed and emerging markets.
- VBMFX or BND (30%): wide spectrum of public, investment grade, and mortgage backed securities
You are often limited by the options within your employer-sponsored portfolio. If there is no opportunity to pick individual index funds, try to diversify as much as possible (0.09 expense):
- US Large Cap (such as VOOG) – 25%
- US Mid Cap (such as VOE) – 7.5%
- US Small Cap (such as VBR) – 7.5%
- REITs (such as VNQ) – 5%
- International Stocks (such as VEA) – 17.5%
- Emerging Markets (such as VWO) – 7.5%
- US Municipal Bonds (such as MUB) – 10%
- US Corporate Bonds (such as LQD) – 10%
- US Gvmt Bonds (such as BSV) – 5%
- International Bonds (BNDX) – 5%
If you have no interest in finance and just want to make sure there is money to enjoy at the end of your career, another option is using low-cost online investment companies such as Betterment (.15% expense), Wealthfront (.25% expense), or FutureAdvisor (0.49% expense). They tend to keeps costs down by using low-cost ETF options, automatically keep your money in balanced portfolios (factoring in investments you have not under their management such as employer sponsored accounts), and perform tax-loss harvesting to maximize your earning power.
- It is important to diversify your assets: Large-cap, mid-cap, small-cap, real estate, international, emerging market, and bonds. This will minimize the effect of losses in individual sectors.
- Avoid active trading and active mutual fund management. Over the 20-year horizon, less than 20% of funds outperform the benchmark and they have much higher fees that eat away at your profits.
- Don’t try to time the market … unless there is a crash – and when there is panic in the market, don’t sell, buy! (consider this the clearance rack at your favorite store – buy the market cheap).
- Don’t change your plan based on the finance media chatter – the law of averages is in your favor.
- Early in your career, seek the advice of a Registered Independent Financial Advisor who is fee-based (fiduciary) to get you on the right track. Run from the “advisor” who sells you products! From there, you can likely just continue investing on the same track with periodic portfolio rebalancing.
Note: This advice is for long-term investors. If you are saving for the down-payment on your house, a more conservative approach is warranted. My financial advisor was mortified by the cash equivalent I accumulated over my first few years out of residency, but he understood my needed liquidity for purchasing my home in CA when the opportunity presented itself … and living 20 minutes from work and 10 minutes from the beach is priceless! Good luck to you all, and remember, slow and steady wins the race.
4 – The 5 Mistakes Every Investor Makes and How to Avoid Them by P. Mallouk, 2014.