Personal finance is a significant component of overall personal well-being. However, it is almost universally overlooked by physicians in general, including plastic surgeons like me. As rates of burnout and moral injury continue to rise, optimizing physician well-being is becoming a more recognized parameter. Again, however, the impact of financial well-being on physician well-being is rarely addressed within hospital systems, training programs, and on a personal level. That’s why, whether young or old, an important question for physicians to answer is, “Why is retirement planning important?”
To some, it may seem silly that a plastic surgeon 2 years out of training is already thinking about retirement. But hopefully by the end of this post, you will see why it’s not!
Why are doctors (like me) financially illiterate?
The reasons for the lack of financial literacy and education among physicians are multifold. First, in our years of education, we rarely, if ever, receive formal education regarding personal finance. Certainly, within our residency and fellowship training, financial education is limited to off-handed advice in the operating room and occasional visits from salespeople masquerading as financial advisors.
Second, as physicians, we are often hesitant to acknowledge blind spots or knowledge gaps. This is something that impacts us surgically as well. However, in the context of a subject with which we again have no formal education, the outcomes can be disastrous.
Lastly, there remains a significant taboo within medicine regarding attention to money and finance. A common refrain is, “We did not become doctors to get rich.” And, in general, this aphorism is and should be true. As physicians, our main focus is helping our patients. However, to completely ignore our finances leads to sequala like burnout and impairs our ability to function at our highest levels. Therefore, by not paying attention to our finances, we actually become worse doctors.
Why is retirement planning important for physicians?
My goal here (and throughout the blog) is to introduce the basic concepts of financial literacy for physicians. Financial literacy leads to financial freedom. Financial freedom is the idea that one can work because they want to, not because they have to.
The irony is that while many of us view money as a complicated subject that we hire out to other advisors, it is quite straightforward. Certainly managing one’s finances is easier than becoming a doctor!
As a last note, there is another aphorism stating, “The best time to start was yesterday. The next best time is today.” While starting early with habits like saving and investing is ideal, that is not where all of us are on our journey. The key is that there is never a time that is too late to start.
12 Answers to “Why is retirement planning important for physicians?”
1. You need a why
This is the most important step. It is the reason you want to achieve financial freedom and financial wellness. If there is no reason, then it will feel pointless when, and if, you get there. Any roadblock in the way will feel insurmountable. Your “why” is there to pull you through the hard times when you need it.
My “why” is that I want to gain financial well-being to enhance my overall well-being, to spend more time with my family and friends, and to pursue my passion on my own terms.
2. We love learning…so do some more!
Pick up a finance book. Start reading 10 pages each day, then try to read one financial book each year. It is minimal effort and will pay huge dividends in the long run. If you are not a fan of reading or want to get up to financial speed faster, I recommend podcasts or blogs.
3. Debt is soul crashing
This truly is the first step to financial freedom.
You need to stop taking on new debt and get rid of any and all debt you currently have. When you are in a hole, the first step is to stop digging; then start climbing out. You can’t run until you get out of the hole. Each $1 you use to pay off debt is another $1 increase toward achieving a positive net worth.
My plan to pay off all of my loans in 5 years is right here.
4. For you and your family
What does insurance have to do with the question, “Why is retirement planning important?”
Well, if you depend on your income to live (i.e., you are not financially independent), then you need disability insurance. Does someone (i.e., spouse, kids) depend on your income to live? If so, you need term life insurance (not whole life insurance). Additionally, if you are practicing medicine, then you need malpractice insurance.
Not having sufficient coverage in these areas could set you and your loved ones up for potential financial catastrophe. Consider the idea that it is better to have it and not need it, than to need it and not have it.
And then, when you are financially free and retired, you don’t need this insurance. But you always want to be thinking about this so you know you and your family are taken care of…
You can find my trusted recommendations for independent insurance brokers here.
5. You need to make sure you optimize your contract (current or new)
If you are not thinking of the future and answering the question, “Why is retirement planning important?”, you may miss important things in the present…
Fair or not, contract negotiation is the time when you set the foundation for what you will make and how you will make it.
There is usually some wiggle room within the contract to make more or less over time. However, you largely set the scale of your physician income as soon as you sign on the dotted line. Therefore, if you are negotiating your first contract, take the time to make it as favorable as possible. If you already have a contract, go through it and see what you would change if you could. See how close you are to your renewal time and create a strategy to make the next contract the best it can be.
For more contract tips, check out the Top 10 Things to Know Before Signing Your Contract (The First or Tenth)!
6. You gotta learn to keep score.
One of the biggest mistakes that high-income earners like doctors make is that we confuse income with net worth.
In essence, we confuse out profession (medicine) with our business (personal finance).
And a high income does not guarantee a high net worth, i.e. wealth. If one makes $1 million each year and spends $1 million each year, their net worth and wealth is actually $0.
Net worth is calculated as the difference between your assets and your liabilities. Put simply, assets are things that put money in your pocket like stocks, bonds, and cash-flowing real estate. Liabilities meanwhile are things that take money out of your pocket like credit card debt, student debt, car loans, and personal home mortgages. This is why each $1 of debt paid off equals a $1 increase in your net worth.
Review your net worth at least every 2-3 months. See what actions are helping your net worth and which are hurting it. Then you can adjust your strategy.
Just learning to keep score was the most important part helping me and Selenid increase our net worth by nearly $1 million in 2 years!
7. Because budgeting can’t be ignored for long
Budgeting can seem quite restrictive. But in reality, it is the opposite. A budget allows us to track our spending to ensure that we can reach our financial goals. And it is very easy to do using the following steps:
- Come up with a list of broad categories of expenses (i.e. rent/mortgage, groceries, entertainment, taxes, etc.)
- Go to your bank account(s)/credit card(s) and put every single expense from the past month (1st of the month to 1st of the month) in an expense category
- Add up the total for each expense category
- Add up the grand total for the month and make sure it is less (or at worst equal to) your monthly income
- Do you have enough left over to save for your financial goals?
- If yes, great! If not, what can you adjust to make this happen?
- Aim for a savings rate of at least 20%
- Now, go through each category and decide how much you can spend while still reaching your goals
The end goal of your budget is that you want to create a savings rate of at least 20% of your gross income. This savings rate is your margin, or the difference between what you earn and what you spend. And a simple formula to build wealth is to increase and invest your margin. Your budget helps you do exactly this.
My budget template can be downloaded for free here.
8. You need the right strategy to invest your money
Why is retirement planning important? Because if you don’t know how to get there, you never will!
Once you have created a savings rate of at least 20% of your gross income, you need to invest that money. If you don’t invest it, you are actually losing money due to inflation. After you figure out how much of a nest egg you need to retire, the question then becomes, what is the best way to invest your money?
First, an important definition. A stock is a part ownership in a company. You buy one share and you become an owner. Each share has a price tag when you buy it that changes based on various and, at times, arbitrary factors as they are traded in the stock market.
Now, the how…
When you buy a company’s stock, you are saying that you believe in that company’s success. If you are right, like with Apple, you make a lot of money. If you are wrong, like Enron, you lose all of your money. Picking the right company, or horse, can be difficult even for the “experts.” Research shows that even “experts” underperform the overall stock market 80% of the time when they try to actively invest by timing the markets and picking stocks or funds.
When you buy the whole stock market…
You are saying that you believe in the overall ingenuity and innovation of humankind and the world economy. This is a much safer bet. Over the long term, the overall stock market has always gone up. And you should only be investing money that you do not need in the short term. In this way, the short term volatility of the stock market does not matter to you. You are now investing and not speculating.
You can invest in the overall stock market or large sectors of it using index funds. An index fund is a collection of stocks strategically picked to mirror some index marker of the overall stock market. For instance, the S&P 500 is an index with a collection of stocks thought to give a good sense of the overall market. (Is the market going up or down?, etc.) An index fund will mirror the movement of the index that it is based on.
You can also invest in index funds of bonds and even real estate, called Real Estate Investment Trusts, through just about any investment brokerage.
If you save 20% of your gross income and invest wisely in index funds, as a high income earner, you will be able to retire and reach financial freedom on your own terms.
The 7 Step Basic Formula for Wealth as a Physician
9. You need to figure out where to invest in the right places
Once you have decided how to invest your savings, the next decision is where to invest your savings. You can invest in a regular taxable investment account. Money in this account is taxed when contributed (via income tax) and taxed again when it is withdrawn (via capital gains taxes).
However, there are other investment accounts available that carry significant tax advantages. These include 401k, 403b, and 457 accounts. These are typically available through your practice or employer and are accounts that are not taxed upon contribution and only taxed upon withdrawal (tax deferred).
Another available tax deferred investment account is an Individual Retirement Account or IRA. These accounts are available to anyone earning an income. However, most or all plastic surgeons will be above the income limit to contribute to this account with a tax benefit.
However, high income earners can still contribute to a “backdoor” Roth IRA in which your money is taxed upfront but never taxed again including upon withdrawal. Currently, the contribution limit for this account is $6,000.
The best strategy is to maximize contributions to tax-advantaged accounts available to you before utilizing a taxable investment account.
10. If you never figure out “Why is retirement planning important?”, you will never learn to spend intentionally
Intentional spending is the concept that one is intentional with the money that she or he spends. Meaning that any purchase is well thought out and carries an intended purpose. In contrast, unintentional spending is a reflex when money is spent without focusing on the joy, or lack thereof, it brings.
Unfortunately, research has shown that we are incredibly bad at predicting what will make us happy – especially with our purchases. Therefore, it is important to mindfully practice intentional spending.
Here is a simple formula (laid out in more detail here):
If a purchase meets both of these criteria:
- The purchase fits into your financial plan and
- The joy derived from the purchase is ≥ the dollar value of the purchase
You should buy it.
If the purchase meets either of these criteria:
- The purchase does not fit into your financial plan and
- The joy derived from the purchase is < the dollar value of the purchase
You should not buy it.
Money is simply a tool.
A tool that I believe should be used for the betterment of yourself, your loved ones, and your world community. Spending money that you would is not bad. But at the same time, to spend that money unintentionally in a way that does not accomplish those goals would be wasteful. So, the key is to spend money intentionally.
11. K.I.S.S. will make you rich
We all know doctors who are complexifiers. And we know doctors who are simplifiers. In general, it is the simplifiers who are able to break down difficult medical concepts into understandable and teachable components. Finance is no different.
Seek financial mentors who are able to simplify the concepts of wealth building. If you can understand and practice medicine, you can understand and enact health financial strategies. If someone is explaining an investment that you cannot understand, it is best to avoid it.
12. It will stimulate you to create a written personal financial plan…then you can sleep
Asked again, “Why is retirement planning important for both young and old physicians?”
Because we need to rest. And it can be hard to sleep when we are worried that we won’t meet our financial goals.
Ah, but there is an answer…
A written personal financial plan is a document that you create to guide your financial decisions based on your personal goals. With a financial plan, you can constantly refer back when faced with tempting or challenging financial decisions to ensure that you make the right ones – which will be completely personal to you. Creating a written personal financial plan is the culmination of each of the previously discussed steps.
To begin making your personal financial plan, list out your financial goals.
Everyone’s goals should be different and unique to your own philosophy and circumstances. Once you have established these goals, create financial priorities or steps that will serve as signposts on your journey.
Now guidelines for how you will invest to reach these goals. That way, you know exactly what you need to do. After this, all you need to do is follow the plan and you will reach financial freedom.
With a written financial plan, you have laid out your goals as well as general and specific directions for getting there. That’s the hard part. Now, all that you have to do is implement the plan in an emotionless and mindless fashion and you can rest assured that we will reach our goals.
If this seems intimidating, just use my actual written financial plan as a template!
So, why is retirement planning important?
It’s important because the fact of the matter is that by the time most doctors realize it is important, it’s too late…
The other important truth is that financially free doctors are better doctors. So, why is retirement planning important? It’s not just for you. It’s also for your patients.
Personal finance is an important but all too overlooked component of personal well-being for physicians. By enacting simple and reproducible strategies, like saving and investing, all doctors can improve their financial well-being and reach financial freedom.
And that is a great reason!
The path to wealth for physicians is actually quite simple. But it’s not easy. Yet but is worth it!
So, let’s get started on your path to financial freedom today by learning the rules of the game and combining our knowledge with thousands of other like-minded physicians!
What do you think? Why is retirement planning important for doctors? When did you start your retirement planning? Let us know in the comments below!