Do you know exactly how much debt you have, including medical school loans? Do you contribute the maximum to your retirement accounts each year? Do you know how much you need to retire, and do you have a plan to get there? Do you know what fees you’re paying to your financial advisor and do you understand exactly what investments you’re in?
If the answers to any of these questions are no (or your answers make you uncomfortable), join the club – radiologists are seen by investment professionals, realtors, and bankers as a big pot of money that they want part of. “They’re targets,” said Douglas G. Burnette, Jr, MD, CFP. “People know they have money and know they don’t have a lot of time, and they make snap decisions. They’re prone to fall prey to oil wells and risky alternative investments, things that promise a very high return,” said the recently retired radiologist who is now a wealth manager at Clark & Burnette Wealth Management in Lake Charles, Louisiana.
Are radiologists alone in this lack of financial savvy? “No,” said Paul Thacker, MD, assistant professor of radiology and pediatrics at the Medical University of South Carolina, who published Personal Finance for the Radiology Resident: A Primer in the JACR. “It’s prevalent throughout medicine.”
While doctors make the same mistakes as everyone else, there’s a difference partly because they have high incomes, said James M. Dahle, MD, an emergency department physician and author of The White Coat Investor: A Doctor’s Guide to Personal Finance and the blog The White Coat Investor. “Like a successful musician or professional athlete, doctors’ level of income has nothing to do with their business savvy.” Compare this to a prosperous business person, whose income and wealth is a result of learning about investing and personal finance.
Burnette said that physicians tend to be worse money managers than the average person. “Because they generally have more money, they’re less averse to loss,” he said. There’s a feeling that they can always earn more money. “They also tend to be bigger risk takers. They deal with life and death, so money is really nothing.”
What’s the Problem with Doctors and Money?
Doctors don’t save enough: In one of his favorite personal finance books, The Millionaire Next Door, “one of the things they found is that physicians are the second worst savers of income, with lawyers being the first” as a percentage of income, said Thacker.
Doctors spend too much: The doctor coming out of residency has been in a cocoon, and is then handed a high income, said Dahle. The doctors look at senior partners and friends who have been working longer. They have nice lifestyles, and the newly employed doctor wants that too.
But instead of just paying off the average $176,000 in high interest medical student loans, the doctor blows the first paycheck on a car or boat, said Thacker. “The cycle of debt keeps going.”
Instead, Dahle recommends that physicians entering practice continue living the more frugal resident lifestyle for a few years, to save money and pay off loans. “They shouldn’t be in practice for 20 years still with massive student loans,” he said.
Doctors take on too much additional debt: While many students need financial help getting through medical school, during and after school, you should live within your means. Lenders know that doctors are unlikely to default, said Thacker, so they make borrowing easy for doctors. “If we started defaulting all over the place, they’d stop giving us the money,” he said. “It’s kind of our fault, we should realize what we’re doing.”
Buying an expensive house is one example. “That’s usually where people get in trouble,” he said. The realtor shows homes in a high price range, and the loan officer qualifies you for more than you can afford, using the debt to income ratio. However “certain things are excluded from that ratio, like student loans,” Thacker said. In buying a high priced house, you also have to budget for insurance and repairs, and “if you buy a fancy house you have to fill it with fancy things.”
Doctors unquestionably follow their investment advisors: Before he became a certified financial planner, Burnette used several advisors referred to him by colleagues. “I was blindly following the advice of someone I respected,” he said. “I think that’s pretty common. They were telling me what to do, not necessarily asking what was important to me. It was mostly about the dollars.”
When it comes to financial planners, “everybody wants to talk to you about retirement, that’s the happy side,” said Thacker. “No one wants to talk to you about how you’re going to live your life before retirement.”
Doctors try to time the market: Radiologists like playing the stock market out of a sense of control, said Burnette. “In their day-to-day life they have so little control. You never know what’s coming. You have to do everything that comes across your workstation,” he said. Radiologists are looking for a way to exercise control, and playing the market is a way to do this.
Plus, doctors overestimate their investing abilities. “Physicians think they’re absolutely geniuses in the market,” Burnette said. “A lot of them have a fair amount of superficial knowledge in investing. They overestimate their ability. They think they know a lot more than they do.” If investment professionals can’t accurately time the market, how can a doctor do it, he asked.
Doctors are too trusting: Doctors are used to working with colleagues with similar ethics, education, and training, said Dahle. The doctor is duty bound to do what’s right for the patient. “The financial world works differently,” Dahle said. “A lot of people who sell financial services not only receive very little training, as little as a week and often just in sales, they don’t have that fiduciary duty to the client.”
As a result, doctors come in trusting that they’re getting helpful advice, but it’s really a sales pitch, said Dahle. This includes advice to buy cash value life insurance without understanding the consequences, or buying a bigger house because the realtor and mortgage broker tell them they qualify.
Doctors don’t understand the role of many financial advisors: “The way the financial advice industry works is that most who call themselves advisors are really salesmen of insurance and high load funds,” said Dahle. “The problem when selling commissioned products is that you have an incentive to sell what pays you the best.” He encourages doctors to get advice from fee-only advisors, meaning you pay them for their time giving advice.
While service providers deserve to make a living, it’s important for doctors to understand how they’re being paid, and their motivations. “While most financial planners are good guys,” said Thacker, “realize that the whole financial system is built on taking money from you. They make money on fees. They’re trying to get a little bit of your wealth and retirement. They’re not there out of altruism.”
Doctors don’t investigate financial planners: Some doctors spend more time researching a television purchase than they do a financial planner, said Dahl. He recommends getting referrals from financially savvy colleagues who are doing their own planning. “Just getting a referral from a physician colleague is not necessarily the best way to go. They might not know what quality looks like,” Dahle said.
Just as it’s difficult for patients to judge physician quality, it’s hard to judge advisor quality, said Dahle. “By the time you know how to hire one, you know most of what you need to do it yourself,” he said. In addition to finding out what they charge and their investment philosophy, you’ll also want to look up disclosure forms on the regulatory sites like the Securities and Exchange Commission, looking for complaints against them.
Getting Your Financial House in Order
The first step in getting your personal finances in order is to “get a bottle of bourbon out, and pull out all their student loan documents out and add it up,” Dahle said. “It’s amazing how many doctors don’t know what they owe in student loans.” Take stock of the whole financial picture, adding up assets (eg, home equity, investments) and liabilities (eg, car loan, house loan). Then think about your short and long term goals. “That’s the beginning of any financial plan. If you don’t know where you are, it’s hard to get started.”
Part of the plan should be a budget, said Thacker. Without a plan, you won’t know how much you need to save to meet those goals. And know that a lot of projections are based on fluid assumptions like anticipated life span and estimated investment interest, while inflation and market fluctuations aren’t considered, said Thacker.
One benefit radiologists have over other professions? “We can get out of debt a lot quicker because we’re paid higher,” said Thacker. However buying nicer cars and luxury vacations delays the opportunity for the financial freedom of being debt-free. “It just depends on the person and how motivated they are to get out of debt,” he said.
Just like doctors get continuing medical education, Dahle recommends continuing financial education. To him that means following a good financial blog and reading one helpful financial book a year (see sidebar for recommended books).
With many doctors starting with little financial knowledge, the initial lessons can be worth millions over a career, said Dahle. “The first few things they learn about are so high yield.” One of those topics is to understand how retirement accounts work, said Dahle, who recommends maxing them out each year.
While Dahle’s interest in personal finance led him to a second career, he stresses that “it’s not that complicated. Learning medicine is harder.”