Q: I was looking over my statements recently, and I am pretty disappointed with the return I have been getting on my money. What can I do to increase my investing return?
A: Most physician investors need their portfolio to do at least some of the heavy lifting in creating the nest egg they will live off in retirement. Unrealistically high expectations for investment return often cause physicians to save inadequately, leading to a need to work longer than they wish or spend less in retirement than they had hoped. However, sometimes their expectations are fine; they simply made mistakes that lowered their investment return.
A general rule of thumb is that a physician needs to save about 20 percent of gross income each year for retirement, more if hoping for an early retirement or with a particularly late start. If you failed to do that, there are only three possible solutions: work longer, spend less in retirement, or earn more on your money. Often a combination of the three can do wonders in just a few years. Here, I’m going to discuss several ways to earn more on your investments.
1. Decrease Fees
Perhaps the most significant drag on investment return is the impact of the financial services industry. It is not unusual for physicians to be paying 2 to 3 percent of their assets in advisory and management fees. Eliminating those fees can boost the investment return by 2 to 3 percent. If you have a $500,000 portfolio now and save $50,000 per year over the next decade, earning 8 percent instead of 5 percent on that portfolio results in a 25 percent larger nest egg.
How is it possible to cut fees that much? One of the largest fees is an adviser fee, such as the “industry standard” 1 percent of assets under management. Learning to be your own financial planner and investment manager saves that fee right off the top. That could be worth $10,000 a year on a $1 million portfolio. Many doctors are surprised to learn their financial adviser’s hourly rate is a multiple of their own. In addition, many investors have mutual funds with expense ratios of 1 percent or more, 20 times what you could be paying with the least expensive index funds at Vanguard, Charles Schwab, iShares, or Fidelity, where the expense ratios are generally less than 0.10 percent. As you pay more attention to fees, you may also find others you can reduce or eliminate altogether.