Question

I am overwhelmed by all things financial. What is the simplest, most reliable way for me to have a secure retirement?

Answer

As much as I enjoy learning, talking, and writing about “all things financial,” I recognize that most doctors are not hobbyists when it comes to personal finance and investing. While this may be the best-paying hobby ever (especially when you consider that even a fairly priced financial advisor may be charging you up to $10,000 per year), it is not required in order to achieve a well-deserved, financially secure, comfortable retirement after a career “in the pit.” 

While there may be faster pathways to becoming wealthy, there is a very reliable method that does not require any entrepreneurial skills, excessive borrowing, risk taking, stock picking, cryptocurrency, or a second job in real estate. It does require a little bit of discipline applied over several decades, but so does showing up and taking care of whatever comes through the door 15 shifts a month throughout a career. Let me describe this method to you. 

Save Your Money

The first requirement is to save money. You cannot invest money that you do not have and for most full-time physicians, there is no money other than what they earn taking care of patients. Carve out 20 percent of your gross income to invest for retirement. The average emergency physician makes about $375,000 per year. Twenty percent of that is $75,000. This is money that you cannot spend if you want to have a secure retirement. Pay yourself first by carving this money off the top and putting it away for retirement.

Protected Retirement Accounts

Ideally, you will be able to protect most or all of this money from the tax man and any potential creditors using tax- and asset-protected retirement accounts such as 401(k)s, 403(b)s, 457(b)s, profit-sharing plans, cash balance plans, individual 401(k)s, and Roth IRAs (usually funded via the “backdoor” method). Your investments grow faster when you do not have to pay taxes on the earnings each year. If you run out of retirement account space before you get to 20 percent, then contribute the rest to a regular, non-qualified, taxable, brokerage account. 

Index Funds

Once you have the money, you need to invest it. Investing is actually the simplest part of personal finance. It turns out that the vast majority of what is happening on Wall Street does not add value to your nest egg. Your goal as a long-term investor is to invest for the long term, so you do not need to pay attention to the “hot money managers,” the latest tech stock, or really any financial news at all. You can simply buy all the stocks and bonds using dirt cheap, broadly diversified, index funds. You will be guaranteed the market return. By accepting average returns, in the long run you will outperform 80 to 90 percent of investors. Any reasonable mix of a handful of index funds will do. One simple combination might be 50 percent of your money in a U.S. stock index fund, 30 percent in an international stock index fund, and 20 percent in a U.S. bond index fund. Maintaining these ratios is done by directing new investments at whichever asset class (type of investment) has underperformed over the previous few months or years. This “rebalancing” helps maintain the same portfolio risk level over time. 

So far, so good. You’re saving 20 percent of your earnings, preferentially putting it into retirement accounts, and investing it into index funds. This can be set up to happen automatically, but even if you’re doing it manually, it takes just a few minutes a month to maintain an investing plan. It seems very simple, but over time produces powerful results through the miracle of compound interest.

Compound Interest

While there are no guarantees about future returns and there is wild variability in the returns of stocks and bonds in any given year, over decades all that variability more or less evens out. A reasonably conservative assumption would be that your investments would earn eight percent before inflation and perhaps five percent after inflation over decades. If you start upon graduating residency at 30 and work and save until you retire at 60, that $75,000 per year would grow to be about $5 million, in today’s dollars. (In reality, by saving 20 percent of a gradually increasing income, you would likely end up with more than $10 million, but it would only purchase as much as $5 million does today). 

$5 million allows a retiree to safely spend about $200,000 per year in retirement. Adding Social Security to that (and yes, Social Security will still be there for you in some form) will allow you to maintain a similar lifestyle to what you enjoyed during your career. Keep in mind a net worth of greater than $5 million will put you into the top 10 percent of physicians. Despite the simplicity of this plan, most doctors are not doing this due to ignorance, lack of financial discipline, or misfortune.

Final Best Practices

While saving up a retirement nest egg is the greatest financial task of your life, it does not need to be overly complicated. You need enough discipline to start early, to save 20 percent of your gross income for retirement, and to leave your investments alone when markets seem destined to implode, but you don’t need to have any sort of specialized knowledge or put in an inordinate amount of time or effort. You can focus on your patients, your family, and your own wellness and enjoy a wonderful career in emergency medicine. You can have your cake and eat it too.  