The secret to smart investing for physicians
What is your number? It is the amount you need to save by the time you would like to retire or to slow down your practice. A certified financial planner (CFP) can derive this number for you by calculating, in today’s dollars, how much income you would like to have in retirement and incorporate assumptions for the likely investment rate of return and the cost of living, based on your lifestyle goals. With this information, you will know how much money you need to save each month to reach your goal when you are ready to retire.
How much to save?
I notice that, on average, the amount of money my physician clients need to save is somewhere between 10% to 30% of their income. It may sound daunting, but that target is reachable. Having a plan in place will help to provide the necessary discipline and will remind you that saving the prescribed amount will pay off for you and your family. But it requires patience.
This is an area where many people can end up with a scattered and ineffective approach. Many physicians I meet have not started investing properly, even though they are deep into their careers. A big reason for this hesitancy is that becoming a physician is an all-absorbing journey with little time to devote to learning about financial matters. These feelings are understandable, but they can be paralyzing.
Accumulating a large amount of cash earning meager returns is generally not the path to a secure retirement or even to attaining most other goals. An overly large cash build-up also can lead to following well-meant tips from colleagues or family members—attractive land available for sale, a real estate deal with no risk and huge returns, etc.
Stocks still rewarding
These tips are often followed by warnings to “stay away from the stock market” because, the tipsters warn, they have already tried that and lost money. While it is certainly true that the stock market can be volatile, financial history tells us that in the long term, it can be quite rewarding.
The money you set aside for retirement should be invested in a diversified investment portfolio consisting of uncorrelated asset classes. In other words, assets that do not all tend to rise or fall in value at the same time.
Traditionally, this would be a combination of stocks, bonds and alternative assets such as gold, real estate and whole life insurance. The ultimate investment allocation should be based on the time horizon to reach your goal and your tolerance for riding out the ups and downs of the financial markets.
“Process” can sound mundane, but a sound financial plan is a process. It puts other kinds of decisions involving spending in context and steers us away from bad spending choices. Markets will have corrections, which can be painful. The world economy can shift. That should not drive a physician or anyone else from saving and following a well-crafted plan.