Top five financial mistakes orthopedic surgeons make
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Practicing orthopedic surgeons, young and old, are often disappointed when viewing their bank accounts and wonder where their money went.
We have previously written that orthopedic surgeons, and many physicians for that matter, commonly underestimate their true take-home pay and overspend and underinvest, as a result. Unfortunately, such habits, especially beginning early in a physician’s career, can sap the true earning potential of a young physician. In this month’s column, we highlight the top five financial mistakes orthopedic surgeons make and hope to help readers achieve their best financial future.
Taxes affect take-home pay
The number one financial mistake made is not understanding the effect of taxes on take-home pay.
As was outlined in a column on financial modeling as it applies to job decision analysis, understanding take-home pay as it pertains to locality is fundamental to the all-important step of budgeting one’s finances. When coming out of residency, many orthopedic surgeons falsely believe that, since their income is increasing by five to 10 times what it was when they were a resident or fellow, they can increase their spending habits proportionately. This ignores the impact of our progressive tax system where increased income levels are subject to higher tax rates. For many surgeons in high tax states, their marginal tax rate (the highest rate they will pay on their last dollars earned for the year) may approach 50%.
Overspending due to lifestyle creep
Mistake number 2 is spending too much due to lifestyle creep, which is the phenomenon whereby discretionary consumption of non-essential items increases as the standard of living improves. Nowhere is this more apparent than the short interval when a young physician jumps from residency or fellowship into the attending life, during which the natural tendency is to suddenly spend more than necessary on things such as cars and houses, high-end dining and luxury travel. With lifestyle creep, it is common for discretionary spending habits to be unconsciously linked to the spending habits of peers. In some cases, luxury items that were once perceived as choices are now viewed as rights or necessities.
Although spending hard-earned dollars on life’s finer things is truly a right, it is best to do so within one’s means to safeguard one’s financial future and harness the magical power of compound interest with investing. Once after-tax monthly cash flow is known, a budget can be developed easily to keep a person on track. As a general rule of thumb, fixed expenses should not make up more than 50% of monthly cash flow. By the same token, variable expenses should not top 25% of the monthly cash flow. The goal each month should be to save 25% or more of after-tax take-home pay to adequately achieve financial goals and prepare for unexpected events.
Invest take-home pay
Mistake number 3 is not investing at least 25% of take-home pay.
Albert Einstein said, “Compound interest is the Eighth Wonder of the World. He who understands it, earns it and those that don’t, pay it.” Despite being familiar with the power of compounding from medical school microbiology and student loan debt, it is amazing that so many physicians and surgeons fail to utilize this incredible force for supercharging their wealth. Many physicians simply don’t understand that wealth generated by prudent, regular contributions to diversified and risk-optimized investment vehicles that compounds over time will always dwarf even the most miserly of saving habits.
Often, this lack of investing mistake is made by physicians not because they fail to understand the power of compounding, but because they simply do not have funds to invest. This is often related to mistake number 2, which can often be the root of the problem.
False belief income will remain high
Mistake number 4 is when orthopedic surgeon falsely believes one’s income will remain high forever and they will earn tens of thousands of dollars monthly for the rest of their lives. For better or for worse, the COVID-19 pandemic and its associated economic downturn gave many surgeons a first taste of a drastic drop in income, a scary but real possibility for any physician. Although many occupationally disruptive events, such as disability claims, can be insured against, many financially disruptive events such as the COVID-19 pandemic, medical staff complaints or medical board suspensions, are not insurable. These can occur unexpectedly and have harsh outcomes.
Save for college, retirement
Mistake number 5 is not realizing how much must be saved for retirement or college.
Anyone who has lost a job or been without income for several months knows how fast a checking account gets depleted when credit card bills, mortgage payments and living expenses continue to mount. This drawdown of wealth only accelerates as one enters retirement due to the permanent lack of occupational income, especially if passive income streams are unavailable.
Many physicians do not realize that to retire comfortably and successfully in their 60s, a multimillion-dollar nest egg is required to sustain their same lifestyle and spending habits into their retirement years. It is shocking then to learn 25% of physicians between ages 60 and 64 years have a net worth of less than $1 million, despite being on the cusp of retirement. These physicians may face the unfortunate reality of not having the ability to retire comfortably, despite having had an upper echelon income for decades.
Conclusion
Without careful budgeting and understanding of actual monthly cash flow, an orthopedic surgeon’s high income can easily be mismanaged. Understanding spending habits, living within means and investing wisely will help physicians achieve financial independence comfortably and consistently.
- References:
- Medscape Physician Wealth and Debt Report 2019. www.medscape.com/slideshow/2019-compensation-wealth-debt-6011524. Accessed: Sept. 15, 2020.
- Wealth Protection Planning for Orthopaedic Surgeons and Sports Medicine Specialists and the newly-published Wealth Planning for the Modern Physician: Residency to Retirement are available free in print or by ebook download by texting OT20 to 47177 or at www.ojmbookstore.com. Enter code OT20 at checkout.
- For more information:
- Sanjeev Bhatia, MD, is an orthopedic sports medicine surgeon at Northwestern Medicine in Warrenville, Illinois. He can be reached at email: sanjeevbhatia1@gmail.com.
- David B. Mandell, JD, MBA, is an attorney and founder of the wealth management firm OJM Group www.ojmgroup.com. You should seek professional tax and legal advice before implementing any strategy discussed herein. He can be reached at mandell@ojmgroup.com or 877-656-4362.
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