Physicians generally lose out on compounding interest because they don't start working until well after the majority of people, which helps explains why they're so behind on retirement savings despite high incomes.
An interesting in-depth study by Fidelity gave some fascinating statistics indicating physicians, in general, are underprepared for retirement. The study was fairly robust and included data pulled from 5,100 physicians with an average annual income of $299,000, which is a very healthy sample size when looking into these topics.
An observation the study authors and I have made while working directly with many physicians is that physicians, in general, drastically underestimate the compounding they lose out on by starting their attending or practice positions around age 32, as opposed to the majority of people who go through college and start saving at age 22.
Physicians also have a large amount of delay of gratification from all of the additional training and education and tend to want to buy the big house, car, and more when they finish. These factors combined with a larger student loan payment and usually higher mortgage obligations tend to put physicians behind from the start.
Some highlights of the report:
• Fidelity suggests a good rule of thumb to save for retirement is 15% of total salary. Many physicians cannot put 15% into employer-sponsored plans due to IRS limitations and need other outlets (one of which was highlighted in a previous column post).
• Physicians tend to have their assets too aggressively allocated at the end of their careers (this especially didn’t serve them well in 2008-2009). Risk assessment needs to be continually readjusted as time horizon to retirement becomes shorter.
• The replacement ratio for healthcare workers making $120,000 or more is 71% of their pre-tax retirement income and only an estimated 12% (if any down the road) is covered by Social Security.
In sum, I would recommend this study to all physicians regardless of where you are in your career to help give you some detailed thoughts on this major portion of your financial strategy.
View this helpful and eye-opening report in full: http://go.fidelity.com/physiciansreport
Jon C. Ylinen is a Financial Advisor with North Star Resource Group and offers securities and investment advisory services through CRI Securities, LLC. and Securian Financial Services, Inc., Members FINRA/SIPC. CRI Securities, LLC. is affiliated with Securian Financial Services, Inc. and North Star Resource Group. North Star Resource Group is not affiliated with Securian Financial Services, Inc. Please consult a financial professional for specific advice in relation to your individual circumstances. This should not be considered as tax, specific loan repayment for an individual or legal advice. 874602/ DOFU 03-201