(*Content provided by the White Coat Investor)
1. Poor Debt Management
This one begins early for most medical students as they get into the habit of living beyond their means. Student loans, car loans, credit card loans, vacation loans, and poorly designed mortgages. It isn't just that the doc lives beyond her means (although we'll get to that next), but she is simply paying too much interest causing a major drag on her finances.
2. Inadequate Savings Rate
Living within your means is very important. But to be truly successful, you need to live sufficiently far below your means that you can carve out money to invest, pay down debt, and build net worth. Saving 10% is the general rule for most people (although even that might be a little low given our current low-expected-return investing environment), but most people also have 40 years to save for retirement. Doctors only get 30 years, so they really need to be saving 15% if they plan to retire at 65. If you want to retire early, better bump that up to 20-25%. Remember that isn't counting saving for your next car, that boat, a house downpayment, or your kid's college fund. That's JUST retirement. A 5% savings rate just isn't going to cut it. So on a $200K salary, that's $40K a year. Just putting $17K into your 401K each year isn't going to be enough.
What keeps doctors from saving more? Debt is a big factor, as is a sense of entitlement after years in training and many long hours at work. But a major factor is the expectation in your own mind (and the mind of family and neighbors) that you need to live like a doctor. In short, you spend too much. Quit it. Like quitting smoking, it's simple, but not easy.
3. Inappropriate Tax Management
Doctors are well-known to make all kinds of stupid investments just to lower their tax bill. Yet far too many don't take advantage of the simple tax shelters available to them. Why some doctors have investments outside their 401Ks and IRAs when they're not maxing those out is beyond me.
I'm always surprised how few doctors have heard about Backdoor Roth IRAs or Stealth IRAs. For most doctors, every dollar they put into a retirement plan saves them ~40 cents in taxes. Some self-employed physicians don't even open the right kind of retirement plan, severely limiting their contribution amounts.
Those doctors investing outside retirement accounts don't realize the impact of using tax-efficient investments, minimizing churn (and the capital gains taxes it produces), tax-loss harvesting, and using investments with low tax basis for charitable gifts and inheritances.
Most doctors are smart enough to either learn about the tax code and do their taxes themselves or hire a good accountant to do the job. But finding a few bucks here and there at tax time is missing the forest for the trees. The big gains are found in changing your tax behavior throughout the year.
