Top 5 financial mistakes of a mid-career physician

My previous two posts on common financial mistakes focused on young doctors and those nearing or in retirement. But what about all the physicians in the middle?

Don’t worry, I haven’t forgotten you.  In fact, it is probably the middle of your career when your decisions are less straightforward but just as impactful, if not more so.  With more options come more opportunities to make great choices—but also to make costly mistakes. Because you still have time for compounding to work in your favor, your decisions can have an outsized impact on your financial future.

Here are some common pitfalls:

1. Lifestyle Inflation Without Intentionality

When you first get out of residency, any upgrade in your lifestyle seems like a big deal, right?  You were used to living in a crappy apartment and driving a beater car. You didn’t have time for much of a vacation anyway, and you got most of your meals at the hospital. So, your new attending lifestyle feels amazing—even if you followed my advice and reined in your spending for the first few years while you started investing and paying off your loans.

But, once you have a handle on those things, and start looking around you at your partners who are at the same career stage (but maybe not as financially savvy), it is easy for your spending to increase dramatically to match your “status” in life.  Before you know it, all that extra income has been swallowed up by your big house, private schools, and expensive family vacations.  And with kids, everything costs more anyway. Maintaining what now feels like just an “average” lifestyle can cost a lot of money if you are not careful or purposeful. 

There is nothing wrong with enjoying life as you go, so long as it doesn’t impact your savings and investment plans.  Remember that the more you save and invest, especially earlier in your career, the more options that you have when you’re in your 50s and getting really tired of working full-time.  So, it is a trade-off and requires intentional planning and careful balancing of your goals and values.

Go ahead and enjoy your family and your time off.  You don’t have to live like a pauper (or a resident) forever. But keep in mind that your kids might enjoy having you around at home just as much—or even more—than that fancy yearly vacation. If you are having to work 80 hours a week to provide everything for everybody, then maybe you are missing the point.

 

2. Neglecting a Written Financial Plan

Many mid-career physicians are just winging it when it comes to their finances--no detailed plan for retirement, college savings, insurance, or debt payoff. Your paychecks make you feel comfortable and protected. It feels like you are a long way off from retirement and you are just hitting your stride as a physician.  

You're doing the basics—paying your bills and contributing to retirement accounts—but you're not really sure how those accounts are invested (or if you remembered to invest them at all). Your retirement plan is basically to just keep working and paying for things as you go. 

If this is you, you are wading in very dangerous waters.  It does not take much of a twist in life to derail you from the track.  It could be an illness, job change, burnout, injury, divorce, or any number of other life curveballs.  This lack of planning could cost you hundreds of thousands, if not millions, of dollars down the road. 

3. Overconfidence in DIY Investing

Many doctors are do-it-yourselfers (DIY) when it comes to investing and finances.  I mean, why not?  You are smart, you understand numbers and statistics, and you’ve been told that financial planners aren’t worth their fees, right?  Plus, it’s kind of fun!

Like anything else, being good at investing takes work and practice.  Investing prowess doesn’t come automatically—unless you choose a simple strategy like low-cost index funds that you don’t touch again until you retire (which is a strategy that outperforms most active DIY investors almost all the time).  But that kind of investing is boring!

As a doctor, you are bombarded with advertisements from all kinds of people and companies trying to “help” you make more from your investment dollars—whether it is actively managed funds, real estate syndicates, private equity opportunities, crypto, options, or precious metals. There are all kinds of ways to win and lose in the investment game. 

However, you are busy as a physician.  You don’t really have time to learn everything that you need to know to fully understand and vet the opportunities that may be out there.  So, you dabble.  And without the knowledge, experience, or background, dabbling usually leads to mistakes.  Sometimes those mistakes are major, and it sets you back.  Often, the biggest mistake is just doing nothing with your investments—or failing to understand risk and reward and aligning your investments with when you'll need the money.  

The value of a good financial advisor, if they work under a fiduciary standard, is more about saving you from yourself and being sure that you are following a defined path than from squeezing out extra investment returns.

4. Under-Utilizing Tax Strategies

As a high income professional, you pay a lot in taxes.  It is not unusual for doctors to find themselves with marginal tax rates approaching 50% when you account for all the different ways that we are taxed.  Tax strategies that can lower that tax rate pay huge dividends down the road. 

There are many opportunities to save on taxes, but it takes some research and some effort, and again, best done with help from a tax advisor or financial planner to be sure that everything is legal and makes sense.  The last thing that you want is to have to defend some questionable write-offs to the IRS if you are faced with an audit. 

There are many absolutely legal and well-defined approaches to saving tax dollars including:

• Maximizing workplace retirement accounts (including a 457(b) which is essentially a bonus 401(k) if it is available to you),

• Mega backdoor Roths,

• Defined benefit plans,

• Smart charitable giving strategies,

• Using your small business or 1099 income to write off business expenses and to add more employer contributions to your retirement accounts using a solo 401(k).

  
  

If you have a taxable brokerage account, it is even more important to be tax aware.  Every time you sell an investment in a non-qualified account (not an employer-based retirement account), it is a taxable event.  It is critical to understand the tax rules and look for opportunities for tax loss harvesting to balance losses against gains and lower your capital gains tax liability.

Minimizing or deferring taxes not only saves you from paying them at a higher tax rate, but it allows you years or decades of untaxed growth.  That can make a huge impact on your net worth down the road when you need it.

5. Forgetting to “Insure the Plan”

Remember that your biggest asset in your early and mid-career is you—your ability to generate income with your skills and education.  If you don’t adequately insure against the loss of that asset, your financial situation can turn dire.

Hopefully you obtained disability insurance when you were still a resident and qualified for the Guaranteed Standard Issue (GSI) rates for new physicians.  Disability insurance isn’t cheap, though, and maybe you kept your benefit low so that you could afford the payments early on. 

But now, you have more income, and the payments would be less of a burden.  Does your insurance policy have a benefit increase option and if so, did you remember to increase your benefit as your income cushion has widened?  If you become disabled now, you probably will need more income than you did when you first came out of residency.  You have more expenses.  So always be sure that your disability benefit matches your income needs should you become disabled and can no longer work.  Eventually, you’ll be able to self-insure this risk and drop the coverage. But that time is probably not yet. 

And what about life insurance?  If you die and you are the primary provider for your family, will they have enough to maintain the standard of living and to achieve the goals that you have in mind for them? 

Don’t be fooled by insurance salesmen who are trying to get you to buy insurance couple with an investment vehicle (aka whole life or universal life insurance).  The investment part of that is always going to come with a higher cost and worse options than if you invest it on your own outside of the insurance company. 

Get term insurance, but make sure the coverage is sufficient and lasts long enough—until your nest egg is sufficient to provide for your family, regardless of what happens to you or your income.  And don’t forget to invest that extra money that you are saving from wisely choosing term insurance over whole life.  That decision doesn’t help you if you just spend the money instead. 

Closing Thoughts

Mid-career is a crucial turning point. You're no longer just trying to survive—you’re building your legacy. Avoiding these common mistakes can help ensure that your hard work today translates into options, freedom, and financial peace down the road.

If you have interest in looking for help to avoid some of these mistakes and to help create a comprehensive financial plan, contact us at www.targetedwealthsolutions.com.