What are the five biggest financial mistakes that doctors make … and how can you avoid them?
If you could take a sneak peek at the financial arrangements of Australia’s doctors, you’d probably find some common threads.
Although medical professionals are a diverse group, financial advisers say they face some common pitfalls when it comes to turning a healthy cash flow into ongoing, productive wealth.
MJA Careers spoke to leading financial advisers who specialise in the medical sector to identify the five most common mistakes that doctors make, and tips on avoiding them:
1. Complacency about cash flow
Some doctors are so focused on the patient side of their practice that they fail to keep tabs on their financial health. Others have been burned by financial advisers in the past and prefer the do-it-yourself approach.
Mostly, though, complacency is a doctor’s biggest enemy when it comes to better leveraging their earnings, according to financial advisers. Because doctors earn high incomes, they are easily lulled into a false sense of security about the future and so they may miss opportunities to build wealth.
Compounding the problem, according to Paul Cooke, a Canberra-based financial planner with Centric Wealth Adviser, is the gap that exists between most doctors’ pre- and post-tax income. Specialists in particular see a lot of gross revenue entering the bank account and gear-up their lifestyles accordingly, without considering their after-tax position, he says. The result is that their costs start to suck up their income, and nothing is left for savings.
Another potential trap is debt, says Mr Darren Johns, a Sydney-based independent financial adviser with Align Financial. As it tends to be readily available to doctors, they can be tempted to take on too much — especially early in their careers.
“Lending institutions are comfortable lending to doctors as they have solid, stable earnings, so doctors tend to over-borrow and then they find they have to pedal fast just to keep up”, he says.
2 Overloading on property assets
Doctors love property and tend to focus a large slab of their investment portfolios on it. According to Mr Cooke, this can be a mistake that only becomes apparent when it’s time to retire. “Lots of doctors have great balance sheets with net assets in the millions — but only half a million or so in financial assets”, he says.
“Financial assets like shares, super or investment properties pay you income when you retire. If you’ve got all your earnings in lifestyle assets, you can’t retire, as that $3 million home or holiday house won’t pay a cent unless you sell — and many don’t want to sell.”
What it comes down to, says Mr Cooke, is determining the difference between a lifestyle asset and a financial asset, and balancing your efforts between the two.
Diversification can take many forms, says Mr James Gerrard, a certified financial planner with PSK Financial Services. Though shares have lost favour due to recent volatility, he says they still do better than property over time.
Buying physical gold is another good asset in a portfolio as it tends to hold its value over time and, when the global economy dips, the price goes up.
If doctors do want to invest in property, they should consider buying it inside their super fund, he says. “By getting a loan of up to 80% from inside your super fund, not only do you not need to come up with cash, when you retire, there’s no tax on rental income from the property and no capital gains tax if you sell that property”, Mr Gerrard says.
3 Under-prioritising insurance
Doctors are like everyone else in that they tend to be underinsured. However, they are not like everyone else in that they are likely to have more debt and are often their family’s primary income earner, which means they have more need for insurance, Mr Johns says.
He says income protection insurance, which provides a monthly benefit if you are unable to work, is one of the most important types of insurance for doctors, yet many don’t have it.
“It’s surprising, given that they see sick and injured people every day. I think they think nothing will ever happen to them”, says Mr Gerrard, who notes that one of his health professional clients couldn’t work for 12 months due to depression. If he hadn’t been insured, Mr Gerrard says, he would have had to sell his house.
Those who do have income protection insurance are often underinsured — even though it is relatively cheap, according to Mr Cooke.
Sufficient life cover is also worth the investment, especially for doctors. Because many have high net assets, they assume their family will be okay should the worst happen. However, those left behind would probably have to sell property in order to cover any loans, eroding their future security. “That’s a good reason to ensure your cover is high enough to cover those loans”, Dr Cooke says.
4 Getting serious about super too late in life
Doctors generally earn an above-average income, so they get used to a certain lifestyle. To continue living that way in retirement, they need to start investing in super early in their careers.
But because many doctors are self-employed, there is no mandatory requirement to put money into super, says Mr Gerrard. “Often, it’s only in their mid 40s that they start to give thought to it.” However, since the rules around maximum contributions changed a few years ago, it’s even more important to start young, he says. If you wait until the 11th hour, you won’t be able to pay in enough to retire comfortably.
Mr Gerrard says the time to start contributing seriously is when a doctor is earning about $200 000 to $250 000. “If you want to retire on $100 000 a year, you’d need to have at least $2 million in your super fund. If you’re starting in your early 50s and you want to retire in your late 50s, you won’t manage it. Ideally, you should start in your 30s”, he says.
According to Mr Cooke, doctors too often treat super as an afterthought once their school fees and car leases and taxes have been paid. “What’s left in the kitty is often not enough for the maximum deduction.” But because super is so tax-effective, he says it should take on the same importance as, say, paying the school fees and the lease on car.
5 Getting sucked in to risky schemes
If you were to examine a list of the victims of failed managed investment schemes (think olive groves and ostriches) in recent years, doctors would be well represented, say financial advisers.
As high taxpayers, they are easily drawn in by the big upfront deductions promised by the schemes, and as a result are more likely than the average business executive to write a cheque for $80 000 without properly weighing up the high chance of failure.
According to Mr Johns, prioritising a tax deduction above preservation of capital can be fraught with danger. “In recent history, there have been many cases where the tax problem has disappeared — along with the investment”, he says.
Mr Cooke urges doctors to instead focus on solid income-producing blue chip investments. Their aim, he says, should be to “get rich slowly and stay rich”. He says although these tax-minimisation schemes have gone out of favour post-GFC, they will be back, and when they are, doctors should resist their temptation by focusing on the risk.
The future in focus
Brisbane ophthalmologist and former AMA president Dr Bill Glasson has a well trained eye when it comes to the financial management challenges of doctors.
Dr Glasson, who is a director of MAP, a “profit for members” superannuation and investment fund, grew up running the office of his parents’ rural property, which gave him an understanding of the importance of budgeting and planning for the future.
“Dad was adamant about the importance of life insurance, which was like super in those days”, he says.
“Doctors, however, often see insurance as a waste of money because they think they are immortal and they think it will only happen to somebody else.”
Doctors also tend to put their patients’ health ahead of their own financial health and physical health. He also agrees that doctors love their property, often at the expense of their future finances.
“Many of them are frustrated farmers particularly wine growers but also cattle producers. The coastal property is seen as a way of getting away from work and being able to relax in a seaside spot. It’s the same old mistake. Most are not cash-producing assets, especially the rural property”, he says.
He believes medical courses should include segments on running a business and financial health.
“The older generation in particular are not focused on building for the future”, he says.
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