Top five financial planning mistakes that doctors make
Though being a doctor is often considered a high-earning profession, money continues to be a big stressor for many. Managing personal finances on top of a busy role as a medical professional can be tricky. This means that doctors tend to miss out on opportunities to grow their wealth and make mistakes which can make life (and retirement) difficult further down the track.
Jon Collier is a Private Wealth Manager, based in Auckland. He has extensive wealth management experience as a financial advisor and has worked with many doctors to help them manage their finances to meet their personal lifestyle and retirement goals.
Jon has outlined a few key areas where doctors commonly make financial mistakes, either by paying too much, by not saving enough or through little or poor financial planning. Are you making any of these typical financial planning mistakes?
Typical mistake: Borrowing too much or paying it back too aggressively
Banks are typically quite generous when lending to doctors and it’s tempting to borrow the maximum amount – however, this may not be the wisest plan. Think carefully about how much is feasible to borrow and how you’ll fix or stagger your lending relative to your other financial goals in life.
“It’s important to look beyond your mortgage too,” says Jon.
“Look at your overall opportunities and the impact on your life short and long term. I’ve talked to some doctors who were paying their mortgage off aggressively as this was all they understood as a way to grow their wealth. The high repayments meant they were unable to afford a holiday for years or make any other financial decisions that may have benefitted their wealth creation. In cases like this, what does the impact of paying off a big mortgage over ten years, as opposed to five, do to your balance of lifestyle and ability to grow wealth in other ways?”
Jon adds that currently in New Zealand, the market is very competitive. Interest rates are the lowest since the Second World War and now is an excellent time to look at lending. The market is currently so competitive that even if you have a fixed rate, it still might be possible to secure a lower rate and have the new bank cover your break fees.
KiwiSaver and SuperFund
Typical mistake: Not researching or managing investments
Many doctors limit their ability to build wealth by using locked-in retirement schemes like KiwiSaver and Superannuation. These schemes have their place, but mean you typically can’t take out funds until you reach a certain age (or by special exceptions). This can limit other financial and life goals should this be your only strategy for building wealth.
The choice of provider and type of fund also has a huge impact on the amount of wealth you can create. Recently (2018), we assisted a doctor in increasing their projected wealth in KiwiSaver by over $1m by the time they turn 65. This was simply by giving KiwiSaver advice specific to their needs across a range of different KiwiSaver providers and fund types.
“Do you know what you’re invested in? Is it one of the top performing funds? Should you be doing more? Many doctors put 3% into KiwiSaver and 3% into a retirement superfund, but do no planning beyond that,” says Jon.
How much you should put into schemes like KiwiSaver and what level of risk you should be taking depends on a number of factors including your age, earning potential and other financial goals beyond your retirement income. Chances are, you may not be on track for a comfortable retirement and with some careful planning, you could be doing a lot better.
Typical mistake: Over-payment
It’s not uncommon for doctors to overpay their insurance as many insurance brokers will sell you as much as they can – you may be paying for insurance that you don’t need. Jon says this is the area in which most doctors make substantial savings.
“Many doctors set up and then forget about their insurance payments. Things change, it’s important to pay for what you need now. I’ve worked with lots of doctors who’ve easily saved $5 – 10K just by reviewing what they have,” he says.
Make sure you’re getting good bang for your buck on your insurance. Insurance products between insurers are vastly different to each other even though they may share the same product names. Ensure you have quality coverage from the best available in the market and have not just been recommended a company’s own products, which may well be inferior to others in the market.
Typical mistake: Paying expenses which could be business expenses via a personal account
Whether self-employed or earning income outside of employment, minimising tax (legally) is a key area where doctors could save money. Offsetting legitimate business expenses against income, rather than paying via personal accounts, is key. Ownership structures for your assets also play a crucial part in determining tax.
Typical mistake: Taking a one-plan-fits-all approach to finances
Jon says the first thing to think about when re-organising your finances is to plan around your age and what you’d like to achieve. How much do you want to retire with? What is your ability to earn over the next few years? Are you self-employed?
Doctors should think carefully about the opportunity cost of doing too much of one thing in isolation; for example, over-contributing to schemes like KiwiSaver, taking out as much finance as you can or repaying as much of your mortgage as you can in lieu of a proper investment strategy. There is a danger of unwittingly preventing yourself from achieving other goals in life (either sooner or later down the track) by making financial decisions without thinking about the bigger picture or considering other potential strategies.
Doctors who have got various investments, insurances, finance and other assets should make sure that they’re structured efficiently and are appropriate to their evolving needs – an inefficient structure can cost thousands in lost savings or returns.
“One thing that no doctor I’ve talked to so far has demonstrated for me is a solid financial plan,” says Jon.
“It’s usually fragmented, with no clear end game. Most doctors who have a good financial plan in place at 40 years of age can retire at 55 if they want to! You often just need better planning and to change a few key things across your existing setup.
“On the flip side, doctors who don’t invest enough or save for their retirement can end up having to take serious action later in life, like working longer or selling their home. It’s important to have a coordinated view and a managed plan that works towards your goals.”