How to Optimize the 4 Financial Stages of a Doctor’s Life

All of life is stages. And the stages analogy passes on to our financial life as well.

I’ve been adamant about how improving our financial well-being and reaching financial freedom can and will make us better doctors in addition to improving our overall well-being and lives. I know because I’ve experienced it firsthand, even though I am still not yet at financial freedom.

With this in mind, I love breaking seemingly big and intimidating goals into smaller, manageable, and self-evident steps.

And last week, I met with a friend of mine, Brian Zdrowak for coffee/tea. It also just so happens that Brian is the financial advisor who famously sparked my written financial plan. He is also part of Buckingham Wealth, a key resource here at PPS. Anyway, after catching up we got to talking about my path towards financial freedom and he broke down the journey into 4 stages. Then he even set out the main points of focus during each stage.

I was really impressed, number 1, with his expertise, but also by his graciousness sharing this with me pro bono. I asked if I could share the information here because I found it so useful and he was equally gracious and generous.

So, thanks to Brian, let’s break down the 4 financial stages of a doctor’s life and the most important points to address and optimize in each stage!

Optimizing the 4 financial stages of a doctor’s life

In order, I’m going to run down the 4 financial stages of our lives, providing the typical analogous time period in a doctor’s life (more on this later). Within each stage, I’ll discuss the overall goals and then break down the most important steps that you need to be completing to make sure you reach financial freedom.

As a bonus, I’ll tick off all of the steps that I’ve completed so far as well!

Stage 1: Accumulation (Residency to Mid Career)

The goal of the accumulation phase is setting the foundation for future financial security and freedom. By definition, one is not going to be financially free in the stage. Major points of emphasis include aligning your career path within medicine with your lifestyle and values to best ensure job satisfaction, saving and investing your money.

Most important steps in the accumulation stage:

*** means that Jordan and Selenid have completed this step

Links direct to posts/resources that provide in depth guides to help you learn about and complete the relevant step towards financial freedom

• Create a plan to get out of bad debt (i.e. pay off student loans)
• Maximize savings and contributions to tax-deferred, tax-free, followed by taxable investment accounts ***
• Manage financial risks of disability or death (obtain appropriate disability and life insurance) ***
• Optimize asset allocation (typically stocks and bonds) based on risk tolerance ***
• Capture market returns via investments in broadly diversified, low cost index funds ***
• Optimize asset placement among tax-deferred, tax-free, followed by taxable investment accounts in preparation for future withdrawals in retirement ***
• Manage tax bracket creep through maximization of tax deductions and deferring income among other tax saving strategies ***
• Position investments in taxable accounts for tax loss harvesting
• Draft living will, health care proxy, and other documents to protect wealth ***

Stage 2: Transition (Late Career to Retirement)

Ok, now we are progressing beyond the accumulation phase. At this point, you’ve accumulated wealth. Now you are moving towards using that accumulated wealth to cover your daily expenses and live off of. You are at or very near to financial freedom. So, the main steps in this phase tend to orbit around the idea of preparing yourself for successful retirement and living life on your own terms.

*** means that Jordan and Selenid have completed this step

Links direct to posts/resources that provide in depth guides to help you learn about and complete the relevant step towards financial freedom

• End your deferred income. In other words, you are no longer deferring any income. You are going to use the income now
• Estimate your taxable income and adjusted gross income
• Calculate expected in-retirement tax rate
• Estimate your total expenses ***
• Review the purpose of any life insurance and consider terminating it
• Create tax strategy to minimize tax drag on retirement withdrawals/income, including minimizing net investment income tax (NIIT) 
• Explore Roth conversion strategies
• Plan exit from your clinical career

Stage 3: Distribution (AKA Retirement AKA You Won)

Congrats! You are financially free. You planned and executed that plan so you have enough of a nest egg to draw down on +/- passive income to cover all of your expenses. And you no longer need to practice medicine or work! The main steps in the this stage are all about establishing how you will use your wealth to find your lifestyle, minimizing risk, enjoying life and setting the stage for your legacy.

• Consider when to take social security (early is usually better)
• Optimize your asset allocation with a focus on wealth preservation rather than growth
  • Focus on after-tax, risk-adjusted market returns
• Optimize your wealth draw down plan for tax efficiency and to maintain asset allocation
  • Initially use investments with higher cost basis to realize less taxable gains to fund lifestyle (unless you have passive losses available to offset passive gains from liquidating investments with a high cost basis)
  • Don’t sell investments you have held for less than one year to avoid short term capital gain tax rates
  • Sell equities with a higher tax basis in “up” markets (when your stock allocation will be overweighted)
  • Sell bonds when the market is down (somewhat controversial but the idea is to give stocks a chance to recover; also in this situation your bond allocation may be overweighted and selling will bring it closer to your goal allocation)
  • Project your taxable income and convert investments to cash where appropriate
• Consider charitable donations
• Update wealth protection documents like living will and trusts

Stage 4: Legacy (End of Life and Beyond)

At this stage, you are thinking about and executing a plan for how your leftover wealth will be used to help those after you – namely your spouse, children, family, and charities.

• Decide if you want to leave anything behind or die with zero
• Determine how much you want to give away to others while alive versus after death
• Equalize ownership of investments between spouses when both still alive
• Leave assets to surviving spouse
• Consider holding any deferred structures like annuities or an old whole life policy for end of life costs
• Accumulate unrealized gains for tax-free step up in basis at death of first spouse
• Fund surviving spouse and reduce risk to remaining assets (i.e. large focus on preserving wealth, not growing)
• Ensure assets titled appropriately
• Transfer assets in tax-efficient manner, especially if you will reach the inheritance tax threshold

Putting the 4 financial stages of a doctor in perspective

In going through this, I want to address a few important overarching concepts and perspectives based on these financial stages:

1. It does not matter when you start. It matters that you start. I hesitated to put the typical time period in a doctor’s life that correlates with each financial stage. Because they are just that…typical. But that doesn’t mean that if you are later in your career that you can’t still get started and conquer stage 1. Like the old proverb, the best day to start is yesterday, but the next best day is today. These steps do need to get completed more or less in order. But when you start them is less important. So don’t get discouraged wherever you are in the process.
2. The longest stage is the accumulation stage. Because building investments and harnessing the power of compound interest takes time. So don’t be discouraged. As is likely obvious from my notations of which steps Selenid and I have thus far completed, we are still in the accumulation phase. There are of course ways to accelerate this wealth-building phase. Real estate investing has served that purpose for me as I’ve gone from -$500,000 to over $1 million in net worth within 5 years of finishing training. But either way, there are no prizes for completing each step in a certain amount of time. And I know physicians who have actually burned out by focusing too much on reaching financial freedom. So, set your path and follow it. But enjoy life, and yes, even your clinical work, along the way.
3. All paths will be different. Which is really kind of a cool thing. Yes, everyone needs to complete more or less each of these steps. But how everyone completes each step will be unique. My asset allocation won’t work for everyone because we all have different risk tolerances for instance. Embrace your uniqueness. And create your written financial plan to reflect your own values and no one else’s.