Book review: the white coat investor part 1

The white coat investor by James Dahle MD. 

This is the book we started with in the book club because I feel that it is a great place to start for physicians. It discusses the physician situation in which you spend a lot of time in training and don’t really start to make money until your 30s generally and then you have lots of student loans to pay back. And then physicians often find themselves working so hard that they don’t have time or energy to pay attention to their personal finances. They may have never learned how to save money and may get caught up in keeping up with the Joneses. The downside of this book is that it may not appeal to some women physicians as it is written from a male perspective with a stay at home wife.  Even if you feel this way I think it’s still a great place to get started. Also it may be more helpful for physicians just starting out, but it is never too late to get started. I love the saying “you start by starting!” 

Honestly I wanted to jump ahead to chapter 7, the retirement number you control. It’s nice to think about having control over something when you might feel like there’s so much in this world that you don’t have control over. One of the take-home points here is that your savings rate is the most important variable in your first few years of investing. This is because your portfolio has to get to a certain size before you’re able to make money with money. The variables that you have less control over are your income, your investment returns and how many years you have to save for retirement. 20% is a good number to shoot for per the author. And you can expect your money to grow at a rate of 3 to 7% after taxes, expenses and inflation. Also note that a typical physician can comfortably retire on 25 to 50% of pre-retirement income (retirement calculators may assume that you need 80% to retire on which is too much, given that in retirement we don’t have the same expenses generally, such as high taxes, which were my biggest expense when I was working, or children’s expenses, life/disability insurance, and retirement savings). 

Here’s the example he gives to illustrate why the savings rate is the most important thing (especially early on):

Method                                    Net worth at 40 (after 9 years)

Saving 10%/earning 4%          $220,122

Saving 15%/earning 4%.         $330,183

Saving 10%/earning 8%.        $269,731

Chapter 6 the secret to becoming a rich doctor

Start early and control your spending. The author says the most important advice this book can give you is contained in these four words - live like a resident! Don’t grow into your attending paycheck too quickly, give it a few years and during those few years save that extra money away that you don’t “need”. He says that the most important year in a physicians financial life is his first year out of training. When I look back on my first year out as an attending I recall that I did this. I contributed fully for the year to retirement accounts within the first 4 to 5 months (since I started in August), so I really didn’t see a big paycheck deposited in my bank account. After taxes, Going from 50K to 240K/yr was huge (although now I see that that was such a low amount in my field of radiology in 2008, but then again I came out at a terrible time for the radiology job market as well, and I was in academics). I stayed in my same apartment. He recommends growing into your salary slowly, for example giving yourself a 50% “raise” from 50,000 to 75,000 a year actually feels huge and you can still save enough money for your student loans, dream home, college fund and retirement accounts. 

He mentions that as a physician, you’ve got a huge advantage over many of the millionaires profiled in the millionaire next door (another book I love) who managed to get rich on a middle class income of 50 to 100,000 a year. This book revealed that the millionaires in America are actually not who we think they are, that they don’t look like millionaires. It turns out it is very hard to both live like a millionaire and be a millionaire. Excerpt from the above book “Wealth is not the same as income. If you make a good income each year and spend it all you are not getting wealthier you are just living high. Wealth is what you accumulate not what you spend.” 

It’s in this chapter that he puts the list and order of things to do financially 

15 financial things (in order) recommended to do by white coat investor

1. Get the match - 401k
2. Pay off any high interest debt over 8%
3. Maximize tax protected savings accounts
4. Find a HSA, it’s a stealth IRA
5. fund a personal and spousal backdoor Roth ira 
   
6. Fund a 529 to the amount that’s advantageous for your state taxes
7. Pay off modest interest debt (4-8%)
8. Save for a house down payment 
9. —Reorder below to your interest
10. If you used a physician mortgage pay it down to refi to conventional mortgage
11. Add money to 529s
12. Invest in taxable stock or bond accounts 
13. Pay off low interest student debt 1-3% 
14. Make more payments on your mortgage
15. Spend money on what makes you happy!!!

He states with this plan that most physicians at five years out in practice will have paid off their student loans, catch up to the retirement funds of their non-physician peers, and have 20 to 30% ownership in their dream home. I like that he mentions that the good life is having thousands of dollars of unneeded income every month and getting to decide how you want to use it, and that the good life is not making payments on a mansion and luxury cars upon residency graduation. Also that the good life is rebuilding relationships put on the back burner for the last decade, and this is also the title of another book that I recently read aptly titled “The Good Life” tracking the participants of the Harvard longitudinal lifetime study, and showing that relationships are really the key to a happy life.

Location is also something he talks about since if you’re living in a high cost of living area, you will be going up river financially. For sure living in the Midwest has helped me as I am in more of a medium cost of living area. Interestingly we may be moving to California which has a special chapter in his book as a place NOT to live in for financial reasons given the high taxes, low incomes and high cost of living. Hmm, we’ll see how it goes. 

Chapters 2 and 3: millionaire by 40 and if I had $1 million dollars

In reviewing when I became a millionaire, looks like that happened was when I was 39, six years out of residency and also actually when I first started tracking my net worth. Lol so I guess I’m following the book here too (although I didn’t read it until a few years ago, it seems I was actually living it??). I guess I could have actually been a millionaire before then but I don’t know since I wasn’t tracking. I track my net worth on an excel spreadsheet, and usually try to do so when the markets up so that it feels good. But also I do it when the markets down which I find reassuring that it’s not down as much as I worry that it is.

Also from the millionaire next door, these authors give you a formula to determine whether you’re an under accumulator of wealth or a prodigious accumulator of wealth, multiply your age by your annual income and divide by 10. If the result is more than your net worth you’re an under accumulator, if it is less than your net worth in your prodigious accumulator of wealth. The modified formula for physicians, since we come out of residency late and need to start paying down loans is expected physician net worth equals salary X years in practice X0.3-200,000.

Some reasons the author lists that physicians do not accumulate wealth are the late start in earning and saving due to extended years in higher education, they feel they must live up to society’s expectations in living in a nice house, driving a nice car etc., they are targeted by financial professionals and others who up charge you because you are a physician, and they are too busy to spend the time on boring financial planning tasks. 

Another interesting tidbit I learned from this chapter was that you can use the Medicare income on your W-2 to know what your actual W2 income is. 

Here he also introduces the infamous 4% rule, which tells you how much you can withdraw from your investments during retirement safely. for example if you have $1 million in investments, you can safely withdraw $40,000 a year to live on. 

Key points: 

you can become a millionaire by 40 as a physician

The key to doing this is to rapidly convert your income into wealth (Physicians in general are very poor at converting a high income into a high net worth)

Millionaires are far more frugal than society imagines