December 2004
Risk and return have always been the cornerstone of all investment programs. Typically, most individuals focus on a finite period of time when thinking about losses and gains. Most individuals think of their investment in terms of 3 months to 1 year. How many physicians can tell you what their portfolio return has been over the last 10 years? A long-term outlook should be 10 - 20 years. It is difficult to conceive this long a time frame.
As medical reimbursement and incomes fall, savings by physicians are harder to come by. An alternative to working harder and longer in order to save more, may be simply to earn a slightly higher return on your existing assets.
Let's review the example of a young 33 year-old doctor with no current assets. The doctor is earning $200,000 per year and has finally paid off all medical school debt and is in the position to start saving money. After taxes, the doctor is able to save $30,000 per year. If there is a 5% return on their investments, this would be their savings accumulation.
5% Return:
|
Age
|
Portfolio @ 5%
|
|
33
|
$ 30,000
|
|
40
|
$ 300,000
|
|
50
|
$ 866,000
|
|
60
|
$ 1.8 million
|
|
65
|
$ 2.5 million
|
$2.5 million at age 65 would support approximately a $57,000 per year lifestyle in inflation adjusted today's dollars. Not a very luxurious retirement.
If this doctor works harder to increase the practice revenue by $100,000 per year, this would net a salary increase of $50,000. The savings increase goes from $30,000 to $60,000, thus at age 65 they would have $5 million. This would support a $114,000 cost of living in today's dollars.
Now, here is the interesting part. By simply earning a better portfolio return of 2% more versus working harder, look at the difference in savings.
7% return rather than 5% :
|
Age
|
Portfolio @ 7%
|
|
33
|
$ 30,000
|
|
40
|
$ 344,000
|
|
50
|
$ 1.2 million
|
|
60
|
$ 3.1 million
|
|
65
|
$ 4.7 million
|
In this scenario, earning an extra 2% on investments allows the physician to accumulate the same assets as having to increase their practice gross by $100,000.
Warning: To calculate a true return, the physician must deduct all losses. If a physician with a $1 million portfolio earns 7%, but also invests $70,000 into a high-risk venture that goes under, their true return is 0% for that year. To achieve a 7% return as in the above example, the doctor must earn an average 7% on their entire portfolio, year in and year out. Virtually every doctor can enjoy a comfortable retirement. The key ingredients are consistent savings, consistent returns, and enough time.
Conclusion:
While on the surface it appears that earning a 7% return is reasonable, many physicians have not achieved this. In the 5 year period ending 11/30/04 the S&P was negative -13%, a far cry from the +35% required (7% x 5 years). The good news is that a well-structured, long-term portfolio has a high probability of earning 7% or better over a 10 to 20 year time frame.
Singer Xenos is an established wealth management firm specializing in physicians with $500,000-plus in investments. We manage over $500 million in assets such as retirement plans, annuities and personal accounts, with an emphasis on wealth building and protection from malpractice claims. Both Worth Magazine and Medical Economics named Singer Xenos one of the Top Financial Advisors nationally for physicians. Physician Asset Advisor and Singer Xenos do not provide legal advice.
Coral gables / Ft Lauderdale / Tampa / orlando 888.289.0060
