How much should you make on your
investment portfolio? As much as you can is the obvious
answer — but it's unrealistic and it's an idea
that has led many a physician-investor astray. The sobering
fact is that it's reasonable for you to shoot for an
8% return over the long haul. Above that figure, count
yourself lucky. Or foolhardy; you may have taken some
risks that happened to pan out — for now. Below
8% and you have every right to call your financial advisor
on the carpet.
Remember, that 8% is over the long
haul. Before you jump to conclusions, look at your investment
performance over the last year (where it may well be
higher); over the last five years where it may be lower
(though not too much lower); and over the last 10 years
where you have every right to expect it to be close
to the 8% annual growth, compounded.
Though 8% may seem a modest goal,
your financial advisor will be quick to steer you toward
the glories of compound interest. Its virtues are easy
to forget. The following chart will help refresh your
memory.
If you invest $100 a month at 8%
compounded annually your investment will be worth:
- $18,774.58 in 10 years
- $35,189.15 in 15 years
- $59,307.51 in 20 years
- $94,745.30 in 25 years
- $146,815.04 in 30 years
- $223,322.58 in 35 years
- $335,737.04 in 40 years.
All fine and dandy except unless
you're just hanging out your shingle, you don't have
40 years to go before you'll need to cash in. In any
case, $335,000 may not go far in 2046.
Clearly you'll have to up your
annual rate of saving. Here are the numbers at various
levels of annual savings.
At 8% compounded annually over
40 years your investment will grow to:
- $671,474 if you save
$200 a month
- $1,007,211.74 if you save $300
a month
- $1,342,848.99 if you save $400
a month
- $2,685,897.99 if you save $800
a month
If you saved $800 a month for 40
years, your accumulated nest egg of over $2.5 million
would likely be enough to see you through, especially
if you're 45 or older now. Coming into that kind of
dough at 85 or 90 could be just what the doctor ordered
— unless you're dead. So let's look at some shorter
terms.
If you saved $800 a month at 8%
compounded annually it would amount to:
- $474,460 in 20 years
- $757,962 in 25 years
- $1,174,520 in 30 years
These numbers give you a pretty
fair sense of where you can get to at various savings
levels.
You're not likely invested in vehicles
that are interest-based and even if you are, they likely
pay less than 8% — unless they're poorly rated
corporate bonds, for example (also see "Bonds:
to know them is to like them," March 15, 2006, Vol
3, No 5, page 33). Most physicians have RRSP investment
— over 65% according to NRM surveys — and
many of those are through the CMA's investments arm.
Even here the rule of thumb holds true, your return
after all fees and charges should be around 8%.
HOW
DO YOU GET THERE?
David Chilton got it right in his wildly popular best-selling
book The Wealthy Barber: Everyone's Guide to Becoming
Financially Independent. You force yourself to save
10% of your after-tax earnings every month. In the case
of tax deferred plans like RRSPs, use 10% of your pre-tax
earnings. For investments in which you use after-tax
dollars, base the figure on your net earnings. There's
a maximum allowable deduction for RRSPs but it's been
rising of late and will continue to rise over the next
five years at the rate of $1,000 a year. In 2006 you
can salt away $18,000 in your RRSP without paying taxes
on it; that goes to $19,000 in 2007 and so on up to
$22,000 in 2010.
If you're expecting to earn a pre-tax
amount of $150,000 this year, then plan to put $15,000
into your RRSP (if that's what you do with your money).
That comes to $1,250 a month. Just for fun, let's have
a look at what that would grow to at 8% annually over
20 years. Take a guess. If you guessed around three-quarters
of a million dollars you were right on the money. Will
a nest egg of that size — on which you'll have
to pay taxes as you draw it out of your plan in whatever
form — be enough? Who can tell? If you toppled
over before your 75th birthday, it might stretch. If
you and your spouse survived into your 90s it would
be a comfort to know that your kids had lucrative careers
and felt honour bound to look after their parents. It's
your call.
As far as the monthly amount saved,
David Chilton recommends that you have your bank take
the money out of your account automatically — in
other words that it be the first dollars you save, not
what's left over after everything else has been taken
care of. He claims, and doctors and other's who've tried
it confirm, that you rapidly adjust your spending habits
to the reduced amount and that you scarcely notice that
the money is gone. Granted it's somewhat easier if you
begin your regular savings program fresh out of school
than when you have four kids, two of whom are beginning
to speculate on what college they might like to attend.
WHAT
TO DO WITH IT
Despite the glories of compound interest described here,
you can be certain of one thing: Though you may be able
to save enough to enjoy a comfortable retirement this
way, investing exclusively in mutual funds at 8% is
never going to make you rich. For that you have to look
to other kinds of investments, most of which require
more hands on attention.
Doctors have made big money by
investing in start up companies doing pharmaceutical
research; by launching companies which do clinical trials;
by investing in executive health clinics, which have
grown into chains; by putting money into franchise operations;
by starting labs; and speculating in real estate. Group
practices have made substantial money in recent years
by selling downtown buildings which housed their practices
and relocating to the suburbs. Others have profited
from investments in medically oriented dotcoms like
WebMD — not everyone lost money on the technical
boom in the late 90s. The next issue will feature some
of the ways your colleagues have gone beyond comfortable
to rich.
|
PHYSICIAN LIFE
