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calculating Physician Net Worth Rule from WCI Book

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  • #16

    i’ll check out the blog, but intuitively this doesn’t make any sense especially as you get farther and farther into your career.

    In essence this argues one should have converted 1/4 of one’s income into wealth. If one saved 25% of income and NEVER EARNED ANY INVESTMENT RETURNS, they would meet this metric. Anyone earning returns on their investments would surpass it. The stock market has tripled in the last 9 years, I think most of us have very positive returns on investment.

    Furthermore this metric partly ignores inflation. Your average salary might have been $100,000 over the last 20 years but the dollars earned earlier were worth more because the value of the dollar was higher. This may not matter 3 years out of training but 15 years out of training it’s going to be relevant. For instance 13 years ago I earned $147,436. That’s not as low as it sounds: in 2017 dollars that was worth $189,434. Assuming my expenses were a constant $100,000 in 2017 dollars, I didn’t have $47,436 to save in 2004; I actually had $89,434 to save. My inflation-corrected salary allowed twice the saving power of the non-adjused number.

    To be most accurate/helpful, the metric should be adjusted in 2 ways. First, all salaries/incomes should be adjusted for inflation. Second, there should be an exponential return factor, like (1.05)^x where x = number of years in practice.

    I once proposed a metric along these lines, not just for physicians.

    “efficiency of wealth creation” = 100*net worth/((sum of lifetime household medicare wages, each year adjusted for inflation)+(inheritances and gifts, adjusted for inflation))

    When you get to 100% it means you’ve successfully converted every dollar of your lifetime household income, adjusted for inflation, into Wealth.

    The inflation adjustment is tedious if done manually, but it’d be easy to operationalize in an online calculator, importing BLS inflation data. With some data points I could establish a scatter plot and then some best fit curves – including by specialty, by age, by marital status, or all of the above. Could also establish different percentiles.
    Click to expand…

    That sounds like something I could get a doc who doesn’t know how a Roth IRA works to do.  ????

    Seriously though, the point of the formula isn’t to make some sort of exact curve and then grade people on it. The point was to adapt Stanley and Danko’s simple formula to a physician financial lifecycle.
    Click to expand...

    You're absolutely right. After reading the blog post I see what you were trying to do.