calculating Physician Net Worth Rule from WCI Book

[behindthetimes]

Hi Everyone,

I'm new to investing with intention and recently purchased the WCI book.  I posted my financial snapshot on BogleHeads Forum before I realized there was one here!  Would it be redundant to repeat that post here?  I wouldn't want to post unnecessarily but would appreciate any help I can get.

About this post, I was thinking about the Physician Net Worth Rule written in the book and was wondering ... am I calculating things right?

155k x 6yrs in practice x 0.3 - 200k = 79k Expected Physician Net Worth

I currently have about 178k.  While I initially feel good compared to the result of the calculation, I now wonder if my math was wrong.  In addition, if I factor that the national average for family physicians starting out of residency is now 230k these days and do the calculation with that, then I am actually behind!

Thanks for your insight.

[Peds]

its supposed to be: (avg post residency income) x (years since training) x (0.25)

so for you: 155 x 6 x 0.25 = 230K

what is the 200 you put in your formula?

[q-school]

the national average income for starting FP is 230?  i imagine it is increased by hospitalists?   it will be bimodal in distribution rather than normal distribution?  or maybe i don't know anything about family medicine.  

 

[hightower]

That's a pretty nifty formula. It estimated my net worth almost exactly!

[The White Coat Investor]

Peds wrote:

its supposed to be: (avg post residency income) x (years since training) x (0.25)

so for you: 155 x 6 x 0.25 = 230K

what is the 200 you put in your formula?

Click to expand...

Yours is from the original blog post. I modified it a bit for the book. The update is to reflect the fact that most docs start out as attendings with a negative net worth. Average debt is $200K, so that's where the $200K comes from.

[The White Coat Investor]

behindthetimes wrote:

Hi Everyone,

I’m new to investing with intention and recently purchased the WCI book.  I posted my financial snapshot on BogleHeads Forum before I realized there was one here!  Would it be redundant to repeat that post here?  I wouldn’t want to post unnecessarily but would appreciate any help I can get.

About this post, I was thinking about the Physician Net Worth Rule written in the book and was wondering … am I calculating things right?

155k x 6yrs in practice x 0.3 – 200k = 79k Expected Physician Net Worth

I currently have about 178k.  While I initially feel good compared to the result of the calculation, I now wonder if my math was wrong.  In addition, if I factor that the national average for family physicians starting out of residency is now 230k these days and do the calculation with that, then I am actually behind!

Thanks for your insight.

Click to expand...

What's wrong with your math? Looks about right to me. Good job!

And yes, it's fine to post here to get some help. There are fewer eyeballs here than at Bogleheads, but almost everyone can relate to your situation here.

[Re3iRtH]

Would you still use that net worth formula for a military physician? Both you and I did not have any medical school debt. Would you go ahead and leave the minus $200K or just omit it for military docs? Cheers.

Edit: I just read the follow-up blog posts. So looks like:

Expected Net Worth of Doctor = Salary X Years since Training X 0.25

should cover non-military and military docs quite well!

[FIREshrink]

seems way too low to me. hypothetical $250k average pay for ten years and only expect a net worth of $625,000? and only $425,000 if accounting for the student loans?

[Re3iRtH]

I think there was a blog post from Nov. 10, 2011 showing that the formula correlated very well with physician surveys from 1 to 35 years out of training. Maybe someone can post the link.

Just did the calculation for myself.
Expected net worth = $175K X 1yr. post residency X 0.25 = $43.75K.

Actual NW is $850K. Almost all is in real estate equity. I invest almost exclusively in real estate because that's what I understand. Based on that formula, I'm not doing too bad. Although most people would tell me I'm an idiot for not contributing to the TSP and investing in mutual funds.

[FIREshrink]

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.

[Donnie]

FIREshrink wrote:

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...

I'm all for rigor, but there's probably no reason to complicate WCI's simple formula.  Having not read the blog post, I'll assume the idea is to encourage docs who are not saving to save more if their net worth is lower than implied by the formula.  Complicating the formula will only make the target users of the formula (docs with a poor grasp of personal finance) not use it, thereby massively reducing its value.

if you want to more accurately calculate and project your net worth, do some work on a spreadsheet.

[behindthetimes]

thank you for all the input !

[The White Coat Investor]

Re3iRtH wrote:

Would you still use that net worth formula for a military physician? Both you and I did not have any medical school debt. Would you go ahead and leave the minus $200K or just omit it for military docs? Cheers.

Edit: I just read the follow-up blog posts. So looks like:

Expected Net Worth of Doctor = Salary X Years since Training X 0.25

should cover non-military and military docs quite well!

Click to expand...

Most military docs have/had a debt just like other docs. It might look like time instead of money, but in the end it's the same thing. Generally the military pays you less as an attending and the difference between civilian pay and military pay during payback is about what it would take to pay off your loans.  So yea, I'd keep the $200K factor in there.

But again, it's a rule of thumb. It's not perfect. Take what seems helpful and leave the rest.

[The White Coat Investor]

FIREshrink wrote:

seems way too low to me. hypothetical $250k average pay for ten years and only expect a net worth of $625,000? and only $425,000 if accounting for the student loans?

Click to expand...

You also have "FIRE" in your name. I would expect someone focused on FIRE to be way ahead of average. This isn't the WCI forum participant net worth formula.

 

Think of it this way. What percentage of income does a doc making $250K need to put toward building wealth in order to get from a net worth of -$200K to a net worth of $625K in 10 years? If you assume those dollars make 8%, getting $825K in 10 years requires putting in about $57K a year, or a little over 20%.

[The White Coat Investor]

FIREshrink wrote:

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.  :roll:

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.