The spending patterns you develop in your first year of work as either a GP or a Specialist can largely determine your wealth.
Think this is an overstatement?
When you are a Doctor in Training, you know well that once you have completed your training and received your Fellowship that your income can increase significantly. As a result of this you may place less importance on your earnings and savings during this period. You focus purely on working and obtaining your qualifications reasoning that this is likely to be the best investment for your future – and you would not be wrong.
Once you have achieved Fellowship and commenced working in your speciality (including as a GP), it is often a time to play catch up – enjoying the increase in income after the years of sacrifice by both yourself and your family. The purchase (or upgrade) of a home along with some overdue lifestyle expenditure can become the order of the day, as well it might.
While playing catch up though, it is also important to understand what the future might hold and to plan accordingly.
We often base our expectations of the future on recent experiences. Through training, incomes generally increase as milestones are reached and can jump significantly once fellowship is achieved. These experiences combine with an intuitive sense that incomes should increase over time to create an expectation that incomes should continue to increase throughout a career. This which would appear logical, meaning experience and wisdom is rewarded.
As a result of these expectations there is a risk that doctors early in their career will place less importance on savings for the long term because of the sense that there is always time to play catch up.
The following graphs show the reported earnings of employed and self-employed specialists in 2011. These figures have been grouped into cohorts with varying degrees of experience – 0-9 years, 10-19 years and so on.
Changes in GP and Specialists Income Based on Experience
In both graphs, the initial 8 years corresponds to the training period from Internship through to the attainment of Fellowship.
As can be seen, with the exception of Self-Employed GPs incomes of doctors do increase over time. This would appear to support the common expectations of income growth over the course of a career.
These graphs illustrate the effective changes in income achieved within the profession as a result of experience, but make no allowances for any changes that may occur across the profession as a result of changes in inflation or pricing power. How incomes across the profession will be able to change relative to the rate of inflation in future is an unknown, however there is pressure on incomes resulting in part from the freezes placed on Medicare Rebates and the shrinking Health Budgets which may make it more difficult to achieve growth rates significantly above those of inflation.
Despite the increases in income over time, the idea that one can play catch up on long term savings is problematic. In spite of their best intentions, people often find that as their incomes increase so too do their expenses. This can be described as Lifestyle Creep.
Lifestyle Creep is best understood as spending more on the things you currently spend on, rather than necessarily introducing new sources of expenditure. For instance holidays may be upgraded from trips to the Gold Coast to trips to Bali or Fiji, and from there to Europe or the USA. Cars may be upgraded from a Toyota to a BMW. The wine we drink may easily go from a $15 bottle to a $30 bottle, and then a $50 bottle. Or rather than bringing your lunch to work each day you may decide to buy it instead. In each case the additional cost is an incremental increase, and may not significantly change your overall budget in and of itself, although clearly the combined effects will.
The problem is magnified because of the effect on future expectations – we grow accustomed to our current lifestyle and the thought of going backwards can be painful. To really see this in action try telling a coffee lover they can no longer afford espresso’s and will instead have to drink instant! These incremental changes in expenditure therefore become permanent fixtures, and the minimum requirement for future income.
This highlights the importance of the level of lifestyle spending you establish in your initial years post Fellowship. The more modest this level, the less of an impact these incremental changes will have, and vice versa.
When looking at these graphs (particularly the Specialists), you may find yourself thinking that the increases are so significant that you would not fall into this trap – the jump in income would easily outstrip your lifestyle expenditure and you would automatically save and invest these additional earnings.
Unfortunately, while these jumps are significant when taken over a 10 year period, when broken down into a yearly or even weekly increase, it is far easier for them to be lost. For instance, while the income of an employed Specialist jumps 30% ($73,627) once they have over 10 years of experience, the weekly after tax change (assuming this increase is spread evenly over the 10 year period) would be a far more modest $63.95. It is far easier to see how this could be spent without even noticing – two bottles of better quality wine and a couple of lunches would easily account for it.
While you might comfortably be able to afford this additional spending now, the cost of it lies in the longer term and your expectations for your lifestyle in the future.
For many people, their greatest financial concern is ensuring they are able to maintain their lifestyle both now and in the future. As the cost of this lifestyle increases though, so too does the investment amount required to maintain it when you are no longer willing or able to work.
The following graph illustrates this issue. It shows how a small difference in the initial level of your lifestyle expenditure can have a significant impact both on the level of savings you are able to accumulate, plus the level of savings you actually require in order to maintain your lifestyle.
In this example, an individual saving 20% of their gross income has virtually succeeded in reaching their savings goal by age 62 assuming modest levels of investment return, and is therefore essentially financially independent. This is in marked contrast to the individual who saves only 15% of their gross income (and therefore spends more), and who despite having accumulated nearly $2.4M in savings finds their goal is actually further away from them than when they first started working.
These big differences resulting from small changes in expenditure levels may help explain why only 1 in 2 doctors are confident that they will have saved enough to ensure they can retire comfortably. It is therefore vital that you spell out what is important to you and determine the financial resources needed to provide for this, and then to have in place a plan that you are confident will allow you to achieve this.
If you would like a Second Opinion on your current plans and confirmation (or otherwise) of whether you are on track to be able to do the things that are important to you, please feel free to contact me.
This publication used data from the MABEL longitudinal survey of doctors conducted by the University of Melbourne and Monash University (the MABEL research team). Funding for MABEL comes from the National Health and Medical Research Council (Health Services Research Grant: 2008-2011; and Centre for Research Excellence in Medical Workforce Dynamics: 2012-2016) with additional support from the Department of Health (in 2008) and Health Workforce Australia (in 2013). The MABEL research team bears no responsibility for how the data has been analysed, used or summarised in this publication.
The information about Doctors In Training incomes is drawn from the Health Professionals and Medical Salaries (State) Award of 2013 (NSW).
The calculations in the savings graphs are all calculated in today’s terms (net of inflation). The assumed rate of return is 3% p.a. above inflation. No allowances have been made for taxes on investment earnings. Tax rates used to calculate net incomes are based on 2015/16 tax scales. Required savings level is determined by assuming a 4% drawings rate on investments to meet the required level of lifestyle expenditure.