Is there something inhibiting your financial growth? Is the dream to retire early dead to our generation? Do you know how to retire with lower taxes?
Albert Einstein called compound interest the 8th wonder of the world. From 1982 – 2000 that wonder was on steroids. This biggest bull market in history saw the Dow Jones Industrial Average rise 1500%. The baby-boomers were in their prime working years and not only benefited from this prosperity, but fueled it.
WHERE IS OUR BULL MARKET?
As the turn of the millennium came so did a bear market. Many of us entered our prime working years only to find little to no compound interest to be had in the stock market. For over a decade now, volatility has been high, but financial growth has been anemic to say the least. Where is our 1500% rise?
Currently, the baby-boomers are retiring in large numbers. They are fueling a new growth – a growth in Medicare and Social Security spending. The government has been a poor steward of these funds and knows these obligations are coming due.
In their search to find additional revenues to pay for these obligations, they have found a prime target in physicians and other health care workers. Every effort is being made to cut our reimbursement and increase our taxes. As if this double whammy of lower incomes and higher taxes wasn’t enough, the threat of inflation looms large in the not so distant future.
MINIMIZE WHAT IS INHIBITING YOUR FINANCIAL GROWTH
Rather than cross your fingers and hope this storm will pass, what can we all do to increase our fortunes? You might start by looking at what is inhibiting your financial growth – what I like to call wealth decelerators.
- Spending Habits
Your ability to earn an income is your most valuable financial tool. That skill-set puts food on the table and allows you to invest for your retirement. Burnout is a real threat to your income and should be taken seriously.
In 2012, JAMA published an article on burnout that is a real eye opener. To summarize, physicians are more likely to experience burnout than other working adults with nearly half of all physicians experiencing one or more symptom of burnout. Several specialties far exceed this number with Emergency Medicine Physicians topping the list.
Physician shortages are a contributing factor to burnout and are projected to get worse. Couple this with the cuts in reimbursement and the temptation is to work longer hours, take fewer vacations, and delay retirement.
While earned-income may be a blessing, it is also a trap. It is the highest taxed income and it requires the largest investment of time than any other source of income. That is why earned-income is frequently referred to as the rat-race. Fifty and sixty hour work weeks for thirty plus years are not uncommon time burdens that physicians face.
While earning a comfortable living, each and every physician should also be looking for sources of passive income to supplement and someday even replace their earned income. The day that your passive income equals or exceeds your earned income is the day you are financially free. You no longer have to work for money. You can continue to see patients, if that is your passion, or you can choose to work part-time or even retire. Options are a beautiful thing.
For years, the Federal Reserve has been inflating the currency. Evidence of this can be seen in the value of the dollar. Decades ago, you could buy four gallons of gas for one dollar. When I was in college, that same dollar could only buy one gallon of gas. At the time of this writing, one dollar will only buy you a third to a quarter of a gallon of gas.
This is the effect of inflation – it is a silent tax on us all. While we didn’t create inflation, we can decide if we will become victims of it or if we will benefit from it. Just like the oil drillers who benefit from the higher cost of gas, real estate investors can benefit from the effects of inflation. Historically, as inflation rises, so do rents. This is why real estate is considered a hedge against inflation.
I once heard a tax-strategist say that she would always pay the government every dime she owed in taxes, but she simply refused to give a tip. Unfortunately, too many of us are leaving tips year after year. Most people don’t know that the bulk of the tax code has nothing to do with paying taxes. That’s right. The bulk of the tax code is about how to legally avoid taxes. It is in fact, one big stimulus package for people who do what the government deems important and necessary for society.
Providing housing for others is one of those things the government wants us to do. As such, they incent real estate investment through the tax code. Real estate is one of the most tax-advantaged investments you can make. How can you learn about the advantages of real estate? I use a tax-strategist and not just a CPA.
I am always surprised by how few physicians use tax strategists. Most simply employ a CPA who takes their receipts at the end of the year, crunch the numbers, and gives them a bill to pay. While this may make sense for employed W2 physicians, those who are self-employed need a tax strategist.
A good tax strategist will charge you nothing up front. They usually want to review your last two years of taxes to determine if they can save you any money. If they can’t, they will tell you. If they can help, they will tell you how much savings they think they can bring you and how much they will charge you to access that information and develop a plan for you for the future. You see, tax strategists look forward while ordinary CPA’s look backward.
If you don’t already have one, or don’t know how to find one, feel free to email me for a recommendation for a good tax strategist.
Lastly, our own personal spending habits can be a huge wealth decelerator. Keeping up with the Joneses is a wealth destroying past-time. By the time we finish residency, we have sacrificed for so long, that the natural tendency is to feel like rewarding yourself. Luxury cars for you and your spouse, a 4000 square foot home packed with expensive amenities and private school for the kids is not uncommon amongst our colleagues.
Couple these expenses with student loan debt and there is very little left over for retirement. Because each and every one of us will be responsible for funding our own retirement, these expenditures can become golden handcuffs that can sentence us to a very late retirement or no retirement at all.
While I have nothing against luxuries, I do advise that retirement savings come before the non-necessities. My recommendation is to save a minimum of 20% of your take home pay for retirement. If you invest that money wisely in income producing real estate, the day will come in which those properties can do the saving for you.
Minimizing and eliminating as many wealth decelerators as you can, will help accelerate your wealth and can bring you financial freedom much sooner than you ever thought possible.
What wealth decelerators threaten your financial growth?
To Your Wealth!
Dennis Bethel, M.D.
P.S. When considering your financial growth, keep your inhibitors to a minimum. Having options that can help you retire early are a blessing!