THE PUNGENT ODOR of formaldehyde filled our nostrils. Rows of cadavers lay before us on cold metal tables. The class was gross anatomy and we were nervous first-year medical students. That day marked the beginning of our long, arduous journey to becoming physicians, lasting anywhere from seven to 13 years, depending on the specialty.
Money was the furthest thing from my mind that day. But for many of my peers, financial worries cast a long shadow. They had begun to amass a mountain of debt that would average more than $200,000 by the time they earned their medical degrees. That was on top of any existing debt carried over from college. Though blissfully unaware, I was at a huge advantage because I was unencumbered by student loans, thanks to the generosity of my parents.
I didn’t exactly excel in medical school. Memorizing hundreds of muscles, bones and nerves just wasn’t my cup of tea. I was more comfortable around numbers, which explains my passion for finance. But I’m getting ahead of myself.
After four years staked out in the library and hospital wards, I finally graduated medical school. Unfortunately, a medical degree hardly prepares you to practice medicine. That’s the function of residency and fellowship, which come after medical school and often last longer than medical school itself. I chose to follow in my father’s footsteps and pursue radiology, which meant another six years of training. I completed my radiology residency in San Francisco and fellowship in Palo Alto, which is where I married my medical school sweetheart. Despite the long hours and brutal nights when I was on call, I relished those years. I finally felt like I was making a difference in the lives of my patients.
One night, while on call as a resident, I read a scan of a young girl with suspected appendicitis. The appendix looked okay to me, but the girl’s ovary had an unusual appearance—one which suggested possible ovarian torsion, a twisting of the blood supply to the ovary. This was unusual for a girl of her age. I immediately performed an ultrasound, which seemed to confirm my suspicions. I’ll never forget the tears in her parents’ eyes as I explained what I saw and the emergency surgery that would be required to salvage their child’s ovary. That my actions could send a child to surgery—or send her home and cause her to lose an ovary—left an indelible impression on me. As a physician, I was entrusted with something both sacred and priceless—people’s health.
Over the next six years, I pored over radiology textbooks and learned alongside some amazing radiologists. From a purely financial standpoint, it was an investment in human capital, and a sizable one at that. It cost my parents hundreds of thousands of dollars in medical school tuition, room and board, and it cost me 10 years of my life. But ultimately, the investment would pay handsome dividends, both financially and vocationally.
In 1997, I earned $32,000 a year as a radiology resident. After contributing $9,500 to my 403(b) account and paying payroll taxes, my take-home pay was $1,500 a month. It wasn’t a lot, but I never felt poor. I had plenty to eat and a roof over my head. Besides, most of my time was spent either working in the hospital or studying textbooks at home, and I was surrounded by peers who were doing the same. While my official training was in radiology, I was subconsciously learning a financial lesson of immense value—that you can lead a very satisfying life on a modest income.
Then it happened. A decade after that class in gross anatomy, I finally became an “attending” or full-fledged physician. I landed a job in Southern California with a medium-sized radiology group and started working in earnest.
The transition from trainee to attending physician is absolutely pivotal in the financial journey of any physician. When a trainee becomes an attending physician, his or her income skyrockets. A fivefold or greater bump in income isn’t uncommon. In some cases, this is followed by a second, albeit more modest, boost in income several years later, when the doctor becomes a full partner in the practice. Many physicians immediately grow into their attending salary. Imagine delaying gratification for a decade or more, spending most of your life in the library and hospital. The urge to splurge is powerful. Moreover, you’re surrounded by colleagues who drive fancy cars, live in upscale neighborhoods and go on exotic vacations.
I’ll confess, as a newly minted attending physician, I did my share of splurging. I replaced my beaten-up clunker with a brand-new Toyota Camry, and my wife bought a Lexus SUV. We moved into a two-bedroom apartment with a community pool and tennis courts—a big upgrade from the hole-in-the-wall we inhabited in San Francisco during residency. We also ate out and traveled more. But on the whole, we were slow to upgrade our lifestyle. This meant we were able to save prodigious sums. Our savings rate ballooned, ranging between 40% and 60% most years. Living modestly on a physician’s salary is a financial superpower. More than anything else, this paved our path to financial freedom. What’s more, our relative frugality hardly diminished the joy we experienced. As researchers have discovered, the happiness we derive from money is subject to sharply diminishing returns.
Hatching plans. A turning point in my financial journey occurred a few years into private practice, when I was asked to serve as a trustee for our group’s retirement plans. At the time, our radiology group had a traditional 401(k) plan, a profit-sharing plan and a cash balance pension plan. As trustees, we were responsible for overseeing the three plans.
Our cash balance plan was a lot like a traditional company pension. Participants contributed pretax dollars to the plan. They were guaranteed a future payout based on their contribution history and the plan’s investment returns. Since many of my partners made large contributions every year, the plan quickly grew to a substantial size. While the trustees didn’t directly manage the investments, we oversaw the financial advisor who did.
By the time I became a trustee, our group had been working closely with the same advisor for many years. Many of my coworkers also hired him to manage their 401(k) investments. But I became increasingly disillusioned by what I saw. For example, the DoubleLine Total Return Bond Fund had been a staple of the cash balance portfolio for years. We had a few million dollars invested in that one fund alone. I noticed that the fund had two classes of shares, retail and institutional. For some reason, we were invested in the pricier retail shares. Those shares had a 12b-1 fee equal to 0.25% of assets, while the institutional fund didn’t. This fee went to brokers who sold the fund.
Given our sizable investment in the DoubleLine fund, we were needlessly paying thousands of dollars in extra fees each and every year. When I asked our advisor why we weren’t in the institutional share class, he promised to look into it. Months went by and we heard nothing. After more prodding, he moved us into the institutional shares without so much as an explanation.
On another occasion, our advisor proposed we make sizable investments in a nontraded real estate investment trust and a variable annuity, both inside our cash balance plan. Though our advisor never mentioned it, I discovered that both investments paid generous commissions to the selling broker—namely, our advisor. How much of our cash balance plan did he suggest we put in the annuity? “Just” 50%.
We ended up firing the advisor. These experiences reaffirmed my belief that no one cares as much about your money as you do. Don’t get me wrong: There are many upstanding advisors who do good work, and they can add great value outside of portfolio management. But it’s my view that once you know enough to separate the wheat from the chaff, you should consider managing your own investments. Don’t underestimate the power of compounding: Saving 1% or 2% in fees over a lifetime can really add up.
While I was a trustee for our cash balance plan, I was also an investor. One of the most important decisions I had to make: whether and how much to contribute. Participants could choose their annual contribution amount up to a limit, as determined by their age and years with the group. The amount of money at stake was considerable. The more senior members, for example, could make tax-deductible contributions of $200,000 or more per year. In a high-tax state like California, this was very appealing.
But since a cash balance plan is a pooled account with a guaranteed rate of return—for years, the 30-year Treasury yield was our benchmark rate—it had to be invested very conservatively. If the portfolio sustained a sizable loss, we would have to make up the shortfall. By “we,” I’m referring to the participants in the plan, which was nearly everyone in our group. Because of this, the plan typically kept about 70% in bonds, with the remainder in stocks. Such a conservative allocation was destined to generate modest returns.
The consensus among my partners was that the tax benefits far outweighed these limitations. I wasn’t convinced. Given the enormous money at stake, I ran some numbers. My fundamental question: Should I save large sums in the tax-deferred cash balance plan with its low expected return—or should I pay taxes on my earnings and then invest in a taxable account with higher expected performance?
If I went all-in on the cash balance plan—as many of my partners did—I’d likely retire with a huge 401(k) balance. That’s because, when partners retired or left the practice, their portion of the cash balance plan was rolled into their 401(k). On the other hand, forgoing the cash balance plan meant taking a large tax hit today and investing the after-tax savings in a taxable account. Despite that big tax hit, my spreadsheet showed that the taxable account might beat out the cash balance plan on an after-tax basis. This was chiefly due to the higher expected return for my more aggressively invested taxable account. Ultimately, I decided to hedge my bets, contributing some money to the cash balance plan but also saving significant sums in a taxable account.
Toward the end of my tenure as a trustee, I lobbied hard to add another type of retirement account: the Roth 401(k), which would offer participants tax-free growth but no initial tax deduction, unlike the traditional 401(k) plan we already had in place. Here, we dragged our feet. Though the Roth 401(k) was born in 2006, our group didn’t add a Roth 401(k) option until 2014. I believe this was a serious mistake. While the cash balance plan was popular, given its obvious tax benefits, the lack of tax diversification it encouraged was a major downside.
To get a sense of the problem, imagine the following scenario: You’re a high-earning physician who is also an aggressive saver. You’re able to contribute more than $60,000 a year to a traditional 401(k) and profit-sharing plan, plus another $200,000 or more to a cash balance plan, depending on your age and years with the group. Now imagine doing this consistently, year after year. By the time you retire, you’ll have built an enormous tax-deferred nest egg, with income taxes owed on every dollar withdrawn.
Many of my partners did just that. But they probably saved little to nothing in a taxable account or a tax-free Roth account. This lack of tax diversification could come back to haunt them in retirement. The assumption that they would enjoy a lower tax rate in retirement could prove badly wrong, given the substantial required minimum distributions that must start at age 72. Should income tax rates rise from today’s historically low levels, that would only compound the problem. Roth 401(k) accounts—coupled with Roth conversions—could provide some tax relief in retirement.
Choosing badly. Our practice’s 401(k) plan was entirely self-directed, offering the sort of choice found in a traditional brokerage account. Participants could buy and sell what they wanted, when they wanted. The commissions were relatively low—later to disappear altogether—which reduced the frictional costs of trading. Complete freedom to invest as one pleased, combined with near zero commissions. Investing nirvana, right? Not so fast.
Some physicians hired financial advisors to manage their 401(k) investments—including the less-than-scrupulous advisor mentioned earlier. About half were self-directed. Without an iota of formal financial education or training, many saw fit to manage their retirement nest egg completely on their own, me included. It was like giving a layperson a scalpel and forceps, maybe throwing in a surgery textbook or two, and saying, “Take out the patient’s appendix.”
The results were predictable. Although I joined the group in 2002, I heard stories of fortunes made and then lost during the late 1990s technology stock bubble. Some portfolios held just five or fewer stocks. Others languished 100% in cash. By the looks of the hyperactive trading in some accounts, you might have guessed we were running a hedge fund rather than a medical practice.
It’s clear to me now that most of us would have been far better served by a menu of fewer but smarter investment options inside our 401(k)—things like target-date funds and index funds. If I could go back in time, I would have made age-appropriate, low-cost target-date funds the default investment within our plan. Smart defaults and free choice can coexist. If plan participants don’t like their default target-date fund, they could switch into other investments. But my guess is that many of my coworkers would have appreciated a gentle nudge in the right direction. The federal Thrift Savings Plan, which I would encounter later in my career, is a model in this regard.
Physicians are a proud and confident lot. Years of academic success and being addressed as “doctor” can go to our heads. Add to that generous compensation and you have the makings of a toxic brew. Physicians—especially male physicians—suffer from supreme overconfidence. We fall prey to the specious notion that we can beat the markets, in our spare time, no less.
I, for one, should have known better. Fairly early in my career, I’d read some of the investing classics—A Random Walk Down Wall Street by Burton Malkiel, Common Sense on Mutual Funds by John Bogle, and The Four Pillars of Investing by William Bernstein. The message was loud and clear: Markets are efficient. Passive investing was the way to superior results. But pride and overconfidence intervened, whispering, “Surely you, John, are not an average investor.” Unfortunately, I believed the lie. Here’s just a sampling of my investment mistakes:
Now that you’ve lost all respect for me as an investor, let me say that I’ve also had my share of investing successes. Amid 2008’s global financial crisis, I made large investments in the big banks that paid off in spades. More recently, I bought aggressively during the COVID-19 bear market of 2020, investments that have paid off handsomely so far.
But on the whole, I sincerely doubt that my investments have outperformed a simple index-fund portfolio. Even if I had marginally outperformed the averages, it wasn’t worth the cost. As any economist will tell you, there are opportunity costs to every decision. How do you place a price tag on the hundreds of hours spent researching stocks and poring over the market, time which could have been spent in other, more fulfilling endeavors? Time is the one commodity that can’t be recouped.
Leap of faith. About four years ago, my life took an unforeseen turn. Our children were approaching their teen years, but we had yet to find a suitable high school for them. This was not for lack of trying. Public school, private school, homeschooling—we had tried them all. The ideal school seemed an elusive dream.
Our parenting philosophy may seem extreme to some, but providing our children an opportunity to thrive academically was our highest priority. My own parents sent me to boarding school in the seventh grade. It was a major sacrifice for them—and a rough few years for me—but, in retrospect, I benefited enormously. Now, it was time to do the same for my children.
Eventually, we found what seemed to be the ideal school—one that grouped students by ability rather than age. There was just one problem: It was located in another state. While our children’s education was of paramount importance to us, we weren’t willing to break up the family so they could attend. If our children were to go to this school, we were moving as a family. By this point, I had been with my Southern California radiology group for nearly 16 years. It wasn’t the perfect job—no job is—but it was an incredibly stable and desirable one by most criteria. On top of that, I had toiled four long years just to become a full partner. Moving meant giving all that up and starting over from scratch.
A preliminary job search had come up empty. Still, I assured my wife that we could afford to move even if I didn’t find a job right away. Years of saving aggressively had put us in a position to make a difficult choice based on our values rather than our finances. While we weren’t financially independent at that point, we were financially secure enough to make a leap of faith. I took great solace in Ecclesiastes 3: “To everything there is a season, and a time to every purpose under the heaven.” It was the season to invest in our children’s education.
Having no job leads, I sent my CV to as many radiology practices as I could find through the internet. I also tried cold calling. Nothing. Either radiology groups weren’t hiring or they were only considering people they knew through personal connections. It seemed like I might be unemployed for the first time in my life.
One day, as I was dictating cases alone in the “reading room”—the term radiologists use to refer to our dark, computer-packed work area—a thought occurred to me. What about a Veterans Affairs (VA) hospital? As a radiology resident in San Francisco, I’d spent a few months training at the San Francisco VA. Rotating through the VA was a godsend for sleep-deprived residents since the patient volume was far lower than at other hospitals. But working for a VA hospital as a fulltime attending physician had never before crossed my mind—until now.
A quick Google search returned an immediate hit. There was indeed a VA hospital where we planned to move. Feeling an invisible nudge, I picked up the phone and placed a call. After being transferred to the radiology department, I asked the person on the other end, “May I speak to one of your radiologists, please?” After what seemed like an eternity, a man picked up the line. It was the chair of the radiology department. Trying to hide my trepidation, I introduced myself and explained, “My family is moving to your town in a few months. I was wondering if you have any job openings for radiologists.”
I heard a pause and then a quiet chuckle. My heart sank. Was my desperation so obvious? “That’s funny,” said the voice on the other end. “Just last week, one of our radiologists gave notice that he plans to leave. So, yes, we have an opening.” He gave me his email address and asked for my CV.
As I put down the phone and sat in silence, goosebumps rippled over my body. What had led me to make that phone call at that moment? Had I called a few weeks earlier, I would have been rebuffed. Had I searched the official government job website, I would have come up empty—the job hadn’t yet been posted. Was it an amazing coincidence or had I just witnessed a miracle?
Over the next month or so, I interviewed for the position and was offered the job. In becoming a government employee, I took a very steep pay cut. But having a job was infinitely better than the alternative—being unemployed. I soon learned that there are wonderful benefits to being a federal employee: an inflation-adjusted pension upon retirement, access to an excellent defined contribution plan—the aforementioned Thrift Savings Plan—with generous matching contributions, and amazing health insurance benefits, to name just a few.
But it turned out that the greatest benefits were nonfinancial. After joining the VA, I channeled my passion for finance into spreading financial literacy. I developed a curriculum for health care staff and trainees, giving monthly talks on personal finance and investing. Later, I taught an elective on personal finance to fourth-year medical students at a local university. It was also around this time that I started writing for HumbleDollar and I finally published my first book, How to Raise Your Child’s Financial IQ: The Most Important Things, which was years in the making.
This latest phase of my life and financial journey are replete with lessons. The first one is immortalized by Robert Frost’s beautiful line in The Road Not Taken: “Two roads diverged in a wood, and I—I took the one less traveled by, and that has made all the difference.” Giving up a secure, well-paying job in midcareer was viewed by many as financially irresponsible. But what I discovered was that the road less traveled is often the most scenic. The educational benefits for our children were well worth the move. But the risk we took also paid off for me both personally and professionally.
The second lesson is that financial security opens up doors. One reason we were willing to leave California was that our financial house was in order. Had it not been, I wonder whether we would have taken such a large risk. In the end, financial freedom is about far more than retiring early and hitting the proverbial golf course. It’s about being free to make difficult choices and follow your true north.
Finally, I’ve learned that we are in far less control of our finances and lives than we imagine. Instead, life is filled with randomness and chance. In investing, these forces can easily conspire to make or break an investment. But they can also bend the course of our lives in unpredictable ways. How many blessings in my life—financial or otherwise—were the result of dumb luck or divine grace? Plenty.