The Doctor's Bill Verdict: Happy Wife, Financial Strife? ⋆ XRAYVSN

Johanna’s Take:

Can a super-hustling doc earning $1.2M/yr afford a true doctor’s home?

As in a $3M doctor’s home?

We’ll put aside the question of should this couple buy a $3.5M home…yesssss, let’s all take off our “should” caps and put on our “can” caps – this guy (who, for reasons known only to myself, I will refer to as Dr. Vader) is, after all, working his booty off and this couple should enjoy their bounty in any way they so choose.

Soooo…can they afford this home, especially given the unknown future of medical reimbursements and his concern about a lower salary later on?

The Facts:

They are saving for a $3.5M house, planning to borrow $1.5M & put $2M down
Plans to pay off the mortgage in <8 years.
They will reduce investment savings over the next 4 years to 20%, saving $375k/yr for the downpayment

This brings their savings rate to 51.25% for 3 years, but I’m using 50% for calculations
After 4 years, the savings returns to 50%

They already have the 1st $500k in the bank.
The $1M rental prop cash flows $50k/yr, which is spent on living expenses, making this figure irrelevant for our purposes (Dr. Vader said he’s never really paid attention to this, which I find concerning but won’t address in this week’s column).

The positives:

High income
High savings rate
Plans to work until age 70
No debt

Reasonable college costs (I always calculate future needs to NPV [Net Present Value] and deduct from current savings balance)
Age 33 and already has a $4M net worth – incredible.

The negatives:

High-cost dream home
Possibly a 100% consumption item (i.e. no growth in value) and hard to sell if you change your mind

Future uncertainty of medical reimbursements
Will lose half of the mortgage interest deduction in the beginning (limited to interest paid on first $750k of mortgage)

Assumptions (I will use conservative estimates wherever there is an uncertainty.)

6% average long-term returns on savings (Assuming no emotional mistakes in upcoming bear markets and corrections)
Average inflation

You retire in 37 yrs
No more children
$200k in future dollars for college
You have plenty of appropriate life and LTDI in place.

No divorces
Savings as articulated below
No private school tuition
No significant financial assistance for other family members
Reasonably good health

My comments:

Dr. Vader rates this dream with a high happiness factor for both spouses now, but lower for himself in the future (~5 – 6) because of concern with future earning security.

My most basic concern for a client is that they do not run out of money in retirement, so my goal is to determine that this couple will be able to retire with adequate savings.

Given that, I decided to approach this problem in 3 phases:

House saving phase – at the end of 4 years, Dr. V would have approx. $3.5M in retirement savings.
Mortgage payoff phase – at the end of 8 years, Dr. V would have approx. $8.1M in retirement savings
Lower income phase – instead of leaving income at $1.2M for the next 25 years, I slashed it by 50% and, as a result, kept the savings rate at 20%.
- Let’s face it, this house is going to be expensive to maintain, so I want to look at the almost worst-case scenario**, and I think this approximates it.

By retirement at age 70, Dr. Vader would have $43M in retirement savings.

Let’s not forget, however, that we are calculating far into the future and must consider the $43M amount in net present value terms.
As they say, $43M in 37 years just won’t buy what $43M will today. Discounted at a 3% inflation rate, the NPV [Net Present Value] of Dr. Vader’s retirement savings is ~$14.5M.

**What would be my worst-case scenario?

Dr. V becomes fully and permanently disabled after purchasing the house.

I do not believe he can replace anywhere near $1.2M in earnings with LTDI coverage.

I also recommend a review of term life coverage, as this would be my 2nd worst-case scenario.

This can fairly easily be remedied with plenty of coverage.

What is plenty?

I’ll leave that to his financial planner.

Do you believe $14.5M in savings is enough to retire on? (That’s not even counting the investment rental property, by the way, which is returning 5%/yr.)

I do.

Xrayvsn’s Take:

I have to admit, I had to do a double take when I saw the age, salary, and already accumulated assets.

So first off congratulations on already having a net worth at age 33 (approximately $4 million) that most doctors a decade or more older are still shooting for as their target number to retire.

Of course one of the quickest ways to erode that net worth is to become house poor.

There are some parts of the submission where, if I was a betting man, I would bet against, such as continuing medicine for another 37 more years and retiring at age 70 (ah, the exuberance of youth in medicine).

I would love to revisit this sentiment in 5-10 years when the medical machine is likely to have caused premature aging and that exuberance is replaced with grumpiness.

I do share the submitter’s concern of decreasing medical reimbursements in the future as that is already the trajectory in the current medical climate.

However even a 50% decline in salary, as Johanna so aptly pointed out above, still leaves an impressive six figure salary that could handle a home purchase of this size given the additional assets available.

Not to overstate the obvious but a larger home also comes with higher running costs (utilities, insurance, maintenance, property taxes, etc) but again the submitter’s current net worth and income should easily handle this on top of the purchase price.

The submitter rightfully raises very valid concerns about properties in this price range, namely the market for buyers at this price level rapidly decreases as the price point goes up.

In the end I agree with Johanna that Dr. Vader certainly has the means to buy the doctor home.

With the concerns already being brought up by Dr. Vader, whether or not he should is a discussion for another day.

The Decision: