I remember reading a post recently on a Facebook physician group that involved a cardiologist who asked for help on how to manage her finances after a divorce.
The pertinent aspects of this situation involves the physician being left with essentially nothing in retirement savings. She is mid-career with children and wants an option to reduce her schedule eventually to spend time with her children during the weeks she has custody. Her gross income is roughly $700,000+ a year.
Now, most readers are going to pause at that income and say that there’s no financial dilemma, but there are in fact many issues with this situation. People get into financial trouble for only two possible reasons: 1) spending too much, or 2) not earning enough. This physician earns enough by most accounts, and is unlikely able to carve out more time to dedicate to earning more. She should tackle her expenses, especially since it sounds like she is on the short end of the divorce settlement.
The original poster did not mention any further details about divorce settlement other than the spouse works in the financial sector and “made out like a bandit”. Fair enough. If we assume roughly a “worst case scenario,” the physician might have to pay out five years of alimony, maybe a chunk of child care expenses and some lawyer fees. Maybe the payouts for the first year might look like this:
- Alimony: $150,000
- Child care: $100,000
- Lawyer fees: $50,000
The second to the fifth year might incur $250,000 each, and child care costs may never end (only half-joking about the child care costs). Note that one can raise children for much less than $100,000 a year, but her financial strategy should function independently of child care expenses.
A $700,000 pre-tax salary on a W-2 will likely result in a 30 percent effective federal tax rate. If you assume that state and local tax rates chew up another 10 percent, then she will bring home roughly 60 percent or $420,000. After divorce payments, the physician should have $120,000 in the first year and $170,000 in subsequent years.
Live like you’re poor (because you are)
This mid-career cardiologist may be in her late 40’s or early 50’s. She will likely need to dedicate the rest of her working career of 15 to 20 years rebuilding what is lost, but her options might be significantly more favorable depending on the terms of the divorce settlement. There is a good chance that child care expenses are not nearly as high as portrayed but this would not alter the financial recovery strategy. Should ought to be able to retire at a “normal” age, and even opt for fewer hours if her financial situation recovers quickly.
The most challenging aspect of handling finances in mid-career is that it is not easy to go counter to lifestyle creep. Any physician who is at least decade out of residency is going to have difficulty cutting back, but this physician will need to itemize her lifestyle expenses and figure out how to pare everything down.
Car lease, mortgage, travel consumption, food consumption, discretionary spending should all be assessed and slashed.
The goal in financial recovery is to assess all variables that are under her control. This includes everything that is unrelated to her divorce expenses. However unfavorable, she might benefit from downsizing her home or reducing costs on her vehicles. These recurrent costs typically consume a progressively substantial amount of earnings that could be better invested elsewhere for retirement.
Back to the basics
This physician simply needs to go back to the fundamentals of building wealth for residents and new graduates. She should maximize her pretax retirement vehicles like her 401k and contribute to any profit sharing plans that her practice offers. She should also make sure she is contributing to a Roth IRA as long she does not have savings already in a Traditional IRA. She should immediately try to save at least 20 percent of her post-tax, post-divorce fee income and build up.
Remember that the longer that your investments are in the market, the more they will have time to grow. After her divorce payments are completed, she should contribute that same amount towards her retirement. Even with conservative estimates, she ought to be able to retire comfortably by age 65.
Going to part-time is solely a practice-specific and specialty-specific endeavor. Shift-based professions tend to be more conducive to part-time status simply because colleagues can simply pick up the shifts that you don’t do and receive clear-cut compensation. Cardiology tends to be more challenging, especially in the proceduralist subspecialties. For instance if you are an interventional cardiologist, you will likely need to make compromises in the on-call schedule if you opted for reduced hours. The math doesn’t always work out in your favor, but the hope is that your financial health is able to take the hit if going part-time significantly reduces your income. It would not be surprising if a 1.0 FTE cardiologist making $700,000 would see her salary reduced to $250,000 if she were to drop to 0.5 FTE.
She is going to be fine
Wealth is often defined by a relative number. This cardiologist will unfortunately not have the option to live a wildly extravagant lifestyle had her divorce not occurred. But she will not likely be out on the streets and there is a good chance that she will be able to enjoy many purchased luxuries that her colleagues in less lucrative (and less busy) fields may not necessarily be able to. What this means is that if she is able to quickly rebuild wealth in the next five years, she will have the option to cut back to spend more time with her children.
If her salary were “only” $300,000, her divorce settlement will likely be less and she ought to be able to recover similarly.
The moral of the story? Financial disasters can happen to everyone. Obviously having a greater earning potential will get you out of trouble sooner, but everyone has the ability to rebuild financially no matter where we start out.
“Smart Money, MD” is an ophthalmologist who blogs at the self-titled site, Smart Money MD.
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