Covid and your finances

By John McGill

The pandemic has likely dramatically impacted both your personal and practice finances. How has your personal spending, saving, wealth accumulation, and plans for retirement changed? Use our member survey results discussed below to compare your current situation with your colleagues.

Four hundred and sixty-four members responded to our recent survey about the pandemic’s impact on their personal finances. As a result of the forced practice closures and related pandemic restrictions, most doctors have cut their spending, increased their savings, and changed their views on how much they need to be financially comfortable in retirement. These factors, together with the dramatic clinical changes required to practice in the “new normal,” have convinced a growing number of doctors to sell out or semi-retire.

Spending Habits Changing

The COVID-19 pandemic triggered a massive decline in consumer spending of up to 20%. Much of this decreased spending was concentrated on vacation/travel, entertainment, dining out, and gym/athletic membership expenses.

Sixty-four percent of doctors reported their spending had decreased as a result of the pandemic, while 33% reported no change, and only 3% reported spending more. We also asked doctors who had cut their expenditures how much their spending declined. As the chart below illustrates, the highest percentage (27%) of doctors reported their spending had dropped between $1,000-$1,499, while another 17% cut their spending by even more ($1,500-$1,999). Moreover, 24% saw their spending drop by $2,000 or more a month.

How Much has Your Spending Decreased?
<$500/month 11%
$500-$999 19%
$1,000-$1,499 27%
$1,500-$1,999 17%
$2,000-$2,999 14%
$3,000-$4,999 6%
$5,000 or more 6%
Total 100%

Has this reduced spending detrimentally affected doctors’ happiness? In most cases, our clients report remaining content despite spending a lot less. This suggests you could be saving a lot more.

Using the Extra Funds

We also asked doctors how they applied the additional funds available from their decreased spending. The combination of reduced personal spending and federal stimulus providing almost $1.0 trillion in household income support has resulted in a cumulative impact of over $1.3 trillion in additional savings since January 1, 2020.

As the chart below illustrates, 46% of doctors have left the extra funds sitting in cash due to the economic uncertainty. Another 32% used these funds to increase their savings or investments, while 12% used them to pay down debt. Finally, 10% used them to offset their reduced practice income.

How Did You Apply the Extra Funds?
Sitting in cash 46%
Increased Savings/Investments 32%
Paid Down Debt 12%
Offset Lower Practice Income 10%
Total 100%

Annual Savings Amount

The most critical element in determining when you’re ready to retire financially is not how much your practice grosses, or even how much it nets. Rather, it’s the amount you’re saving annually, after paying income taxes and covering all your personal living expenses.

We also asked doctors how much they are saving each year. This savings amount includes not only personal savings, but also retirement plan, IRA and HSA contributions, college education savings, and debt prepayment.

Total Amount Saved Annually Over Time
  2020 2017 2014 2011
Under $25,000 5% 6% 7% 11%
$25,000-$49,999 11% 10% 13% 18%
$50,000-$74,999 15% 17% 19% 14%
$75,000-$99,999 12% 11% 16% 14%
$100,000-$124,999 10% 15% 12% 12%
$125,000-$149,999 6% 6% 5% 7%
$150,000-$174,999 7% 5% 5% 4%
$175,000-$199,999 3% 5% 5% 3%
$200,000 or more 31% 25% 18% 17%
Total 100% 100% 100% 100%

The average savings amount continued to grow this year, as 47% of doctors are saving $125,000 or more annually, up from 41% in 2017 and 33% in 2014.

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We also asked doctors what percentage of their practice net income they were saving or using for debt reduction. For example, if you generated $500,000 in annual practice profits and saved $100,000 annually, you would report a savings percentage of 20%. The highest percentage of doctors (29%) are saving 20-29.9% of their annual income.

Total Personal Wealth

We also asked doctors to estimate their “total personal wealth,” meaning the value of all assets including retirement plan and IRA accounts, health savings accounts (HSAs), personal stocks, bonds, mutual funds and other investments, personal residence, office buildings and other real estate, but excluding the value of their practice and life insurance coverages. Furthermore, the total amount of personal wealth was not to be reduced by any personal or practice debts or mortgages.

Our survey revealed most doctors are achieving higher personal wealth levels than ever before. The following chart details this trend, demonstrating a record percentage of doctors reporting total personal wealth of $3,000,000 or more (72%), up from 69% in 2017 and 62% in 2014. Of these doctors, a record-high percentage (50%) reported total personal wealth of $5,000,000 or more, while another 22% reported total personal wealth of $3,000,000-$4,999,000.

Changes in Doctors’ Total Personal Wealth Over Time
  2020 2017 2014 2011
Under $1,000,000 6% 4% 10% 8%
$1,000,000-$1,999,999 8% 14% 13% 20%
$2,000,000-$2,999,999 14% 13% 15% 20%
$3,000,000-$4,999,999 22% 25% 30% 26%
$5,000,000 or more 50% 44% 32% 26%
Total 100% 100% 100% 100%

Changing Perception of Wealth

The COVID-19 pandemic has also changed the way doctors view their wealth. A recent Charles Schwab survey showed that, on average, investors believe it now takes $655,000 to be financially comfortable, down from $934,000 in January of 2020. And the minimum benchmark to be considered wealthy is now $2,000,000, down from $2,600,000 in January of 2020.

Impact on Plans for Retirement

Doctors’ growing wealth, reduced spending, increased savings, and changing views on the amount of spending and wealth necessary for happiness have prodded many to consider selling sooner. The fact that reducing spending by $2,500 a month cuts the assets necessary to achieve a financially secure retirement by $827,500 has brought the retirement goal line closer for many doctors. Also, the prospect of practicing under the dramatic clinical changes required today has pushed a growing number of doctors to sell or semi-retire. In fact, 35 of the 464 responding doctors commented they had either sold their practice and retired, or semi-retired, as a result of the pandemic.

 


 

John K. McGill, CPA, MBA, JD

John K. McGill, CPA, MBA, JD
John K. McGill, CPA, MBA, JD is a nationally prominent tax attorney and CPA who has specialized in dealing exclusively with the dental profession for more than 30 years. He is President of John K. McGill & Company, Inc., Editor of The McGill Advisory newsletter and shareholder in the law firm of McGill and Hassan, P.A. He is a member of the American Bar Association and the American Institute of Certified Public Accountants.

 

This article was reprinted with permission from The McGill Advisory, a monthly newsletter with online resources devoted to tax, financial planning, investments, and practice management matters exclusively for dentists and specialists, published by John K. McGill & Company, Inc. (a member of The McGill & Hill Group LLC). Visit www.mcgilladvisory.com or call 888.249.7537 for further information.

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