How Has COVID-19 Affected Your Personal Finances?
December 2020 ISSUE December 1, 2020Personal Finances Budgeting, Spending, Saving
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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.
464 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.
64% 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, 26% saw their spending drop by $2,000 or more a month.
|How Much Has Your Spending Decreased?|
|$5,000 or more||6%|
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%|
|Paid Down Debt||12%|
|Offset Lower Practice Income||10%|
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|
|$200,000 or more||31%||25%||18%||17%|
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.
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|
|$5,000,000 or more||50%||44%||32%||26%|
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 through 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.
The McGill Advisory content Is provided For informational purposes only And does Not constitute legal, accounting, Or other professional advice.
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