Feature | Dec 2015

Start Thinking About Your Financial Future

Financial Planning

Guardian Publishing released Wealth Protection Planning for Dermatologists, their newest book in their series of financial resources for physicians. Wealth Protection Planning is co-authored by David Goldberg, MD, dermatologist, clinical professor, and attorney, along with Guardian principals David Mandell, JD, MBA, Jason O’Dell, MS, CWM, and Carole Foos, CPA, who author sister publication Practical Dermatology’s Financial Planner column.

The book features four concise lessons on practice structure, tax reduction, asset protection, and wealth building—topics that can have a significant impact on a dermatologist’s long-term financial well-being.

“The purpose of this book is to arm you with information,” writes Dr. Goldberg in the book’s introduction. “Each section includes an introductory challenge, followed by lessons in how to handle the issues. The issues and lessons include information on how to protect your assets, reduce your tax liability and plan for retirement while growing your practice.”

Following is an excerpt from the book—Lesson 1. Read below and then download the book to read in its entirety. As a special offer for NewDerm MD readers, visit www.ojmbookstore.com and use promotional code NDMD to request or download your free copy of Wealth Protection Planning for Dermatologists, available in hard copy and ebook formats for your Kindle or iPad.

An excerpt from Wealth Protection Planning:

Lesson 1 | Be the CEO of Your Career, Even if You are Employed

David Mandell, JD, MBA, Jason O’Dell, MS, CWM and Carole Foos, CPA

TRIAGE SUMMARY: You must act as the CEO of your own practice and career, and go beyond “seeing more patients” as a primary strategy. Learn how to use leverage—especially of your advisors and assets—and take advantage of the opportunities around you.

Work “On” Your Practice, Not Just “In” It

In medicine, patients come to physicians like you when their bodies are unable to heal themselves. Patients who delay seeking medical treatment are missing out on the power of modern medicine and failing to take advantage of an opportunity to dramatically improve their health. Similarly, the financial, tax and legal ailments impacting your medical practice or personal finances cannot be healed without professional care. Simply working harder and hoping that the problems will solve themselves is like the patient hoping his body will heal itself.

Even more likely, you may not even see any problems yourself, but you will not be working at maximum efficiency without consulting an expert. You may think that you are adequately protected, pay the right amount of taxes, or are truly positioned well with your assets—but how do you know without a check–up or second opinion?

“Seeing More Patients”—A Placebo

Confronted with any legal, tax, or financial setback, many doctors follow the business strategy of “seeing more patients.” If the practice suffers because of a successful lawsuit, a sudden unforeseen expense, or an unproductive associate, physicians often simply try to “make up for it” by seeing more patients in hopes of billing more—and dermatologists follow the same instinct.

The same tactic is followed by many doctors who are behind in their retirement planning, who feel like they are paying too much in taxes, or who are getting divorced. Any financial setback seems to yield the same resulting behavior. Many physicians approach their entire career with the business strategy of working as long and as hard as possible for as long as they can physically endure it. Does this remind you of any of your peers? Do you see someone like this when you look in the mirror?

Certainly, there are many flaws to such a business strategy. Let’s examine a few of these flaws so you can understand why other strategies are better:

1.This strategy has diminishing financial returns

Even if you work harder and see more patients, each patient you see will potentially net you fewer dollars. As your marginal expenses for each additional hour of work may be the same and your taxes may increase if you hit new marginal tax levels, your “take home” may actually become less per dollar as you work harder. Even if this is not the case, the next two flaws certainly apply.

2.This strategy has financial limits

Even if you worked as hard as you possibly could and you could make more on each additional dollar earned, you only have 24 hours per day. As a dermatologist, do you really think that you can work 18 or 20 hours per day over an extended period of time? How long can you work without your skills suffering? Of course, you are capped in the total income that you can generate by “just seeing more patients.”

3.This strategy will take a great personal toll on you

Extreme stress, physical ailments, divorce, decreased life expectancy—these are all common symptoms for all physicians, and especially successful dermatologists, who choose “seeing more patients” as their business mantra. Are these extreme personal costs worth it? We think not—especially given #4 below.

4.There is a better way

If working as hard as you could was the only alternative available to allow you to meet your financial goals, that would be one thing. However, the truth is that there is a much better concept upon which you can build your practice and personal finances. This concept will be explained below.

Use Leverage to Your Advantage

Let’s consider the following all-too-common scenario. You work a very long day and generate $10,000 of billings. The insurance companies pay your practice $3,000 for your hard work. Your practice overhead is about 50 percent, so $1,500 of that income

is gross profit. However, the $1,500 isn’t yours. Of the $1,500 you actually receive, the Federal, state, and local tax authorities will take 40 percent to 50 percent or more in states like California or New York, leaving you with only $750 to $900. In other words, less than 10 percent of the work you do in a given day actually results in money you keep. This means that you have to do $3,000,000 worth of work in order to generate less than $300,000 of money for you to enjoy. Unless you want to continue to work ten times as hard as necessary, you have to learn to work smarter. This is the key to the concept of


If you refer to the Merriam-Webster Dictionary and look up the word “Leverage,” you will be presented with three definitions:

1. The action of a lever or the mechanical advantage gained by it;


3. The use of credit to enhance one’s speculative capacity.

We will offer very simplified interpretations of the three definitions of Leverage stated above. The first definition states that Leverage increases the amount of force exerted. To exemplify this concept, think of Leverage as the act of wedging a stick between two heavy rocks that you could not move with just your hands. In order to efficiently move one of the rocks, you need to push down on the stick that you wedged between the rocks. In doing so, the rock can be moved. Leverage—the wedging of a stick— allows you to move a rock you would otherwise not be able to move.

The second definition of Leverage simply states that the act of Leverage allows people to be more efficient, effective, and powerful. This can be interpreted to mean that Leverage allows people to get more done in less time. It can also be interpreted to mean that Leverage allows people to get a job done with less effort. In either case, Leverage enables people to be more effective.

The third definition of Leverage applies to credit and loans. In this definition, Leverage allows people to buy things they don’t have the money to buy in an effort for them to increase their financial capacity. To illustrate this definition, think of a home loan—the $500,000 home that is purchased by a family with only $100,000 of their own money to use as a down payment. Leverage is the ability to enjoy the use of or participate in the upside potential of an investment you otherwise could not afford.

Quite simply, Leverage is a method by which you can do more with less. Less effort. Less money. Less time. If you are looking for a shortcut to financial success, Leverage is the closest thing to it.

The Importance of Leverage

Successful physicians know that Leverage is an important tool to increase their wealth. Without Leverage, people would have to do everything themselves, including running their own business, earning money, handling financial affairs, paying for everything with only their own money, micromanaging everything at work and at home, and still finding time to eat and sleep.

If you feel like this is an accurate description of your life, then you are not using Leverage. Leverage makes your life easier. Leverage frees you to do the things that are most important, most profitable, or most enjoyable to you. Leverage is what allows you to achieve greater levels of financial success. No matter what your financial goals, mastering the art of Leverage and incorporating it into your planning will help you reach these goals faster. As we mentioned earlier, Leverage is how physicians can increase the power and effectiveness of their financial planning. You can do the same.

Financial Leverage: The Foundation of Wealth

For thousands of years, every great construction project required the use of levers to complete the building process. This was true for moving the large stones to build the pyramids of Egypt and lifting the stones for Stonehenge. Levers were used to build all of the great castles, churches, synagogues, and mosques around the world. Financial projects are very similar to construction projects. Both can seem overwhelming at the beginning and both feature a collection of complex tasks that must be executed with skill and precision. The success of both types of projects begins with significant and detailed planning. After the plans are drawn, they must be implemented accordingly. One person alone could never accomplish the implementation of such plans. Instead, the plan requires a team of people working together to accomplish the same goal. For us, that goal is building and maintaining wealth.

Without exception, every high income earner and wealthy family has relied on financial Leverage in one way or another.

Once you grasp the concept of Leverage and the financial applications of Leverage, it becomes impossible to imagine how affluence could possibly be built without it.

Types of Financial Leverage

Physicians can use different types of financial Leverage to create and build wealth. These include:

Leverage of Effort: Since the goal of Leverage is to get more done with less effort, all forms of Leverage require that you leverage your individual effort by including the efforts of others.

Leverage of Assets: Leverage of assets is one way to increase your financial status and get more out of what you currently possess. If you had an unlimited amount of money or land, you wouldn’t need to accumulate any more wealth; however, this is not the case for most people. Since we all have limited resources, we want to get the most wealth/asset accumulation and financial protection out of what we have with the least amount of effort and the lowest amount of risk.

Leverage of People: Savvy business owners know that they only have the capacity to do so much and that the Leverage of people is one way to get more than 24 hours out of a day. By leveraging other people’s efforts, you can increase the number of tasks you can accomplish in a day. By leveraging people with special skills and expertise you don’t possess, you can get things done in much less time than it would take you to do these same tasks, if you could accomplish them at all.

Generally speaking, physicians utilize Leverage to some degree, but they are not thorough in their application. They try to leverage effort by working hard; we know that. Doctors also may try to leverage assets in their practice through medical equipment for which they can bill and they may try to leverage people through technologists, nurses, and physician assistants, who can generate income to the practice. Still, few physicians apply this concept broadly enough in their practices to result in any real wealth building. Even fewer physicians effectively leverage people or assets with respect to their personal finances.

Leverage of Advisors: This is a sub-set of the “leverage of people” category, but it is important enough for us to break out. As advisors to over 1,000 physicians across the U.S., we see first-hand every day the benefits that can be gained by busy physicians if they have an expert coordinated advisor team working for them. This might come in the form of reduced income taxes, higher portfolio returns, better–protected assets, a superior corporate structure, better-leveraged benefit plans, a true retirement roadmap—or the psychological benefit to the doctor that they know they’re well advised and do not have to be their own CFO, essentially, while also managing the practice and trying to have a life. What is this peace of mind quantifiably? For many busy dermatologists, quite a bit.

Make Your Assets Work for You: The Power of Compound Interest

"Remember that money is of a prolific generating nature. Money can beget money, and its offspring can beget more.” —Benjamin Franklin

“Compounding is mankind’s greatest invention because it allows for the reliable, systematic accumulation of wealth.” —Albert Einstein

We will start with some basics. At some point in your life, someone has undoubtedly explained to you the power of compound interest. Compound interest is a simple concept; your money makes money by virtue of interest earned on prior interest—which has become part of principal. In other words, the “compound” return is the subsequent return earned on earlier returns reinvested alongside the initial investment.

Compound interest is a simple way to build wealth—it just takes patience and discipline. You must have the patience to allow your money to grow on its own, and you must have the discipline to leave the money alone.

Let’s take a look at a few examples that demonstrate the power of compound interest and how it affects retirement savings.

For our first set of examples, we will figure out what the annual contribution to a retirement fund would need to be in order to reach a goal of $1 million dollars by the age of 65. We will assume an annual rate of return of 6 percent, and we will assume for each age that the individual has already set aside a set amount in a fund.

These are basic examples. We are not factoring in taxes, inflation or any number of other factors that could affect any given specific situation. These examples are simply to put years and dollars into context for informational purposes only.

As you can see above, in the example of a 40-year-old with $75,000 in savings, who puts away $12,359.71 annually for 25 years, they save approximately $383,992.75 out of pocket.

12,359.71 x 25 = 308,992.75 + 75,000 = 383,992.75

However, the 6% interest compounding over 25 years accounts for an additional $616,007.25, taking the individual to $1,000,000. The money earned via compound interest nearly doubled what the individual actually saved out of pocket.

383,992.75 + 616,007.25 = 1,000,000

Factoring In Inflation and Taxes

The above examples demonstrate the power of compound interest, but they do not tell the whole story. What happens when we account for two very real and important drags to real investment returns—taxes and inflation? What do you really have to save in order to reach your retirement goals? Also, if we want to look at saving to maintain a lifestyle in retirement, it is important that we calculate based on that—not just a stagnant lump sum at age 65.

In this way, if we factor in 3 percent inflation and a 30 percent tax rate, and assume now 7 percent returns, net of fees (a very generous assumption), and then calculate for an annual income requirement, you will see that you must save much more than previously calculated.

Below, we examine the annual required savings amounts for two basic levels of after-tax retirement wealth—$120,000 and $240,000. In other words, if you think you can live comfortably on $10,000 per month after taxes today and want to project what you would need to save each year so that you can maintain that same lifestylein 2015 dollars when you get to age 65, look in the $120,000 column. If you require about $20,000 after-tax per month today and want to maintain that level of lifestyle in retirement, then the $240,000 is your column.

Keep in mind, there is no guarantee returns will be 7 percent post-fee—in fact, that is a very generous assumption. Of course, as returns decrease, savings must increase to make up for it. Should returns creep into the 3-4 percent range for a period of time, you may have to double your actual savings to reach your goals. Also, if returns decrease, you will have to fight the urge to increase your risk tolerance just to make up for it—especially as you get older and closer to retirement.

As you can see above, there are some significant savings requirements here. While we assume $0 other savings to get you to the goal and you may have some (real estate equity, etc.), this underscores the need for a well-modeled, comprehensive financial plan. As we mentioned earlier, “Failing to plan is a plan to fail.”

Accumulating and sustaining wealth during volatile markets is not easy. There are different ways to build wealth in up, down, and sideways markets that go beyond socking money away, diversification, and managing risk. We will discuss some of these later in this book.

See Opportunities Around You

Many dermatologists already recognize the many opportunities to become a “doctrepreneur” in the enormous healthcare business space.

If you haven’t yet seriously looked at your position in the healthcare system as a source for wealth creation, now is the time. Spending on healthcare in the U.S. in 2010 accounted for 17.6 percent of the Gross Domestic Product.1 With an estimated $2.7

trillion spent on healthcare expenditures in the U.S. in 2011 and projections for 2016 reaching $3.6 trillion, it is obvious that there are opportunities all around you.2 Here are a few to consider:

Real Estate: One way to get started leveraging your practice to create more wealth is to consider the physical location of your practice. Would it make more sense to own the building rather than leasing space? If you owned the building, could you also rent space to others? Investing in commercial real estate may seem daunting, but it can provide for reliable streams of additional income

Ambulatory Surgery Centers (ASC): Getting involved in or starting a surgery center provides physicians the opportunity to pool services, increase efficiency, get higher percentages of reimbursement for procedures, and obtain higher profits with the same working hours. Many centers help doctors increase the quality of care and decrease overall costs to patients. Baby boomers demand relief from their ailments, be it a joint replacement or treatment for an injury. They typically seek out “one-stop shops” and treatment options that call for the shortest possible recovery time and the lowest possible out-of-pocket costs. Catering to the aging boomer population could be a lucrative endeavor.

Medical Devices: As more than 70 million boomers hit retirement age in the coming years, you can expect medical device sales and development to continue to rise—despite a 2.3 percent tax on medical devices that began in 2013.3 Indeed, by 2030 an estimated 4 million knees will need to be replaced in the U.S. alone.4

With an aging population and an improving economy, the government is projecting spending on medical services to reach nearly 20 percent of the U.S. gross domestic product by 2021.5

As frontline participants in the ever-expanding field of healthcare, you have the ability to realize opportunities before others and get involved early. Stay cognizant of what is going on in your field. Stay alert to opportunities. Don’t be afraid of change—be prepared to take advantage of innovation to make your practice more profitable. Always seek out ways to make your line of business work for you.

1. Statistics taken from the Centers for Medicare & Medicaid Services, Office of the Actuary, National Health Statistics Group.

2. Id.

3. Section 4191 of Internal Revenue Code—effective December 31, 2012.

4. Projections of Primary and Revision Hip and Knee Arthopasty in the U.S from 2005 to 2030; The Journal of Bone and Joint Surgery, American Volume; 2007 Apr,89 (4): 780-5; S. Kurtz; K. Ong; E. Lau; F. Mowat; and M. Halpern

5. Statistics taken from the Centers for Medicare & Medicaid Services, Office of the Actuary, National Health Statistics Group

As a special offer for NewDerm MD readers, visit www.ojmbookstore.com and use promotional code NDMD at checkout to request or download your free copy of Wealth Protection Planning for Dermatologists, available in hard copy and ebook formats for Kindle or iPad.