A Retirement Planning Guide for Physicians

A physician’s job is one of the most high-paying and rewarding jobs around the globe, especially in the post-pandemic period. Their income ranges depending on the specialty, practice setting, and geographic location. For example, a pediatrician in an academic setting may earn less than $200,000 a year, while an orthopedic surgeon in private practice may earn six-figures or more! The richest doctors might even make millions each year, often from owning multiple business streams, such as surgical centers and office buildings. However, high incomes can very easily translate into high taxes as well. This can make it difficult for physicians to save for retirement actively or may impact their retirement corpus significantly.

A Medscape survey for 2020 reports that 49% of physicians have a net worth of under $1 million – an amount the survey claimed was not sufficient to support a comfortable retirement. This, the study says, is due to doctors not planning their finances in line with their income. It is not enough to just earn a millionaire’s salary, but equally important to plan and invest to protect the wealth and accumulate a corpus that will add to net worth.

The survey also found that only 15% of physicians put $1001 to $2000 in taxable savings accounts each month, while a whopping 31% of physicians were guilty of not contributing to taxable savings accounts regularly. 12% of American physicians also accepted not contributing to retirement accounts regularly.

For the amount of hard work that doctors put in, they deserve nothing short of a golden retirement period without having to fret about finances or run on-call. Hence, retirement planning becomes all the more important for physicians. However, the process can be a little complicated, especially for medical practitioners who might not be well-versed with personal finance. It is highly recommended that physicians consult with a financial advisor on how to strategically manage their finances for a comfortable retirement.

Importance of saving for retirement for physicians

The most common mistake that investors across high-earning professions make is to trust that their salary would keep them afloat during their old age too. You are comfortable today and tend to believe you will remain comfortable forever. Most people tend to overlook the fact that the salary may stop when they retire, making things difficult. Physicians may continue to practice privately to keep their income going, but at some point, they might choose to retire.

Additionally, it is not just that the salary stops when a physician decides to shut shop. Inflation plays a major spoilsport on the value of money itself, making goods and services more expensive as time passes. The worth of the dollar decreases with time. Therefore, there is a high possibility that the money you retain in your low-interest-earning bank account may not be enough to beat the rise in inflation over time. This is one of the primary reasons why retirement planning becomes important to physicians.

When physicians are mulling retirement planning guidelines, it becomes even more important to answer the hard-hitting question of “how much should I save?”

Remember that one size does not fit all in the financial sphere. The goals and aspirations of one physician may vastly vary from that of their colleagues and contemporaries. They may need a different approach or a different fund size to last their retirement.

In general, most investors follow the 50/30/20 rule to start building a retirement corpus during their earning years. A 50% of the income is used to cover all the living expenses – from house, food, car, shopping, and other similar costs. 30% of your income must go towards investments. What instrument you are investing in is subjective to your needs and risk tolerance levels. The remaining 20% of your income can be kept as a discretionary fund – an emergency fund that is easily accessible to meet quick cash requirements.

When is the right time for physicians to start saving money for retirement?

While the trend numbers may look grim, the bright side is that it is never too late to start retirement planning. The comfortable salary earned by a physician may help them carve out a portion from it for investing without hampering the financial requirements for meeting everyday needs. A small investment today can go a long way and grow substantially over the future- that is how you grow wealth.

Nevertheless, physicians, like everyone else, should consider starting retirement planning at the earliest. The key benefit of starting early is that a person generally has a high disposable income in the beginning years of their career, probably due to minimal responsibilities. While salary may increase over time, the amount one may be able to save may drop significantly because of growing requirements and the fact that lifestyle needs also tend to increase with higher income.

Hence, starting retirement planning early can help you put more money into investments when you have the financial bandwidth to do so. Additionally, starting early gives you the power of compounding.

Einstein described compounding as the 8th wonder of the world. The returns earned from one investment are reinvested so that your principal amount invested expands, and you get returns not only on what you initially invested but also on the return generated from it.

8 tips for physicians to start retirement planning

Physicians need to have a comprehensive plan in place for efficient retirement planning, keeping in mind their income, their health requirements, familial commitments, and other lifestyle needs. The following are a few things to keep in mind when physicians begin retirement planning.

1. Understand your investment horizon
   Assess the timeline of your investment and how long you will keep your funds invested until you start withdrawing them. Having a long investment horizon is highly recommended. For instance, if you start at 25 and have an investment horizon of 35 years, you have time on your side to reap the benefits of compounding and recover from losses over the years (if any). The longer your investment horizon, the more wealth you may be able to accumulate in your retirement corpus.
2. Hire a financial advisor
   No one knows this better than a physician – seek the services of a professional instead of doing it yourself. When it comes to retirement and investments, there is much at stake. Hiring a qualified financial advisor or a retirement planner who can help you maximize your savings for the future may just be the best decision you may take towards achieving financial freedom and securing your future.
3. Build an emergency corpus
   Practicing medicine is like any other job; there is always a risk. You might be laid off in a bad economy or may face losses in private practice. Hence, having an emergency corpus that you can live off for a few months is important before you start retirement planning.
   Even as physicians, there is no protection against untoward incidents that affect all alike. Having an emergency fund will help you or your near and dear ones to some extent to tide over the tougher times.
4. Pay off student loans at the soonest
   Medical college is expensive and the education loan can be a drain on your finances as you progress in your career. Do not defer paying your student loan to later on in life when you hope to start earning more. Start now and try to get rid of the loans as soon as possible to avoid paying more in interest.
5. Budget for your retirement
   Make a rough budget for how much money you would require to live comfortably. Most people expect that their cost of living will go down during retirement, as their children are likely to have already settled, there are not a lot of taxes to be paid, mortgages have been (hopefully) paid and there is no need of putting more money away for retirement. However, many tend to ignore the rising cost of healthcare in retirement. As a physician, you are probably most in tune with this reality. Budgeting will help you understand exactly how much you need to save to meet your future requirements.
6. Re-assess asset allocation
   Investing the majority of your money in stocks or mutual funds is not always the wisest decision. Speak with your financial advisor to figure out what asset allocation mix works best for you and allocate resources to create a multi-asset portfolio. Too much exposure to one segment is a risk to the entire portfolio. Re-analyze your investments and diversify your portfolio to maximize the returns.
7. Defer social security withdrawals
   It may be a wise choice to defer taking social security until you need it. Your payments increase by 8% each year you wait to take social security benefits. Hence, you end up with more money when you withdraw later in life.
8. Maximize the power of Roth IRA
   An IRA is a tax-deferred retirement savings account where you only pay taxes after you withdraw funds in the future. However, in a Roth IRA, you can be exempt from federal taxes when you max out the account to pay for a home or retirement. Physicians can allow their assets to grow tax-free and young doctors are encouraged to fund a Roth IRA as soon as they can in their career.

Impact of student loans on physicians’ retirement plans

While physicians might be grilled for not saving enough for their retirement despite having handsome yearly packages, they might not be to blame.

Medical education is one of the costliest courses for education. A physician will spend at least 10 years practicing medicine. And if they want to specialize in a particular branch of medicine, they would need a more expensive education which translates into more loans.

Therefore, according to studies, the average debt of a doctor can run into as much as six figures!

Additionally, most doctors don’t start earning a proper salary until they are 30. Hence, they don’t have an option but to plan for retirement a little later.

7 recommended defined contribution plans for physicians

Most physicians that are employed in the country by a hospital or an organization might be enrolled in an employer-sponsored retirement plan. Most organizations in the country offer a defined contribution plan to their employees.

This is a plan wherein you as an employee decide what amount of your paycheck goes into the retirement account. The employer will often try to match your contribution and contribute the same amount to your retirement account. However, not all employers do this since it is not mandatory.

1. Traditional 401(k) plans
   One of the most common types of retirement savings accounts, a 401(k) plan lets you decide the percentage of your salary that goes into this account. The manager handling this account will invest the funds of all investors in stocks, bonds, mutual funds, etc., to maximize the returns for the investors. However, individuals can only contribute a maximum of $19,000 per year to 401(k)s and an additional $5,500 is available for those over 50 years of age. For people with a bigger paycheck and those who want to save more for retirement, this can be a major roadblock.
2. Solo 401(k) plans
   This is a great physician retirement plan that single practitioners may consider adding to their savings towards a comfortable retirement. If you have a clinic and no one else on your payroll but yourself or your spouse, opening a solo 401(k) account is a great option to consider. It allows physicians to contribute up to $56,000 annually until the investor turns 50 years, and an additional $6,000 after that.
3. Cash balance plans
   Cash balance plans are like defined-benefit plans where the employee does not have to make any contributions and the employer pays the entire bill. The employee will be informed of how much they will earn in retirement. The employer will invest the money wherever they feel like and the employee will get the promised money.
4. Profit-sharing plans
   Mostly preferred by smaller organizations, employers in a profit-sharing plan can contribute as much money they want to the employee’s retirement account. The amount can be up to $56,000 or 100% of your annual salary, whichever is lesser. However, the employee cannot make contributions to this plan and hence, must open another retirement account.
5. 403(b) plans
   Doctors working in a non-profit or a Government setup are generally offered a 403(b) plan. This plan is very similar to 401(k) but with some limitations. An advantage is that the employers are more likely to match your contribution since both NGOs and govt organizations are not required to pay taxes.
6. 457(b) plans
   This is another kind of retirement account offered to physicians working in the non-profit space, this plan is also pretty similar to a 401(k). However, there are no penalties on an early withdrawal.
7. 401(a) plans
   Also known as a ‘money purchase plan’, a 401(a) plan is also applicable to those working with non-profit organizations. This plan works just like 403(b) and 457(b) plans. The only difference is that it makes it mandatory for employees to contribute to the account regularly.

Other retirement savings vehicles for physicians to consider

1. Mutual Funds
   Mutual funds combine the money of several investors in a pool and invest it to buy a range of different securities in a combination that can yield maximum results. These are a great investment option for physicians who do not have the time to brainstorm different investment instruments since mutual funds have managers whose job is to ensure the optimal performance of the mutual fund.
2. Bonds
   Fixed income securities like government or corporate bonds have low to moderate risk and are a sound investment option.
3. Stocks
   One of the most popular ways of growing money is by investing it in the stock market. However, proper research and knowledge of the financial market are necessary to avoid making losses. Stocks are also the best way for capitalization but it comes with a high risk.
4. Annuities
   Sold by insurance companies, annuities pay the investor a lump-sum amount of money at one time or via a stream of regular payments over a stipulated period.

Bottom line

A doctor’s job is already stressful and involves high-pressure where they have to make the right decision in a split second. The work stress combined with lack of time to study a new field of finances can lead to doctors skipping financial planning altogether. Not to mention the long hours and sleepless nights can make retirement planning look like a task that can be put off for another time. Although it’s never too late to start physician retirement planning; you reap more benefits when you start early. Get your retirement plan going at the soonest and you will be witness to what extent a good financial plan can make to your retired life. To ensure that you know the nitty-gritty of what plans or investment schemes you’re getting to, it is better to consult an expert in retirement planning. Reach out to a qualified financial advisor who can create a customized retirement plan suited for your retirement needs and goals.