Financial Planning for Physicians: The Do’s and Dont’s

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The financial planning guidelines that apply to many people generally aren’t necessarily the same rules that doctors should apply to their financial planning efforts.

Debts are larger, income is more…so the possibility of making bigger mistakes are higher.  There are also so added variables unique to doctors that can complicate financial planning.

If you’re a doctor, you can’t be too careful when it comes for financial planning.

How financial planning for physicians is different

Most people spend four or five years in college to get a bachelor’s degree and some go longer for graduate degrees.

But on overage, doctors spend as many as 14 years in college and postgraduate schooling, leaving a potential for a mountain of student loans.  A bachelor’s degree is just the start and is followed by getting a medical degree, and then serving internships and residencies.

There is such a focus on learning how to treat patients that many doctors are not able to also focus on what it takes to run a practice.  Juggling a large amount of debt from schooling while also managing their family’s financial security is challenging.

Doctors also face a much higher liability risk; primarily the threat of malpractice.  In fact, an American Medical Association analysis showed that 60% of physicians older than 55 have experienced a lawsuit at some point in their career.

Because they may not actually start their careers until after they turn 30, doctors don’t have the advantage of compounding returns by starting early, although many make substantial income that can balance the scales as long as funds are invested in a safe and appropriate manner.

Regulatory burdens and a complicated tax code further serve to create challenges for doctors as well.  Financial problems can also impact a doctor’s relationships with colleagues, hospitals and universities.

When all of these factors are considered, the need for solid financial planning is amplified considerably.

The main reasons financial planning for physicians is a challenge

These differences translate into a number of financial planning challenges for doctors.

The biggest foundational problem is choosing a financial professional to assist them.  Because doctors are above average in intelligence and wealth, it can lead to overconfidence when it comes to investing as well.  They may actually fall prey to questionable financial strategies as they search to solve the problem of how to outperform the market.

Because they generally have larger portfolios, doctors are more attractive clients to all kinds of advisory services, some of whom may not be qualified to handle these types of portfolios or who may put their own self-interests first.  The irony is that because many times physicians have considerable income streams, doctors generally appreciate taking a slow and prudent approach when it comes to planning their portfolio strategy with an advisor, especially young physicians.

The right asset manager will provide financial advice to help a doctor develop a comprehensive financial strategy that accounts for all facets of their life.  This includes protecting their career and family and getting into good habits that make it easy to accommodate investing fluctuations that may occur from time to time.

One of the other challenges that may be overlooked is not adequately protecting against liabilities.  They must make sure there is adequate protection to deal with a potential costly settlement and protracted legal battle.  There are sources of nonmedical liability to deal with as well, such as liability for the actions of employees or employee lawsuits that can put a doctor and his family at risk. This is why it’s important to work with an investment advisor who is risk management focused as they have a fiduciary responsibility to help think through these scenarios.

Doctors may also be guilty of not protecting their families with enough life and disability insurance.  Many doctors do a decent job of buying life insurance, but from what we’ve found speaking with many advisors, the vast majority of physicians do not put enough emphasis on buying disability insurance which can be just as ruinous to a family’s financial stability due to being such high-income earners.  Chances are Worker’s Comp, Social Security disability income, and savings will not be enough to cover the gap in income.

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What are the important components for a physician’s financial success?

Two physicians can have similar credentials, run the same kind of medical practice, have been in business for the same number of years, have similar patient demographics, but still wind up completely different when it comes to their level of financial success.

How can this be?

It all comes down to priorities and a commitment to spending the time it takes to oversee the financial aspects of their personal and professional lives, and make sound financial decisions.  There are no shortcuts if you want to give yourself the best possible chance at financial freedom as a doctor.

So what does that entail?

  • Surround yourself with good people. Hire the best staff, from the receptionist to the doctors you may partner with.  Your patients have every right to demand the highest level of care and it’s impossible to deliver that experience with a substandard staff.  Invest in training, regular reviews, morale building activities and more.
  • Use a business model that has worked for others. Combine elements of your practice with how other successful practices operate and incorporate those elements to your own situation.  This includes outsourcing services to vendors with outstanding reputations so that you can focus on what you do best as a doctor.
  • Invest in ongoing education and training. Medicine continues to evolve at a rapid rate and as advancements are made, you must stay abreast of those changes or run the risk of losing your competitive edge.  This extends to your staff, too.  Investing in your employees builds esteem at all levels of your practice.
  • Keep a close eye on costs. You’ve got to keep score and not let cost variables get out of control.  A constant leak that doesn’t need to be there can drain the financial health right out of a practice if left unchecked.  Look at ways to reduce costs by leasing equipment or working out the most favorable terms possible to keep your cash flow healthy.  Understand the nature of your short-term and your long-term liabilities.
  • Undertake business planning activities and focus on the future. Having achievable goals and visualizing how your practice should grow will go hand in hand with how your financial future will grow as well.  Plan for emergencies and challenges and implement preventative strategies to give you peace of mind for the next five or 10 years and beyond to maximize your retirement savings.
  • Seek mentors and learn from other successful people. Network and invest in personal relationships that can help grow your practice.  When you do this, your confidence and self-esteem will continue to grow as well.

What not to do in today’s market

Here are a few “don’ts” for you to think about in today’s market:

  • Don’t forget to seek the best advice for financial planning for physicians
  • Don’t forget to diversify your investments.
  • Don’t forget to undertake a regular review of your portfolio and brokerage account.
  • Don’t forget to be flexible.
  • Don’t listen to well-meaning but uninformed friends, relatives and colleagues.
  • Don’t over extend yourself.
  • Don’t buy on margin.
  • Don’t set all your investments on autopilot.

How much risk should you take to achieve your long-term financial goals?

As it is with financial planning for others, the amount of risk you take will vary based, in part, on your risk tolerance level, your long-term goals and your net assets and obligations.

Consider implementing some of these strategies at various stages in your life and your career:

If you are a resident or a fellow in an early career:

  • Start thinking about student loan repayment and consider public service loan forgiveness as a possible avenue. Consider deferment, forbearance, consolidation or income-based repayment plans to help manage student loan debt.
  • Purchase disability insurance. About one-third of all doctors will experience at least one period of disability at some point in their career.
  • Start building an emergency fund.
  • Meet with an investment advisor and begin investing for retirement, even in small amounts.

If you are a first-year attending physician:

  • Consider purchasing life insurance, especially if you have a spouse or have started a family.
  • Start saving for a down payment on a home.
  • Meet with an investment advisor on a regular basis to learn more about the investing process. Be an active participant in your own investment finances.
  • Ensure your disability insurance coverage is adequate.

Mid-career physicians:

  • If you have not already done so, buy a home.
  • Consider college savings plans for your children’s college expenses.
  • Set up a budget for retirement and make sure you contribute on a regular basis to retirement accounts.
  • Work with a financial planner on estate planning and asset protection strategies.

Close to retirement:

  • Review your budget for retirement, make sure it is in line with your current goals.
  • Update your estate documents as needed.
  • Consider buying long-term care insurance.
  • Begin looking at ways to downsize your responsibilities.

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How life insurance fits into an investment plan for doctors

Physicians with families should own life insurance to provide for their family’s needs in the event of their untimely death.  Owning the right type of insurance and the right amount is critical to making sure a family can meet its financial goals, even if the main source of income dies prematurely.

There are several way ways to arrive at the amount of life insurance a physician should carry.  Two of the more popular include:

  1. Human Life Value or Multiple of Income Method. The method calculates the net present value of a physician’s after-tax earnings over the course of their work life. From this, an arbitrary multiple of gross income is used, such as 10- or 20-times gross wages to arrive at a policy amount.
  2. Needs-Based Analysis. This method calculates the gap between a doctor’s financial resources available today (such as retirement funds and college savings) and the present cost of future goals. For example, if a physician’s family needs $2 million in today’s dollars to fund retirement and the family currently has $500,000, then the coverage gap would be $1.5 million. This method is more accurate and often lowers overall amount of recommended life insurance, saving premium dollars.

Different ways doctors can save for retirement

There are a number of ways doctors can save for retirement.  Here are a few suggestions:

Save about 20% of what you make.  “The most important way for physicians to save for retirement is to spend about 20 percent less than they earn and put that toward retirement,” said James M. Dahle, MD, FACEP, editor and founder, The White Coat Investor, author of The White Coat Investor: A Doctor’s Guide to Personal Finance and Investing, and instructor for various online training courses.

“This should include a mix of stocks, bonds, and real estate and when possible placed into

tax-protected accounts such as 401(k)s and Roth IRAs or their equivalent in other countries.”

Partner with a physician-friendly financial advisor.  The American Medical Association (AMA) has a variety of financial planning resources, including physician retirement planning and services that can connect you with vetted planners who meet specific criteria.  Working with a certified financial planner who specializes in working with doctors is the smartest and most direct way to chart a clear path to retirement.  Also consider asking colleagues for referrals to financial planners they may know or use who understand the unique needs of doctors.

Consider opening a 401(k).  This is the most traditional form of retirement planning for doctors who are working for a company or for those who are self-employed.  Physicians employed by a company that offers a 401(k) plan should also check to see if the organization offers a company match that can boost retirement earnings.

Doctors employed by a government or nonprofit healthcare organization may be offered a 403(b) or 457(b) plan. Overall, they work the same way that 401(k) plans do, with a few unique distinctions.

Pensions or IRAs may be an option.  Doctors who are self-employed and locum tenens can set up Roth IRAs, defined benefit plans and Keogh retirement plans.

What is locum tenens and why it might help a physician’s financial future?

Locum tenens is a Latin phrase that means “to hold a place.” Today, it refers to physicians and advanced practice clinicians who fill in for other staff on a temporary basis.

These assignments can range from a few days to up to several months or more.  From a financial standpoint, this allows a medical professional to bolster their income and work more aggressively toward their long-term financial plans, creating a secondary income stream or helping to establish a career full-time as a locum tenens.

Many physicians who are about to retire often find locum physician jobs rewarding and a great way to “wind down” practicing by just taking a few contracts a year.

There are a number of other benefits for both the medical provider and the facility:

For the facility:

  • Fill vacancies while maintaining patient care quality
  • Add flexibility to physician and clinician staffing plans
  • Test the need for a new staff position or specialist
  • Control long-term recruitment and overhead costs

For the medical provider:

  • Take control of their career, choosing their work environment and schedule
  • Gain experience in their medical specialty
  • Try out a new city, just for a short time or to consider a permanent move
  • Make more time for family or other obligations
  • Transition from full-time to part-time, or from working to semi-retirement
  • Concentrate on patient care instead of managing a practice

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Should doctors hire a family office?

First, lets address what is a family office?

Wall Street Journal said it best.

“Family offices are private firms that manage just about everything for the wealthiest families: tax planning, investment management, estate planning, philanthropy, art and wine collections – even the family  vacation compound.”

This doesn’t mean that every doctor is going to need to use a family office for their financial planning, but it’s certainly an option as career advancement occurs and net worth increases.

Suggested books on financial planning for doctors

Here are some suggested additional resources you can plug into to learn more on the subject:

“Physician Wealth Management Made Easy” by Michael Zhuang

“The Doctors Guide to Eliminating Debt” by Dr. Cory S. Fawcett

“Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners” by David Edward Marcinko and Hope Rachel Hetico

“The White Coat Investor” by James M. Dahle, MD

“The White Coat Investor’s Financial Boot Camp: A 12-Step High-Yield Guide to Bring Your Finances Up to Speed” by James M. Dahle, MD

“Financial Planning Basics for Doctors: The Personal Finance Course Not Taught in Medical School” by Marshall Weintraub, Michael Merrill and Cole Kimball

“Get It Right!: The Five Most Important Financial Planning Concepts Doctors Get Wrong” by Jason Dyken

Now what?  How to find a medical financial advisor

There are several things to consider before you decide on a medical financial advisor.

Do you want an advisor who charges a flat-fee advisor or by the hour?  Fee-only advisors can be harder to find but a good place to start is with the National Association of Personal Financial Advisors.

Flat fee advisors can be expensive, charging as much as $5,000 a year or more.  Having someone there to call about more complicated things without worrying about racking up additional hourly fees is something to think about.  On the other hand, an hourly advisor may be all you need if your finances are comparatively simple.

There are also commission-based advisors who make money when they sell you products such as stocks, annuities or life insurance policies.  Keep in mind when someone makes money only when they sell you something—and not when YOU make money—there can be a potential conflict of interest.

Consider finding an advisor who is also a CPA.  Having a person handle your financial planning who knows and keeps up on the tax code means you could enjoy several added benefits.  A CPA credential adds an extra layer of certainty for important decisions and may get you a discount on tax preparation.

Look to your colleagues for suggestions and referrals or search online. You will need to decide if you want only a local advisor or one who you are comfortable working with primarily online from a distance.

The American Medical Association (AMA) has a variety of financial planning resources, including physician retirement planning and services that can connect you with vetted planners who meet specific criteria.

Also, try to find an advisor who works with medical professionals at the same stage in their career as you.  They will be more in tune with your specific needs.

The key is to find an advisor who has experience working with medical professionals and understands their financial challenges and quirks.

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