8 Retirement Planning Tips for Physicians

Being a physician is one of the most lucrative and rewarding jobs across the world. A physician’s take-home pay depends on a number of factors such as their specialty, practice setting, and geographic location. For instance, a pediatrician in academia may earn less than $200,000 a year whereas an orthopedic surgeon having his own practice may rake in mid-to-high six figures or more! Some of the leading practitioners in their field may even bring in millions every year from different revenue streams such as surgical centers and office buildings. Having a high income can very easily translate into high taxes as well making it difficult for physicians to save for retirement or invest adequate funds in their retirement corpus.

 According to a Medscape survey published in 2020, 49 percent of physicians have less than $1 million in total net worth, an amount that was deemed insufficient to live comfortably in retirement. The primary reason for this observation was that doctors do not plan their finances well compared to the money they bring in each year. Simply earning a handsome salary isn’t enough. It is equally important to plan and invest your money to create more wealth. If you are unsure about where to begin, consult with a professional financial advisor who can create a financial plan for you and advise you on the different instruments you can invest in, and matters related to retirement planning, estate planning, effective tax management, and more.

As per the aforementioned survey, around 15 percent of physicians set aside $1001 to $2000 in taxable savings each month whereas 31 percent do not save regularly. In addition, 12 percent of physicians do not contribute to retirement accounts on a regular basis. It is a grim picture that the survey paints. Due to the effort, time, and money invested to become a doctor, it is important that doctors should be diligent when it comes to their finances and undertake retirement planning. Managing finances can be tricky, especially for medical practitioners who might not be well-versed with personal finance. It is advised that physicians reach out to a financial advisor who can manage their finances safely and securely to ensure a comfortable retirement.

Why is saving for retirement essential for physicians?

Most investors belonging to high-earning professions tend to fall into the trap of becoming too comfortable. They believe that their salary would keep them afloat when they turn old, overlooking the fact that their salary may stop when they retire, making things difficult for them. As a physician, you may continue running your practice to keep earning, but at some point, you might choose to call it a day and retire.

Moreover, if you stop earning a salary, that does not mean that you would be able to continue to stick to your pre-retirement expenses. As time passes, due to inflation the value of money decreases making commodities and services more expensive in the future. The value of the dollar falls over time. Due to this, your savings kept in your low-interest-earning bank account may not be able to beat the rise in inflation over time. This is why it is important for physicians to plan for their retirement.

How much should you save as a physician?

There is a saying which goes along the lines of, ‘there is no one-size that fits all’. The same holds true for physicians as the goals of one physician may vastly differ from another’s. They may require a different strategy or amount of funds to last their retirement.

As a general rule for investors, the 50/30/20 rule can be a good place to begin. Herein, you should use 50% of your income to cover your living expenses (rent, food, gas, shopping, etc), 30% of your money should go towards investments, and the remaining 20% towards savings that can be easily accessed in times of emergency.

When should physicians start saving money for retirement?

Even if a physician starts saving for retirement at a relatively later stage in life, their salary can help them carve out sufficient funds needed to build an impressive investment portfolio without affecting their daily or monthly financial needs. The primary reason for starting retirement planning at the earliest is to take advantage of having a higher disposable income at the beginning of the career due to having fewer responsibilities. While your salary may increase over time, the amount that you can put towards your retirement may fall due to a change in your lifestyle that may require a higher disposable income to sustain.

Thus, starting retirement planning early can help you grow your wealth over time backed by the power of compounding when you have the financial wherewithal to do so.

What tips physicians can use to start retirement planning?

To build a foolproof plan for retirement planning, physicians need to be mindful of their current income, their health needs, familial commitments, and other lifestyle requirements.

Physicians need to take heed of the following things when they start retirement planning:

1. Be clear about your investment horizon

At the time of investing, you need to evaluate the timeline of your investment vis-a-vis how long you would keep your money invested before withdrawing funds. It is advised to have a long investment horizon to harness the power of compounding. For example, if you begin your investment journey at the age of 25 with a view to keep your funds invested for a period of 35 years, you can reap the benefits of compounding and recover from losses suffered by you over the years (if any). The longer your investment horizon, the more wealth you may be able to create for yourself for your retirement.

2. Engage the services of a financial advisor

When it comes to retirement and investment planning, it is better to consult with a professional rather than backing yourself to do it. As a physician, you must know this better than anyone that a professional’s opinion is more valuable rather than doing it yourself. A qualified financial advisor can help you maximize your savings and build a substantial retirement corpus for you enabling you to secure your financial future.

3. Build an emergency fund

Having an emergency corpus can go a long way towards tackling unforeseen emergencies that may come unannounced. Just like any profession, practicing medicine has its own share of risks – you may lose your job, suffer losses in your private practice, or get sued by a patient of yours. Moreover, you would be able to look after your loved ones and take care of their needs if you have built an emergency fund over the years to tide over the tougher times.

4. Eliminate student debt as soon as possible

Going through medical college is expensive and a majority of students take out an education loan to finance their medical college degree. Paying off the loan can be a big drain on your finances which is why you should prioritize paying it off at the earliest to avoid paying more in interest.

5. Make a budget for your retirement savings

One of the essential steps for retirement planning is making a rough budget of your expenses that will allow you to live comfortably in retirement. A lot of folks assume that their living expenses would reduce during retirement due to having paid off their loans/mortgages (hopefully), children have moved out of their homes and settled down, and they do not have to pay a lot of taxes compared to when they were earning a salaried income. But as a physician, you would be well aware of the fact that as you grow older, your healthcare costs tend to rise considerably. By creating a budget you would be able to understand how much you need to save to meet your future monetary needs.

6. Rebalance your investment portfolio

An investment portfolio consisting of only stocks or mutual funds may not be the ideal way to create wealth. A diverse portfolio composed of stocks, mutual funds, bonds, real estate, gold, etc can help reduce exposure to one particular segment and help spread risk across your investments. Consult with a financial advisor to rebalance your portfolio and diversify your investments to maximize the returns.

7. Defer social security withdrawals

Deferring your social security benefits may reap dividends in the long run as your payments increase by 8 percent each year you wait to take social security benefits resulting in more money being available to you when you withdraw later in life.

8. Take advantage of Roth IRA

An Individual Retirement Account or IRA is a tax-deferred retirement saving account wherein you are liable to pay taxes after you withdraw funds in the future. But if you choose a Roth IRA, you do not have to pay taxes at the time of making withdrawals. You can allow your assets to grow tax-free and take advantage of the same in retirement.

How do student loans impact a physicians’ retirement plans?

It’s no secret that physicians draw handsome annual packages but despite making great money they sometimes tend to struggle to save enough for retirement. Medical education is one of the most expensive courses in the US and according to EducationData.org, the average cost of a medical school degree is $218,792.

Add in the fact that most doctors have to complete a residency and do not start earning a proper salary until they are 30, they start saving for retirement comparatively later. As per studies, the average debt of a doctor can run into as much as six figures easily and if one wants to specialize in a particular branch of medicine, then they would have to take out more student loans to finance their education.

Which contribution plans are recommended for physicians?

Since the majority of physicians in the country are employed by a hospital or an organization, they may be enrolled in an employer-sponsored retirement plan. In this type of plan, the employee decides what amount of their paycheck goes into their retirement account. Most times the employer will try and match your contribution and contribute the same amount to your retirement account, however, not all employees do so since it is not mandatory.

Let us go through the different kinds of contribution plans that physicians can enroll in:

1. Traditional 401(k) plans

In a 401(k) plan, you can decide what percentage of your paycheck goes into your account. Your funds would be invested in different kinds of stocks, bonds, mutual funds, etc., to maximize the returns for the investors. An investor can only invest up to a maximum of $19,000 per year to 401(k)s and an additional $5,500 if the investor is over 50 years of age. For individuals who are looking to save a higher amount for retirement, this can prove to be detrimental.

2. Solo 401(k) plans

A solo 401(k) plan can be a great investment vehicle for physicians. Consider that you have a clinic and the only employees on your payroll are you and your spouse. In such a scenario, opening a solo 401(k) account can be a great option as it allows physicians to contribute up to $56,000 each year till the time the investor reaches 50 years of age. The physician can contribute an additional $6,000 after turning 50.

3. Cash balance plans

Similar to defined-benefit plans, in a cash balance plan the employee does not have to make any contributions and the employer foots the entire bill. The employer informs the employee of the promised benefit in terms of a stated account balance and invests the money as per their discretion.

4. Profit-sharing plans

Typically preferred by smaller firms, in a profit-sharing plan the employers can contribute as much money they want to the employee’s retirement account – up to $56,000 or 100% of the employee’s annual salary, whichever is lesser. In this plan, the employee cannot make contributions and must open another retirement account if they wish to save for retirement. 

5. 403(b) plans

If you are working for a non-profit or a Government entity, you would have to sign up for a  403(b) plan. A 403(b) plan is similar to a 401(k) but has certain limitations with respect to investment options available to choose from. A major advantage of a 403(b) plan is that since you are employed by either an NGO or a government organization, your employers are more likely to match your contribution since they are not required to pay taxes.

6. 457(b) plans

Physicians working in a non-profit space can sign up for a 457(b) plan. This plan is also similar to a 401(k) wherein no penalties are levied on early withdrawals.

7. 401(a) plans

A 401(a) plan is similar to 403(b) and 457(b) plans wherein it is applicable to those working with non-profit organizations. Also known as a ‘money purchase plan’, herein, employees have to mandatorily contribute to the account on a regular basis.

To conclude

A doctor’s job is a stressful one and involves dealing with high-pressure situations on a regular basis. They regularly work long shifts that barely leaves them enough time for family or friends. So, learning a new skill such as financial planning can be challenging. Even though you can start saving for retirement at any time, it is better if you do so at the earliest. Not only will you derive more benefits, it will also help you maximize your savings for your financial future.

Consult with a qualified financial advisor to understand the benefits of retirement planning and how you can maximize your investment returns. The advisor can also help you create a custom retirement plan suited for your retirement needs and goals. Answer a few simple questions about yourself using Paladin Registry’s free advisor match service and get connected with 1-3 professional financial fiduciaries that may be suited to help you. You may set up an interview with the financial advisors before you decide to engage with one.

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