Building wealth

Medical Economics Journal, Medical Economics July 2021, Volume 98, Issue 7

How to create, nurture and protect your financial future

When it comes to winding down a medical career, Robert Eidus, M.D., knows he’s in an enviable position.

After spending most of his career in New Jersey, Eidus, 72, and his wife moved to California in 2018 to be closer to family. Now he works a four-day, 30-hour week as a family physician for John Muir Health in Walnut Creek, California, leaving him ample time to spend with their granddaughters who live nearby.

But as important as his work schedule, in Eidus’ view, is having saved enough that he and his wife will be able to live comfortably regardless of how much longer he chooses to work. “I’m in a position where I’m working because I want to work, not because I have to,” he says.

In some ways it should be easy for most physicians to attain Eidus’ level of financial security by the time they’re contemplating retirement. Most of them earn far more than the average American, making it theoretically possible to save enough for retirement while still enjoying a comfortable lifestyle during their working years.

At the same time, doctors face some unique challenges when it comes to savings. For one thing, they start earning incomes later than most other professionals. They also begin their careers owing a lot of money. A 2019 Association of American Medical Colleges study found that 73% of medical students graduated with debt, the median amount of which was $200,000 for medical school alone.

These factors may help explain the results of a 2015 Fidelity Investments survey, which found that nearly half of doctors were saving just 9% of their income, well below the range most financial advisers recommend. The survey also revealed that 48% of doctors weren’t contributing the maximum to a workplace savings plan.

The issue of retirement preparation has taken on new urgency in recent years, experts say, as surging rates of burnout have more doctors thinking about leaving practice earlier than they once anticipated. According to a recent joint survey by Laurel Road, a digital platform of KeyBank, and The White Coat Investor, an online community that helps medical professionals better manage and invest their money, nearly 63% of practicing physicians plan to retire between the ages of 50 and 64 compared with about 20% who anticipate working to age 65 or beyond.

“It’s important for physicians, especially those just starting out, to recognize that they’ll want to have options earlier in their careers than they might think because so many of them become unhappy with what they’re doing,” says Steven Podnos, M.D., MBA, a certified financial planner (CFP) and principal of WealthCare LLC in Cocoa Beach, Florida, which specializes in working with health care professionals. “And the only solution is to attain financial independence as early as they can.”

Financial advisers and retirement experts say that to achieve that goal, doctors need to:

  • Start saving as early as possible.
  • Save as much as possible.
  • Take maximum advantage of financial tools that allow savings to grow tax free, such as individual retirement accounts (IRAs) and employer-sponsored plans such as 401k and 403b plans.

Following these rules takes discipline, but it’s worthwhile in the long run, according to Eidus. “Among my friends, the happiest ones live relatively modest lives,” he says. “It gives them the financial security that allows them to do other things and practice the way they want to. Spending over your needs only creates pressure, and then you start to resent your work.”

Although doctors need to save for retirement throughout their career, it may take different forms depending on whether they’re in their early years of practice, midcareer or close to retirement.

Just starting out: Pay yourself first

Financial advisers say the early years of practice are, in many ways, the most important when it comes to saving for retirement for two reasons. First, the longer that money sits in a retirement account, the more time it has to grow. Second, saving right from the start instills the habit of not spending everything they earn. This is especially important for young doctors who, after years of delayed gratification during education and training, suddenly find themselves with a lot of disposable income.

“When doctors sign on to their first job, for some it’s like they won the lottery, and they quickly get accustomed to living like that,” says Dan Danford, MBA, CFP, principal of Family Investment Center in St. Joseph, Missouri. “The key is to get them started saving and investing right away. They generally find they still have plenty of discretionary income and can do all the stuff they want to. It’s just that they’re doing it with money after they’ve started saving and investing.”

Says Podnos: “We always tell our clients, ‘Pay yourself first.’ That means the first things that should come out of their paycheck should be retirement plan contributions, debt payoffs and any after-tax savings plans they may have.”

Financial planners vary on how much they advise their younger doctor clients to save, but the general consensus is between 20% and 30%. “Typically we encourage clients to save at least 25% of their income in whatever vehicle they have access to,” says Kayse Kress, CFP, a principal with Physician Wealth Services. That’s higher than the industry standard of 10% to 15%, she says, “but physicians typically are getting a late start on savings compared to their peers, so they need to save at a higher rate.

Paying off student loans: Strategies vary

Advisers say that student loans are also an important consideration in retirement savings because many clients want to repay them as quickly as possible, even if it means minimizing or delaying long-term savings — a strategy advisers largely endorse.

That’s the approach that Danielle Carter, M.D., 36, has taken since starting practice in 2014. A family physician at Ascension St. Vincent’s Riverside in Jacksonville, Florida, Carter paid off her $150,000 student debt in five years. She readily acknowledges that she benefitted from being part of a dual-income household since graduating from medical school in 2010. Even so, repaying the loans required her and her spouse to develop and stick to a budget.

“We started with all the things we knew we had to pay for, like the mortgage and car payments and insurance premiums. Then we included all the things we could get rid of if we had to, and we stuck to that until my loans were paid off,” she says.

Carter says she and her husband still benefit from adhering to their budget. “That’s how we’ve been able to get to a place where we have more disposable income and money for savings and investments,” she says, adding that half her income goes to the latter.

“You finally have a nice job with real income, and you want to reward yourself with a nice vacation or a new car,” she adds. “You just have to make sure you have the financial space for it and it doesn’t turn into lifestyle inflation, where you’re spending beyond your means.”

But not every financial adviser thinks loan repayment needs be a young doctor’s first priority. Danford, for one, recommends treating it like a home mortgage — starting out by paying just interest plus a little of the principal.

“When docs come out of school, their debt seems insurmountable, and I understand ... the feeling of wanting to pay it off,” he says. “But 15 years from now, it won’t seem like such a big mountain due to inflation and because they’ll be earning so much more. They can always ramp up the debt payments later on.”

Investing in 401(k)s and IRAs

The two most common savings vehicles are employer-sponsored 401(k) or 403(b) plans and IRAs. Under a 401(k) or 403(b) plan, employees direct a set amount from each paycheck into their individual account, up to $19,500 annually. The funds are invested, usually by an employer money manager, and they grow tax free until the employee begins withdrawing them. (Funds withdrawn before age 59 1/2 incur a 10% penalty).

The advantages of these plans are threefold, experts say. First, as noted above, the funds in them grow tax free. Second, they are funded with pretax dollars, so by contributing to them, doctors can sometimes move into a lower tax bracket. Finally, many plans include an employer match up to a certain percentage of the employee’s contribution. Most financial planners recommend that, at a minimum, doctors fund their retirement account up to the amount of their employer match.

“If you’re getting what’s essentially free money from your employer, at the very least, you want to take full advantage of that,” says Lawrence Keller, CFP, founder and principal of Physician Financial Services in Melville, New York.

Kress notes that 401(k) participation doesn’t require working for someone else. Contractors and the self-employed can have individual 401(k) plans. “It’s something we advise a lot of our clients who are working as 1099 [contract] employees to do because it’s easy and inexpensive to set up and gives them that deferral option,” she says.

IRAs offer benefits similar to a 401(k), in that money in an IRA account grows tax free until it is withdrawn. But unlike a 401(k), it’s up to the individual, rather than an employer, to set up an IRA and decide how to invest the money in it, and there is no employer match.

The IRA contribution limit for 2021 is $6,000 ($7,000 for individuals 50 and older), but whether and how much of the contribution is tax deductible depends on the person’s income and if they participate in an employer-sponsored retirement plan.

Along with traditional IRAs, savers have the option of a Roth IRA, in which deposits are not tax deductible but withdrawals are not taxed at retirement.That makes Roth IRAs particularly attractive for young physicians, says Danford, because they are probably in a lower tax bracket early on than they will be when they start withdrawing money from the account. “The younger you are, the better a Roth looks,” he says.

Roths also come with some restrictions. They have the same annual contribution limits as regular IRAs. In addition, only single people earning less than $125,000 or couples earning less than $198,000 annually are eligible to make the maximum contribution. There is, however, a way around the Roth income limits, known as a backdoor Roth IRA. (See sidebar, “The backdoor Roth IRA.”)

What about HSAs?

Another pretax savings method that advisers recommend for some clients is to fund a health savings account (HSA). As with an IRA or 401(k), HSA contributions are pretax and grow tax deferred while they are in the account. Contribution limits for 2021 are $3,600 for an individual and $7,200 for a family.

Funds withdrawn from HSAs at any age to pay for medical expenses are not taxed, and after age 65, the money in them can be used for any purpose (although withdrawals are taxed if not used for medical expenses). For these reasons Keller calls HSAs “stealth IRAs.”

The major limitation of an HSA is that because they are intended to accompany high-deductible health plans (HDHPs), they are available only to people whose employers offer HDHPs and who don’t use another type of health insurance.

Saving after the early years

By the time doctors have gotten established in their career, they’ve usually reached their peak earning years — which means they can increase their retirement savings without having to sacrifice as much of their current lifestyle as when they were younger.

“That’s the period when we want people to be maxing out their retirement plan,” says Kress. “By that time they should have paid off any high-interest debt and made a good start on their student loans,” she says.

In addition, doctors who’ve built up substantial savings in tax-deferred IRA and 401(k) accounts need to begin thinking about how they’ll pay taxes on that money when they start withdrawing it. For that reason, “this is the point when it makes sense to bulk up contributions to non-retirement savings accounts,” she says.

Podnos also recommends that doctors establish after-tax investment accounts —even early in their careers, if possible. “For younger docs, we suggest they invest in large, diversified, low-cost stock funds and just keep adding to that. They’ll turn around in 20 years and see they did great.”

How much will you need?

As physicians approach the age at which they start thinking about retirement, the question inevitably arises of whether they’ve saved enough to retire and how long their retirement savings will last. The answer to the first question is fairly straightforward, according to Podnos. “Look at how much it costs you to live the way you want to live.”

For the second question, he says the consensus among financial advisers is that, in most cases, retirees can safely withdraw about 4% from their savings annually. “At that rate, it’s almost certain you can go at least 30 years, even under the worst scenarios, without running out of money,” Podnos says.

If an investment portfolio provides better-than-expected returns during the early years of retirement, he adds, the 4% annual withdrawal rate might be increased. “We come up with rough numbers based on what people want to spend and when they plan to stop earning an income, but then we make adjustments when they’re in the distribution years,” he explains.

For his part, Eidus says he has reached a point of financial security by contributing regularly to the savings plans available throughout his career, including both traditional and Roth IRAs and a 401(k). In addition, he received stock options while working for a publicly traded company.

Just as important as taking advantage of these opportunities, he says, has been living within his means. “During my career, I’ve noticed that the happiest doctors are the ones that live modest lives,” he says.

Since moving to California, Eidus and his wife have been working with a fee-only financial adviser to develop a plan for a post-retirement lifestyle that includes traveling, making charitable donations, taking classes and leaving money to their children and grandchildren.

“They use computer-driven formulas based on that information and our life expectancies to determine the plan’s likelihood of success,” he says. “What’s nice is they can change the algorithms in the formulas depending on how long I decide to keep working. It lets us know if we have to modify our goals.”

Eidus says having a solid retirement plan in place frees him from the stress he sees among some colleagues whose financial situations force them to work longer than they’d planned to. “When people ask me how long I plan to keep working, my response is, ‘as long as I keep looking forward to Mondays,’” he says. “When I start looking forward to Fridays, I’ll know it’s time to do something else.”

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