Retirement saving for doctors: advice from an expert

Many doctors find it difficult to balance current wants and needs with long-term financial security.

When it comes to saving for retirement, physicians are better off than most Americans. Their incomes allow them to save enough for a secure retirement while still enjoying a comfortable lifestyle during their working years.

But even with their affluence, many doctors find it difficult to balance current wants and needs with long-term financial security. To learn more about the challenges doctors face in retirement planning, Medical Economics spoke with Steven Podnos, MD, CFP, principal of Wealth Care LLC in Cocoa Beach, Florida and author of Building and Preserving Your Wealth: A Practical Guide to Financial Planning for Affluent Investors. The interview has been edited for brevity and clarity.

Medical Economics: What should doctors today be thinking about in terms of preparing a financial plan for retirement?

Steven Podnos: One of the things we tell young doctors is there are three stages of adulthood: before children, with children, and after children. Your years before children you’re mostly in school, and the most important thing to do financially at that point is try to avoid student debt as much as possible, whether it means going to a less expensive school or working while you’re in school or consider being in the military reserves. But you don’t want to come out of med school with hundreds of thousands of dollars in debt. That’s the only thing you can do at that stage, because you’re really not making money.

The next stage with children, with careers, the working years. For most physicians that starts around age 30, where they’re starting to earn a high income. In that stage physicians need to focus on getting debt paid off ASAP, especially student debt, and not take on additional debt. If they have a lot of student debt they shouldn’t buy a house with a big mortgage. It’s OK to count paying off debt as saving, because once the debt is paid off that money could go to savings. But you’ve set up a habit of not spending that amount of money and that will serve you well.

Beyond that the most important thing is to save enough money, because you want to look ahead and say at the time you start your third stage in life, around 50, you’d like to be well on the road to financial independence. You don’t want to wait until you’re 65 or 70 to be financially independent, because so much in medicine changes and there’s so much burnout. And the only solution to burnout is having the financial independence to make choices. The people who are the most miserable enter that third stage of life without adequate savings and sometimes still with significant debt, and they’re stuck.

A problem we commonly see is young doctors suddenly earning a much higher income than they were as a resident or fellow and they start spending most of it and it’s so hard to go back from that.

ME: Have you developed any techniques to keep young doctors from doing that?

SP: People that hire us are usually motivated, so we have a select population. We can say to them, if you get used to spending 80-90% of your income you will never be able to save enough to achieve financial independence. Unless you’re sure you’re not going to mind working the way you are now for the next 40 years, you might seriously consider not spending that much.

We always say pay yourself first. The first thing that should come out of your paycheck should be your retirement plan contributions, debt payoffs, after-tax savings. Most young couples should be shooting for 30%.

And do most of them do that? – It’s a wide variety. Again, the people that hire us kind of get it, that this is in their best interest to do it. But we’ll also have people who say they really want a vacation home. I’ll say it may put off your ability to work less or retire by a number of years. In other words, the cost is going to be the lack of ability to make choices later on about what kind of work you do and how hard you work, and may ultimately lead to a difference in when you can retire.

ME: I want to go back to the role of burnout. I guess it’s becoming more of a factor, and something doctors need to think about in their career planning, because a lot of them are going to burn out?

SP: I spoke at an investment conference for doctors just before pandemic. There were multiple speakers on burnout and what to do about it. And they all said “Oh, you have to play an instrument, or do yoga, or the hospital should provide a nice lounge.” And I said doctors who aren’t working for money and can make choices about how they spend their time are not burned out, because they’re doing the things they like to do.

I have a number of physician clients in their 50s or 60s who have altered their lifestyles to be more happy, to take time off, to volunteer, or they just say no to certain things in their jobs and are comfortable doing that.

ME: Explain some of the savings tools available and advantages and drawbacks of them.

SP: I think the most powerful way to save is always going to be through retirement plans. Because you put away money pretax, which means the government essentially is loaning you the money you would have paid in taxes and saying you can take this loan of your tax payment and invest it for decades, and it’s asset protected and tax deferred. Also, many people don’t realize when they take the money out it’s often taxed much lower than during their high-earning years.

So we always maximize retirement plan contributions. And for physicians in independent practice we look to design more aggressive retirement plan savings. We add what are called defined benefit plans to their standard 401(k)s and try to maximize their pre-tax savings.

ME: Can you define a defined benefit plan?

SP: There are two types of retirement plan, defined benefit and defined contribution. Defined contribution is like a 401k or an IRA, where the contribution is defined, but you don’t know what the benefit will be because it’s a function of how long you’ve participated, and how well the investments do.

A defined benefit plan is the opposite. Say you’re a 50-year-old physician with a good practice. You decide that at age 65, you’d like to have a benefit of $150,000 per year for life. A pension company will tell you a lump sum you’ll want to have at 65 that could buy an annuity of $150,000 per year, and how much you’ll have to put in for the next 15 years to reach that lump sum. In other words, the benefit is defined.

The next thing is debt payoff. If their debt is high interest we’ll look to refinance or start an aggressive payoff. They may say the loan’s interest rate is only 3%, and wouldn’t they be better off investing? We tell them paying off the 3% loan is a certainty, and investing, though it’s likely to do better, is not a certainty. So we’ll usually encourage debt payoff.

We’ll also suggest that a home mortgage should be paid off by the time they’re entering that final phase in their career, or certainly by the time they retire.

The third stage of savings is to start an after-tax investment account For young families that means they should be mostly in stock funds since they have a long time to invest. They should buy diversified, low-cost stock funds and just keep adding to it. They’ll turn around in 20 years and find out they did great.

ME: At what point should a doctor start asking how much they’ll need in order to retire? And how do they calculate that number?

SP: Just look at how much it costs to live the way you want to live. And there’s something called a safe withdrawal rate. If you’re taking out a certain percentage of your investment pool every year how long is it likely to last? There’s a broad consensus in the financial planning world that you can take 4% from a portfolio every year, adjusted for inflation, and it’s almost certain that you can go at least 30 years under even the worst-case scenario without running out of money.

So we can come up with rough numbers based on what people want to spend and when they plan to stop earning an income. But we also make adjustments when they’re in the distribution years based on how much they’re actually spending and how much their investments are earning.

ME: Are you seeing a difference in doctors’ retirement ages now compared to when you started as an advisor?

SP: There’s been a big change. I started practicing medicine in the mid-80’s. It was very common for doctors to work for as long as they could. Now, just about everyone we talk to says “I don’t want to work this hard the rest of my life.” They’re much more oriented toward family and personal development, and not as satisfied with the work. It’s much more a job than a calling.

A lot of that is because the majority of physicians are employed by some entity and are treated like employees instead of professionals. And I think that’s part of the burnout we see. I would say it’s made a big difference in attitudes towards medicine. There was a lot more autonomy and respect for physicians then.

ME: Is that desire to retire early somewhat offset by the greater debt levels that many doctors now face?

SP: There’s some truth to that, but physicians generally earn enough to pay off their debt in a reasonable period of time. It’s just a matter if they have the discipline to do it. We have a number of physician clients who are really motivated and they’re paying down debt quickly, they’re not spending a ton of money and they’re doing great. But again, physicians have the benefit of generally high incomes. It’s much easier to do what we’re talking about with six figure incomes.

ME: Explain the various type of advisors and wealth managers. What do terms like fee-only and fiduciary and broker-dealer mean?

SP: Fiduciary means you put the client’s interest first. There’s a fiduciary oath where you basically say I’m never going to do something that’s not in the client’s interest first. So for example if you’re investing a client’s money in a stock fund you’re going to use the lowest-cost one that does the trick because you’re not getting a commission for using it.

Fee-only means the only money the planner gets comes from the client. So again, there’s no incentive to sell something. A lot of planners say they’re fee-based and that’s a disingenuous term because it means they can charge you a fee, they can take a commission.

I think physicians get bamboozled all the time. I often use the analogy that I’m a doctor and you come to me with a sore throat, and I want to give you an antibiotic. I look on the shelf and each antibiotic has a dollar sign next to it and each company is willing to pay me a different amount to prescribe their product, so I earn more by giving you the more expensive product. What’s going to happen? There’s a conflict of interest. So I think using a fiduciary fee-only advisor is the way to go.

The best places to find fiduciary fee-only advisors are the National Association of Personal Financial Advisors, or NAPFA, and a group of young fiduciary planners called the XY Planning Network. They’ll take younger couples with fewer assets to manage, some of them will work hourly, some on an ongoing basis. So between those two it’s easy to find a good financial planner.

ME: Is there a standard amount fee-only advisors charge?

SP: It’s all over the place, from an assets under management charge to flat fees per year to subscription fees you pay per month. In general, the percentage drops the more money you have under management.

For example our fees for assets under management start at .75% a year up to $1 million, then drop to .5% on between $1 million and $2 million, then everything above $2 million is .25%.

ME: And you do more than just advise on where to invest money, correct?

SP: Yes. If you go to anyone at NAPFA or XY Planning you’re going to get a financial planner who’s probably a CFP and you’re going to get a written financial plan with your background, your goals, here’s where you are in terms of tax planning, asset protection issues, retirement planning, etc. Then we change the plans as circumstances change.

ME: Anything else doctors ought to know about retirement planning?

SP: I think the most important thing, especially for young physicians, is to recognize that they’ll want to have options earlier in life than they think. They shouldn’t think, “I’ve got until 65 or 70 to save and get comfortable financially” because so many of them become unhappy with what they’re doing earlier now. And the only solution to that is to build up some financial independence early.

When I meet with young physicians, I tell them “Trust me, you’re going to do this potentially for 15 or 20 years and then really want to be able to do something else, or say no to certain aspects of your job, and the only way to do that is to have a little delayed gratification now and not spend all your income.”