Planning for Physicians
As I’ve worked with many physicians over the years, I’ve come to realize that those who have taken the Hippocratic Oath to help others often end up with very limited time to help themselves. While spending their time and talent studying the field of medicine, many have had little exposure to basic personal financial education, let alone more advanced topics such as how to protect against malpractice lawsuits or mitigate income tax liabilities.
Yet, physicians have highly complex financial situations to deal with, even early on in their careers. It is important for those in the medical field, especially recent medical school graduates, to work with a highly skilled advisor, well-versed in the specific challenges they face, who can help navigate their financial future and avoid common mistakes.
Based on my experience, here are the most common areas of support needed by doctors:
Student Loan Repayment Plans
With balances that could be in upward of $300,000 if it includes undergraduate loans, this is often the most critical topic for medical school graduates. It’s hard to see the light at the end of the tunnel with debt like this, but an experienced financial advisor can help. Typically, my clients wonder the following:
- Should I consolidate?
- Should I refinance?
- If they’re federal loans, which payoff plan should I select?
- I’m married. Will my spouse have to co-sign on any refinancing options?
- How could my loans impact our ability to apply for a mortgage in the future?
To answer these questions, an advisor must understand the structure of the loans, the household’s income trajectory, other debt, personal goals and what financial support is available from other family members. It is also important to begin identifying “good” debt versus “bad” debt when considering interest rates. In some cases, carrying debt and building savings may be the best approach. In others, paying off the debt as aggressively as possible may be the right course of action. These decisions should also be tied to your risk tolerance and realistic market return expectations.
As a graduating medical student, you may be engaged, recently married or soon to be married. Young couples often require assistance in gaining an understanding of the realistic timing and affordability of a house or condo purchase. Your advisor should be able to help you answer the following questions:
- What types of mortgages should I consider?
- What about physician loans? How do they work, and what are the pros and cons?
- How does my credit score and debt levels affect my ability to be approved for a mortgage?
- What sort of reserves will I need in the bank aside from the down-payment?
Similar to the above, as a graduating medical student you may be hoping to expand your family unit in the near future. Understanding how family expenses may affect your financial plan is important, especially if you are considering adoption or infertility treatments.
If children are already in the picture, your financial advisor can help you begin to plan for their college expenses and determine where this expense should rank on your list of priorities.
Asset Protection / Risk Management
While the overwhelming majority of malpractice suits are settled for amounts within insurance limits, no one wants to be the exception to the rule. Depending on your area of expertise, or even the state you practice in, the odds of being sued can vary tremendously. In 2015, nearly $4 billion was paid out in medical malpractice awards1. Statistics indicate that every year, 7.5% of all physicians and 19% of neurosurgeons are subject to a malpractice claims2. By age 65, 99% of physicians in high risk specialties have faced a claim. Understanding asset titling by state and more complex trust planning concepts can help preserve your net worth and provide you with peace of mind.
Income Tax Mitigation (for current and retirement income taxes)
Due to a physician’s potentially high tax-bracket, it’s important to incorporate tax efficient investing and saving strategies into your financial plan. Maxing out retirement plans, initiating Roth conversions, using products that capture minimal capital gains in taxable accounts, and trading only when necessary are some of the keys to lowering tax liabilities. Over time, these savings can compound into tens if not hundreds of thousands of dollars.
In addition to building up retirement plans, it’s important for younger physicians to maintain a modest lifestyle early on. By doing so, you have the potential to reap a tremendous amount of reward in the future. With all of your hard work and prestigious titles, you may want to splurge and/or keep up the appearance of a successful doctor.
However, by focusing on saving, while paying down debt, you will be in a better position in the future. A good financial planner will help you recognize when you’re truly able to expand your spending goals.
In my experience, doctors are very charitably inclined. I suspect it’s partly due to the personality trait that inspired them to become doctors in the first place. Helping physicians understand effective giving strategies (cash gifts, donor advised funds, IRA RMD donations, public charities, setting up a private foundation for the high net worth, etc.) is a responsibility of the financial advisor. While giving is the first priority, physicians should work with and advisor who can articulate and quantify the income tax an estate tax benefits of each option.
Physicians understand the benefits of insurance but often require assistance in navigating the various options to meet their particular needs. It is important to work with an advisor who understands the pros, cons and requirements of term and permanent life insurance (both from an income replacement perspective and also an estate planning one) as well as umbrella, long-term care and malpractice insurance.
Sales/Mergers of Private Practices
Due to various regulatory and compliance complexities, declining and uncertain reimbursements, and rising malpractice premiums, physicians in private practices are increasingly merging with larger networks or selling their practices to hospitals. If you are in this situation, it may be beneficial to work with an advisor who can support, not only your personal financial planning needs, but your practice’s needs as well. Specific capabilities may include:
- Addressing valuation issues
- Helping to structure a sale
- Investing the sales proceeds to create value
One of the most important functions of a qualified advisor is coordinating all of the above components into a single, cohesive financial plan that can be periodically updated as the doctor’s needs and objectives change. Due to their tendency to start their careers with high debt, at an older age and at an income structure that will likely change dramatically over time, physicians must take a long-term view of their finances and avoid making decisions in silos.
By working with an advisor who can walk you through the financial planning process and incorporate all aspects into a comprehensive plan, you will be able to define and articulate what is most important to you and establish a plan to help you achieve it.
The information contained herein is not intended to be personal legal, investment or tax advice, or a solicitation to buy or sell any security or engage in a particular investment strategy. Nothing herein should be relied upon as such. The views expressed are for commentary purposes only and do not take into account any individual personal, financial or tax considerations. All examples are hypothetical in nature. There is no guarantee that any claims made will come to pass. Please consult with a tax professional.
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