By Michael Donahoe, CFP®
Although physicians generally earn high compensation, some do better than others when it comes to building wealth and financial security. I’ve had the opportunity to see this firsthand as a practicing financial planner who focuses on helping physicians and their families build toward financial independence. The following are some common concerns voiced by physician families at the start of the financial planning process:
“I know we make a lot of money, but we don’t feel rich at all.”
“I don’t understand how others seem to accomplish so much for themselves and their families. We work really hard and make a lot of money, but still don’t seem to be making much financial progress.”
“We want to make sure we are making the right decisions with our income and building financial security for our family.”
As a physician or other high-income healthcare professional, you have a number of unique circumstances common to the profession that demand specialized focus:
- You’ve had many years of training for your profession, but often with very little business or finance focus.
- You earn a high income, which brings both opportunity and complexity to your financial affairs.
- You are likely busy working a lot, so time away from work is cherished. Spending a lot of time on household finances may not be practical.
- You are likely paying a high rate of income taxes and can benefit from short-term and long-term tax planning strategies.
Physicians are in a unique position to build wealth and financial security. However, it is not necessarily a simple or straightforward process. The following six key success factors can help put you on the right track for financial success.
Success Factor #1: Have a Plan for Your Income
Develop the habit of planning for your income. When you build habits to support what you value, the process can be relatively easy and very worthwhile.
When you earn money, it will ultimately be applied toward one of the following:
- Debt service (student loans, mortgage, other obligations)
- Taxes (ouch)
- Savings (for retirement, education, and other goals)
- Lifestyle/spending (what’s left for you to spend to live)
Often, rather than being purposeful and deliberate, a random pattern emerges that is not efficient and does not focus on your goals. Your objective is to strike an appropriate balance between each area to accelerate the development of your net worth.
Success Factor #2: Protect Your Income With a Sound Insurance Plan
If you are in the early phases of a medical career, it’s likely that the most valuable asset you have is your anticipated future earnings. Think about it. If you plan to work for 35 more years and you earn $250,000 per year, your family may be counting on you to produce close to $9 million in earnings before you retire. If those earnings are disrupted by disability or premature death, the consequences can be catastrophic.
Simply recognizing how critical an insurance plan is to the financial security of your family and taking steps to address risks is a success factor.
In addition, know that insurance planning can be especially complex for high-income medical professionals. Disability income insurance planning, for example, can be challenging. There are nuances to plans, including income limits on most group plans, definitions of disability, and portability factors.
Success Factor #3: Simplify Your Investment Plan and Avoid Common Mistakes
In no area of personal finance is there more white noise than investing. Be careful. The constant stream of information and misinformation often leads individual investors to unnecessary, costly missteps and emotional hardship. As a physician, you are likely to hear about a lot of investment “opportunities.”
There is good news and bad news that you should understand about investing. The bad news is that, despite what you may be told, it is highly unlikely that you will be able to earn returns better than what the general market offers without taking on additional risk. The good news is that the market can provide a satisfactory rate of return to those who adhere to a disciplined strategy and avoid certain fundamental mistakes.
A disciplined strategy can include: 1) an asset allocation strategy that offers risk/reward characteristics that fit your preferences, 2) investing according to when you need the money (the more time you have, the more investment risk you can take), 3) diversification and rebalancing (both can reduce your investment risk).
Emotional decision-making is the most common mistake that can hurt your success, and many investors underestimate the challenges of adhering to a disciplined strategy during difficult market periods.
Success Factor #4: Pay Attention to Where You Are Saving
The types of accounts you use to save can have important consequences.
There are three basic types of accounts, each with different rules and tax characteristics (taxable, tax-deferred, and tax-free accounts), and each with its own unique features, rules, advantages, and disadvantages. For example, pre-tax retirement accounts can help reduce your tax bill in the year you contribute, but build up future tax liabilities that can be problematic later.
Determining what type of account to save and invest in is an important decision. From a tax planning perspective, it can be highly beneficial to build assets in all three general account types. This can give you an additional tool to use when it comes time to plan for your retirement income.
Many physicians, because of the desire to defer income during peak employment years, approach retirement very heavily weighted in pre-tax assets. Employing strategies aimed at achieving diversification among account types can have very meaningful tax benefits down the road.
Success Factor #5: Work With a Proactive Tax Professional
Both short-term and long-term tax planning strategies can reduce your tax burden over your lifetime. Unfortunately, this is a tremendous area of lost opportunity for many physicians. Some tax professionals focus only on the current year’s tax return and are concerned mostly with compliance.
You should have a tax professional who can help you implement strategies that reduce your tax burden over the long run.
A proactive tax professional or financial planner will explore opportunities and ask questions. Examples:
- Is there a Roth 401(k) option through your employer?
- Are you planning to increase your contributions to your retirement plan now that you are 50?
- Let’s look at your regular investment account to see if there are loss harvesting opportunities.
- Maybe you should wait to take Social Security for a few years to allow an opportunity to convert some of your pre-tax assets to a Roth IRA.
As your income increases, the number of deductions and credits you are eligible for decreases—and therefore you owe more taxes. A knowledgeable accountant will collaborate with your financial advisor and attorney to help reduce your tax burden as much as possible.
Success Factor #6: Get the Help You Need
Recognize the complexity of your financial circumstances, determine where you need help, and align yourself with the right services and people.
You want a professional partner who can help you navigate important financial choices that impact your life. A professional financial planner can develop an intimate understanding of your needs and preferences, and their specialized skills and resources help identify opportunities and help coach actions/behaviors that benefit you.
Tackle Your Financial Planning Challenges
Though physicians experience certain financial challenges in planning for the future, that doesn’t mean their financial plans have to be overwhelming or complicated. At Harvest Asset Group, we strive to provide the best comprehensive planning possible by educating and helping our clients with their unique financial needs. If you would like to learn more about how we help physicians navigate retirement savings, student loans, and tax planning, reach out to us at (207) 775-1151 or email@example.com to get started today.
Michael Donahoe is the founder and principal of Harvest Asset Group, LLC, an independent, fee-only financial planning and investment management advisory firm in Portland, Maine. Michael enjoyed a successful corporate career in marketing and sales before transitioning to the financial planning profession, founding his firm in 2012, where he now leads the client services team and serves as the firm’s chief compliance officer. Michael earned his MBA degree from George Washington University and completed his educational requirements to earn the CFP® mark of distinction at the University of California, Berkeley. He is a Fee-Only and NAPFA registered financial advisor, a designation which followed the completion of rigorous continuing education requirements. Michael has lived in the Portland area since relocating from San Francisco in 1995 to be closer to family. He is active in community affairs and spends his non-working time enjoying the natural beauty of Maine.