While many professionals begin earning, saving and contributing to retirement accounts in their early twenties, physicians may spend an additional decade completing medical school, residency and fellowship training. During that time, they may earn modest incomes, accumulate substantial student debt and miss years of potential investment growth.

When higher levels of compensation finally arrive, it can create the impression that financial success will naturally follow. Yet physicians often enter this stage with a backlog of debt, limited savings and several expensive priorities competing for their new income. They may be trying to purchase a home, start a family, repay loans, obtain adequate insurance and begin investing…all while adjusting to a significantly higher tax bracket!

Higher earnings create an opportunity to catch up, but because of the hefty debt load, income alone is not a sufficient strategy. Physicians need a coordinated plan for converting their compensation into lasting wealth while limiting tax liability and strategically paying down debts.

 

Tip #1: Avoid lifestyle inflation

The transition from residency to attending compensation can be dramatic. After years of delayed gratification, physicians may understandably want to improve their lifestyles. A larger home, a new vehicle or an expensive vacation may feel like overdue rewards.

The danger is allowing fixed expenses to increase so rapidly that even a substantial income leaves little room for saving. Once a physician (or their family) becomes accustomed to spending most of what they earn, catching up becomes considerably harder.

A more effective approach is to establish a target savings rate before making major lifestyle changes. Physicians do not need to continue living like residents indefinitely, but maintaining some distance between income and expenses during the first several attending years can create a powerful financial foundation.

During their career, physician compensation may increase through contract negotiations, promotions, partnership distributions, bonuses or growing practice revenue. Just like the initial jump from residency income to attending income, it is advisable to have a plan for how you will allocate future income growth within your financial plan.

 

Tip #2: Create a deliberate student loan repayment strategy

Physicians may be tempted to direct every available dollar toward eliminating student debt. Others may make only minimum payments while focusing entirely on investing. Either strategy has the potential to be the best option, the worst option, or something in-between.  The appropriate approach will depend on many factors, including the interest rates, type of loan, eligibility for forgiveness programs, employer benefits, tax considerations, needed cash flow, expected investment returns, and comfort with debt.

Life doesn’t exist in a vacuum, so neither should your debt repayment strategy.  To be most effective, your chosen approach needs to be coordinated with all aspects of your financial plan, rather than treating it as an unrelated decision.

 

Tip #3: Make full use of available retirement benefits

Physicians who begin investing later have fewer years for compounding to work in their favor. That makes the efficient use of tax-advantaged retirement accounts particularly important.

Depending on their employment arrangement, physicians may have access to a 401(k), 403(b), 457 plan, pension, profit-sharing plan or other workplace benefits. Practice owners and self-employed physicians have their own opportunities to establish retirement plans for themselves and their employees.

In order to maximize your future growth potential, physicians should understand how every available option works including its investment options, contribution rules, vesting schedule, withdrawal restrictions and tax treatment.

A carefully designed contribution strategy can help you accelerate retirement savings while potentially reducing current taxable income. Because retirement-plan and tax rules change, these decisions should be reviewed regularly with qualified financial and tax professionals.

 

Tip #4: Invest for long-term growth without taking unnecessary risks

This is a really tough one. A delayed start to meaningful investment can make physicians feel that they need to be ultra-aggressive with their investments to “catch up.” But taking excessive risk can expose a portfolio to losses that severely disrupt progress, may be difficult to recover from, and will either significantly delay retirement or force you to live below your desired retirement lifestyle.

Instead, physicians should build a diversified investment strategy around their goals, time horizon, liquidity needs and tolerance for volatility. Their portfolio should be considered alongside other parts of their financial plan. When done correctly, your investment strategy should enhance your financial outlook instead of making your other financial decisions more difficult.

Physicians whose income, employer retirement plan, and equity compensation are tied to the same healthcare organization may have a more concentrated risk than is immediately apparent. Practice owners often have a significant portion of their personal wealth connected to, and tied up in, the value of the business.  Physicians in both of these  scenarios can suffer from a lack of liquidity.

 

Tip #5: Use tax planning to keep more of each additional dollar

When physicians transition into higher-earning years, taxes can become one of the largest obstacles to wealth accumulation. Too many focus their attention on their tax return, which records what already happened, rather than engaging in proactive tax planning for their future.

Depending on the physician’s circumstances, planning opportunities may include retirement contributions, charitable giving, investment-loss harvesting, asset location, equity compensation, business structure or the timing of income and deductions.

No single tactic will apply to every physician. An employed specialist, private-practice owner and independent contractor can face very different planning decisions. State and local taxes can also materially affect the appropriate strategy.

The objective is not merely to reduce this year’s tax bill, but to make decisions that improve your long-term financial position.

 

Tip #6: Protect the income that makes catching up possible

For many physicians, their greatest financial asset is their own future earning potential.  An illness, injury or extended period away from practice could undermine even a well-designed savings strategy. It is prudent for physicians to carefully consider their options for disability coverage (including how the policy defines disability).  Life insurance may also be important for physicians whose families depend on their income or who carry substantial financial obligations. Practice owners may have additional protection needs related to their practice.

Asset-protection strategies should also be evaluated with qualified legal professionals. Physicians may face professional liability risks that require more specialized planning than those encountered in many other careers.

 

Tip #7: Plan for several goals at the same time

Life is rarely a straight line and typically there are multiple concerns existing simultaneously that need to be considered.  Trying to complete one goal at a time before addressing any others may seem like a logical approach but can easily lead to costly missed opportunities. For example; waiting until all student loans are repaid before beginning to invest could sacrifice years of potential growth.

Building a comprehensive financial plan with an advisor allows you to rank these goals, assign proper resources to each goal, and educate you on how each decision affects the others. Scenario is a great mechanism to help physicians understand the potential effects of market downturns, career changes, earlier retirement, disability, or other unexpected events.

 

Catching up requires coordination, not perfection

Financial planning is a complex and nuanced field that takes years to master; just like medicine.  We meet too many doctors who place unreasonable expectations on themselves to excel in every aspect of their lives.

For more than 40 years, Altfest Personal Wealth Management has guided physicians and their families through all of life’s complex financial decisions. Our fee-only fiduciary approach combines on-going financial planning with active investment management to help clients turn their earnings into lasting financial security.

If you would like a second opinion on whether your current strategy is doing enough to overcome a delayed start, request a complimentary consultation with the Altfest team.

Investment advisory services provided by Altfest Personal Wealth Management (“APWM”). All written content on this site is for information purposes only. Opinions expressed herein are solely those of APWM, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.