Physicians are among the highest earners, but many don’t feel like it. Having already managed large debt burdens on compressed budgets by the time they pay off their student loans and build up to a sizeable income, many physicians learn the value of setting financial goals and seeking professional advice early on.
A physician’s financial priorities vary by income level and preferred lifestyle; a salaried hospital M.D. with a young family might choose to focus on savings and income protection, whereas someone with an older family who owns private clinic may be better served prioritizing practice protection and investment.
No matter your situation, there tend to be a few areas upon which physicians of particular age brackets focus. The circumstances may be different, but many of the concerns are exactly the same. Here’s how a physician might go about setting his own financial priorities:
Start By Asking the Right Questions About Your Retirement:
What will my lifestyle cost? Consider how long you plan to be retired, whether you will continue to work for income, and how you want to spend your time. If you plan on travelling the world, know it isn’t cheap. Also, what big-ticket items might you still need to buy, such as a family member’s college education, during your retirement
What will my health care expenses be? Medicare pays only a percentage of retirees’ health care costs. Planning on how to cover this gap requires an individualized strategy.
Where will my money come from? You’ll likely be drawing from one or more 401k or IRA accounts, as well as Social Security, but the potential sources of retirement income are endless. Total up all of your retirement incomes and assets to see what expenses you can cover and for how long.
How much can I put into savings? “More” is probably the best answer. Don’t just spend your excess cash; at a 7 percent annual return rate money nearly triples in just 20 years. There eventually may come a time where you’re maxing out your annual tax-deferred investments and must start looking for other ways to save. For example, over-50s are usually able to invest even more into their 401k’s and IRAs, and spousal involvement can increase these thresholds even further.
How will I manage my investment during retirement? Once you retire you’ll start pulling from your retirement savings, but the money you leave keeps compounding. Balance your withdrawals to allow your money to replenish; some experts suggest no more than a four percent yearly withdrawal rate. If you must cut into your balance, make sure that you ration it to last throughout your retirement years.
Physicians’ Financial Priorities By Age
Younger decision makers are more likely to assume outcomes rather than taking a wait-and-see approach, but they’re also more open to new strategies than older adults. They’re also more likely to seek maximum satisfaction from their decisions, as opposed to pursuing a merely adequate solution.
Whether your appetite for risk is non-existent or insatiable, most physicians will find themselves considering similar financial questions at each phase of their careers:
In Your 20s:
Budgeting – Med school students don’t graduate into six-figure incomes, not usually. Instead they go into residency, earning a fraction of the salary they hope to make as full-time physicians, often for several years. Once in residency, young docs must learn how live on a small budget, fast.
Health Insurance – Students often come off their parents’ health insurance while in med school, facing their first big challenge in taking responsibility for their own health. Universities and employers usually offer a health plan, but as a future physician you may also have access to an industry-specific individual health plan through your professional association.
Retirement Savings – Retirement savings accounts work because of compounding interest. Waiting until your 30s to start one can end up costing you hundreds of thousands of dollars in the long run. So when it comes to starting a retirement account, every day that passes by is more important than the next.
Hospital Indemnity – Working-age Americans under 45 have a roughly 1-in-10 chance of a booking a hospital stay in a given year. Younger individuals are also more likely to wait until hospitalization is needed before they seek medical help. Depending on your lifestyle and health habits, getting a supplementary plan just to cover hospital visits may make a whole lot of sense.
In Your 30s:
Income Protection – If you haven’t already, you’re likely to start chasing the big things in life once you hit your 30s: a home, a family, and perhaps a country club membership. As your income increases, it becomes more important to maintain than ever before. Protecting that income with life, disability or accident insurance means hedging against the possibility of untimely death, illness or injury cutting off your income stream for weeks, months, even years.
Housing – Your vision of a owning a big home in an expensive neighborhood might be achievable on a physician salary, but is it worth it? A home is an investment, too, but if property values aren’t rising, it may be smarter to consider something more modest that will give a better return.
Student Loans – The median education debt was $170,000 for graduates in 2012, with a whopping 86 percent taking loans. It’s ideal to pay this down, if not completely, then enough to where your payment is small and interest accrues only slowly.
In Your 40s:
Practice Protection – If you hold on to the dream of owning your own practice one day, then it’s likely to happen in your 40s. A warning: the business side of medicine can get messy. Disability insurance that triggers your practice’s buy-sell agreement and purchasing business overhead expense coverage that keeps the lights on and the staff paid can bail your business out of many otherwise sticky predicaments.
In Your 50s:
Entrepreneurship – All physicians are entrepreneurs at heart, but many are also by necessity. You may need access to alternative sources of income in retirement, and branching out into other parts of medicine — or into another industry altogether — can give you the leeway you desire.
Long-Term Care – Given the need for and cost of long-term care, this insurance can pay off big in your later years. Most people need extended care at some point during their retirement, but buying long-term care insurance too late has consequences. Premiums are higher, coverage options fewer. More people are buying younger, hoping to save on potentially large health costs late in life.
In Your 60s
Tax implications – How you choose to handle your accounts as you transition into retirement can affect how much tax you owe on your savings. How much money will you pull from tax-deferred accounts each year? Will you roll your savings over into new vehicles, and what is their taxable status? Keep in mind that your retirement date has major implications on your investment options and Social Security benefit.
The right advisor – During retirement, your savings is your life. The person or company that helps you manage it should be honest, realistic, forthcoming, and share your goals for your retirement savings. If you haven’t already found a service provider who fits that bill, now is the time.
If you found this article helpful, may we suggest:
- For more on protecting your family against untimely death, read 5 Reasons Physicians Should Consider Life Insurance.
- For more on how to enjoy your life after medicine, read Invigorating Activities for Retired Physicians.
- For more on enjoying your time in the medical profession, read Conquering Physician Burnout: Tips on Maintaining a Healthy Work-Life Balance.