How Physicians Should Tackle Their Toughest Money Decisions
(Medical Economics, Sept. 30, 2019) – Over the course of their careers, physicians face several major financial decisions that can have a lasting impact on their financial well-being. Here’s a look at some of these key decisions and advice physicians should consider when making them.
When to refinance your student debt
According to the Association of American Medical Colleges, three-fourths of medical students carry education debt (including college and medical school), with the median debt level hitting $200,000 in 2018. A 2018 Medical Economics survey of physician readers found that 30 percent of respondents had student loans upwards of $200,000.
Whether physicians should refinance their debt hinges on the types of loans they have, says Carolyn McClanahan, MD, CFP, director of financial planning at Life Planning Partners, Inc., in Jacksonville, Fla. Her advice: If physicians have loans with high interest rates that aren’t available for forgiveness, they should shop around for better rates. “You could save a lot of money over a long period of time just by decreasing the interest rate by 1 percent or more,” she says.
In fact, physicians should consider refinancing their private loans as early as the first year of residency, according to Andrew Musbach, CFP, co-founder and financial advisor with MD Wealth Management, LLC, in Chelsea, Mich. However, those with federal loans may already have low effective interest rates or may be pursuing public service loan forgiveness, so refinancing may not be beneficial, he says.
Roozehra Khan, DO, assistant professor of clinical medicine at Western University of Health Sciences in Pomona, Calif., paid off $289,000 in student loans in three years without refinancing. She started by whittling down her government loans with 7 to 8 percent interest rates and then moved on to loans with 2 percent interest rates.
As a single professional, she was able to keep her rent and other expenses low while paying down debt. “I continued to live like a fellow when I was an attending—I put almost all of my paycheck toward my loan repayment every month,” says Khan. She made sure to direct the additional payments toward reducing the loan’s principal balance, not the interest.
“I want young people to know this is completely possible,” she says. “When you are able to take financial control, it creates a mental freedom that allows you to be the doctor you want to be.”
Buying life and disability insurance
Many physicians make the mistake of relying solely on the life and disability insurance they receive from their employers when they should also have their own individual coverage, McClanahan says. “I tell everyone, especially young physicians who may be thinking about having children, to get a cheap term life insurance policy right out of the gate that you own and that goes with you if you leave your job,” she says.
Another mistake is purchasing whole life insurance rather than a term policy, Musbach says. While term life insurance provides coverage for a fixed amount of time (often 10 to 30 years), whole life provides permanent coverage along with a savings and investment component. “On the surface, it sounds like a good idea. But in the end, it’s just expensive insurance coverage with mediocre investment returns,” he explains.
He also recommends that residents purchase an individual, “own occupation” disability insurance policy (which provides benefits if they are disabled and unable to work in their “own occupation”) specific to their specialty with a rider that allows them to buy more coverage when they become attendings and their salaries increase. This helps them avoid another lengthy medical underwriting process when they are older and may no longer be as healthy, he says.
According to McClanahan, many young physicians are behind when it comes to estate planning. At a minimum, every physician should have documents designating a healthcare surrogate and a power of attorney, she says.
As soon as they have children, physicians also should draw up wills or trusts that allow them to name guardians for their children and dictate what happens to their estate after their death, Musbach says. “Having an estate plan is going to help your kids save a lot of headaches and also minimize the potential for family conflict,” he adds.
Saving for college and retirement
Many young physicians have difficulty prioritizing their money goals once they begin practice and see their salary jump, experts say. Physicians likely still have student loans and are many years behind their peers in other professions who required less education and training, Musbach says. At the same time, they may have a family and want to save for college or a home.
John Cullen, MD, FAAFP, a family physician practicing in Valdez, Alaska, recalls such struggles early in his career. Nearly 30 years ago, Cullen and his wife, who was earning her teaching degree, had their first of three children while he was in medical school and their second during his residency. The young couple had accumulated about $130,000 in student debt, which they consolidated into one low-rate loan.
Even though both of their incomes were modest, they made it a priority to start investing for retirement right away. To save for college, they took advantage of state-sponsored 529 college savings plans soon after their first child was born.
Comparing his experience with young physicians today, he recognizes that many have a tough time getting an early start on investing while balancing other financial priorities.
“Medical students and residents don’t get nearly enough education on investment strategies for retirement,” says Cullen, who hopes to promote greater financial education in his role as president of the American Academy of Family Physicians.
Last year he and his wife, both in their mid-50s, paid off all of their consolidated debt for their house, a sailboat, and loans, so they are able to put away even more money for retirement.
Getting an early start on retirement savings is one of the best money moves physicians can make, experts say. In fact, financial advisors have a mantra: You can borrow for college, but you can’t borrow for retirement. That is why McClanahan and Musbach recommend that physicians save as much as they can in qualified retirement plans like 401k’s and 403b’s, which provide tax benefits and are protected from creditors.
For those in training, contributing post-tax dollars to Roth accounts can provide additional tax diversification before their jump in income makes traditional 401k or 403b contributions (which are made with pre-tax dollars) more beneficial, Musbach adds.
Investment strategies beyond the 401k or 403b
If physicians have maximized their 401k or 403b contributions, they can explore other savings vehicles that may offer tax advantages, Musbach says. Depending on their situation, practice owners may want to consider cash-balance plans, a type of qualified retirement plan that allows them to save considerably more on a pre-tax basis than 401k plan contributions. And for certain physicians who also work in a locum tenens role, a simplified employee pension IRA or 401k may provide an additional tax-advantaged vehicle to save some of their independent contracting income, he adds.
Given their high incomes, there is no need for physicians to take on the additional risk—and hassles—of investing in startups, private deals, or rental real estate to meet their financial objectives, Musbach says. “The goal isn’t to chase the highest return every year, but rather to make sure the way you are investing is aligned with your goals,” he says.
If physicians do invest in a startup or another risky investment, they should use their “play money,” McClanahan advises. But they should shy away from making “friend of a friend” investments in what’s billed as the next big thing, she says.
“Private placements lack transparency, and because of this physicians are often hoodwinked,” she notes.
When to retire
AAFP’s Cullen has no plans to stop seeing patients, although he thinks he could do so while maintaining his financial independence.
Becoming financially independent for life transitions, rather than focusing on retirement, should be every physician’s goal, says McClanahan.
She believes the biggest determinant of when physicians can reach financial independence is how much they spend, not how much they save. “If you develop an expensive lifestyle that you become locked into, it’s going to be hard to achieve financial independence or retirement at a young age,” she says.
Physicians shouldn’t count on the sale of their practice as their nest egg, she adds. Smart investing and modest spending over the long run will likely bring greater returns.
Musbach urges physicians to aim for a state of financial independence where work is optional, not required. As a general rule, retirees can safely withdraw 4 percent from their portfolio each year, he says. That means a doctor looking to draw $100,000 each year would need to save about $2.5 million. Reaching that goal requires saving at least 15 to 20 percent each year, he says.
Hiring and changing financial advisors
There is no set moment, such as when physicians reach a certain savings target or income bracket, when they should consider working with an investment professional, says Gerri Walsh, senior vice president for investor education at FINRA, the Washington, D.C.-based organization that licenses and registers all brokers in the United States. Rather, physicians should contact an advisor whenever they want guidance on managing their money.
When selecting an advisor, Walsh recommends visiting FINRA’s BrokerCheck, a free tool for researching investment professionals that provides information on brokers’ licensing, experience, and history of customer complaints.
When might physicians want to switch advisors? One cause is when they suspect the advisor of engaging in problematic behavior, such as making unauthorized trades, Walsh says. If physicians are not satisfied with their advisor’s explanation, they can contact the firm’s branch manager and visit FINRA’s investor complaint center for more guidance.
Another cause for switching would be if the physician does not believe the advisor is offering unbiased advice. As Walsh says, “If you ever feel discomfort with the products, services, and strategies that are being recommended to you, that is an important point to pause and reflect on the relationship—especially if the products, services, and strategies don’t align with your goals.”