As a physician, you may face some unique financial hurdles, like juggling student loan debt, dealing with unpredictable income patterns, or guarding yourself from potential creditors.
Creating a financial plan that fits your specific situation is key to securing your long-term financial health. But where do you get started?
In this guide, we’ll highlight the seven essential components you should consider for your financial blueprint. By focusing on these key areas, you’ll be well-equipped to tackle your financial future with confidence.
1. Retirement Planning for Physicians
Starting their earning journey later in life due to the lengthy education and residency process makes it even more important for doctors to prioritize retirement savings as early as possible.
The longer you wait to start planning for retirement, the more aggressively you’ll need to save to reach your retirement goals, which could mean sacrificing your current lifestyle.
Retirement Account Options for Physicians
Tax-advantaged retirement accounts are among the most effective tools that physicians can use to build wealth. If you're self-employed or run a private practice, a SEP IRA allows you to make tax-deductible contributions that can significantly increase your savings. Alternatively, a Solo 401(k) is ideal if you practice alone, as it lets you contribute as both employer and employee, maximizing your yearly contributions.
Click here to view more detailed information about specific retirement planning options for physicians including IRAs and utilizing employer-sponsored retirement plans.
Other options to consider if you really want to maximize your contributions include defined benefit plans and cash balance plans. Although these are a bit more complex to administer than other retirement plan options, their contribution limits can allow you to accelerate your retirement savings fast.
Learn more about why Cash Balance Plans can be a great retirement savings tool for physicians and small business owners here.
Additional Retirement Strategies
If you’re over 50, catch-up contributions allow you to add more to your retirement accounts than younger savers. Check the IRS.gov website for the latest contribution and catch-up limits for retirement accounts.
2. Debt Management Strategies for Physicians
Physicians often begin their careers with a heavy debt burden. Managing and paying down this debt while still building wealth can seem daunting. Developing a plan that balances these financial priorities will help you stay on track.
Tackling Medical School Debt
Given the high cost of medical education, it’s important to explore your options. For example, if you work in a public service role, you could benefit from the Public Service Loan Forgiveness (PSLF) program, which forgives your remaining student loan balance after you’ve made 120 qualifying payments. If PSLF isn’t an option for you, refinancing your student loans at a lower interest rate could reduce your monthly payments and total interest paid over time, freeing up more money to invest or save for other goals.
Strategies for Balancing Debt and Investments
A balanced approach to ensure your overall financial plan stays healthy may be to set aside a portion of your income for your retirement while tackling high-interest debts. For example, you might use the avalanche method, focusing on high-interest loans first, or the snowball method, which targets smaller balances. Either way, investing some of your income helps you avoid losing valuable time for growth in the market.
Click here for our more comprehensive guide to tackling student loan debt as a physician.
3. Investment Planning for Physicians
You may have little time to manage investments due to a demanding schedule, but a well-diversified portfolio can still be achieved without constant monitoring.
Diversify Your Investment Portfolios
Diversifying your investments is about reducing risk and maximizing returns. A balanced mix of equities and bonds can cater to different stages of your career. For instance, as a younger physician, you might be more inclined to focus on stocks, aiming for growth.
As you near retirement, increasing your bond allocation may provide more stability. Real estate can be another valuable component of your portfolio. Whether through direct property ownership or Real Estate Investment Trusts (REITs), you may be able to generate passive income while enjoying potential tax benefits.
Tax-Efficient Investment Strategies
Reducing your tax burden through strategic investments can keep more of your hard-earned money in your pocket. For instance, while your income might be too high to contribute to a Roth IRA, a Backdoor Roth IRA (where you contribute to a traditional IRA and then convert it to a Roth IRA) may be a potential option to help you contribute after-tax money so you can benefit from tax-free withdrawals in retirement.
Additionally, Health Savings Accounts (HSAs) are an often overlooked yet valuable tool. Since they offer a triple tax advantage—tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses—HSAs can be a powerful way to manage healthcare costs in retirement while also functioning as a supplemental retirement account.
4. Tax Planning for Physicians
Strategic tax planning throughout the year can help you reduce your tax burden and retain more of your hard-earned money.
Deferring Income and Itemizing Deductions
One of the easiest ways to lower your taxable income (and thus your current tax bill), is to maximize contributions to tax-deferred accounts such as IRAs, 401(k)s, and other retirement accounts mentioned in the first section of this article.
Additionally, if you incur substantial medical or business-related expenses, itemizing your deductions might save you more money than taking the standard deduction. This approach can be especially beneficial if you own a practice or have significant out-of-pocket expenses for continuing education or medical equipment.
Tax-Loss Harvesting and Charitable Contributions
When it comes to investments, tax-loss harvesting allows you to use investment losses to offset gains, potentially lowering your capital gains tax. If you’re philanthropic, a donor-advised fund (DAF) allows you to make charitable contributions while also reducing your tax liability. By setting aside funds in a DAF, you can support your favorite causes while strategically managing your taxes.
5. Life Insurance and Estate Planning for Physicians
Life insurance serves not just as a safety net for your loved ones, but also as a tool for long-term financial planning. Term life insurance provides coverage for a specified period, which is particularly useful if you have young children or outstanding debts, such as student loans or a mortgage.
On the other hand, permanent life insurance covers you for life and builds cash value over time, which can be accessed later for retirement or major expenses. This flexibility can serve as a supplement to your retirement savings, especially if you plan to retire earlier than the traditional age.
Estate planning for physicians goes beyond just drafting a will; it includes setting up trusts, powers of attorney, and healthcare directives. For example, a living trust can help your heirs avoid probate, while an irrevocable life insurance trust (ILIT) can keep life insurance proceeds outside your taxable estate, reducing the overall tax burden. Taking these steps not only protects your assets but also ensures your wishes are followed should you become incapacitated or pass away unexpectedly.
There are also several different asset protection strategies, such as using the practice entity, that you should consider as a physician to minimize medical malpractice and other legal risks to your assets.
6. Financial Planning for Healthcare Costs in Retirement
Healthcare costs continue to rise, making it essential to have a strategy in place for managing these expenses during retirement.
Managing Long-Term Healthcare Costs
It may feel early to plan for long-term care, but according to JRC Insurance Group, over 70% of people over the age of 65 will need long-term care at some point in their lives. Even if that age is still years away, it may be worth looking into long-term care insurance to provide coverage for services not included in Medicare, such as in-home care, assisted living, or nursing home expenses.
Early planning allows you to secure a policy at a lower premium and ensures you’re prepared for any future healthcare needs, providing peace of mind for you and your family.
Planning for End-of-Life Care
End-of-life care planning, including advance directives for palliative care options, is an often-overlooked aspect of healthcare planning. Addressing these details now ensures that your wishes are honored and helps minimize the financial and emotional burden on your loved ones.
7. Working with a Physician Financial Advisor
Given the unique financial complexities you face, working with a financial advisor who understands the medical profession can make a significant difference in your financial outcomes.
At The Troncoso Group, our financial advisors specialize in financial planning for physicians and other business owners. We are familiar with the unique aspects of your career, such as protecting your assets from lawsuits, maximizing your retirement planning, navigating student loan debt repayment, and the need for flexible investment strategies.
If you’d like to benefit from insights that save you time and reduce the stress associated with managing your finances, reach out to us today so you can focus more on your practice and personal life.
