We all want to be able to retire and continue the same standard of living to which we have become accustomed during our working years. Physicians are no different, but because of issues that are unique to these healthcare professionals, starting retirement planning early is even more important for them.
Certified public accountant James A. Stroud of Warren, Averett, Kimbrough & Marino says that physicians face one hurdle right way because of the long educational process they must go through. “By the time they enter the workforce, most of their friends are way ahead of them in terms of making money, so their earnings period is shorter,” Stroud said. “If a physician retires at 65, he or she may have 35 years to live on retirement income. That makes their earning period the same or shorter than their retirement.”
A higher tax bracket is also an issue that physicians face as high salary earners, and Stroud points out that many physicians also live a lifestyle that is more affluent than the general population, which increases the need for more money at retirement. “A shorter period to earn, a higher tax bracket and the need for more money in retirement is like the perfect storm of events that can prevent physicians from earning the money needed for retirement,” Stroud said.
The litigious nature of our society and the regulatory environment also play a role in a physician’s earning and savings potential. “This litigious nature has made an impact on the healthcare industry,” he said, “and these suits take both a financial and emotional toll of doctors when, in many cases, a bad outcome may have had nothing to do with the treatment received.”
It is Stroud’s opinion that the healthcare industry in the United States — next to maybe the nuclear industry — is the most regulated in our country. In addition to normal business rules, physicians must also contend with rules related to hospitals, medical practices, referrals and patient privacy. “These are all good rules, but we live in a world of fear created by regulatory burdens,” said Stroud. “This is one reason some physicians practice concierge medicine where the patient pays X dollars a month for the physician to take care of them. That takes the insurance companies out of it.”
When a physician is ready to start retirement planning, he or she should begin planning with the end in mind. “Look where you are today and talk to somebody about where you want to be at a specified time in the future,” Stroud said. “Use the planning process to decide on a strategy and review your plan annually to ensure you are hitting your targets.”
While saving money is imperative for retirement planning, how much you can save and where you invest that money is key to ensuring that the savings grows enough to provide income for your future. Brad Mitchell, a private banker with the Compass Bank Wealth Management Group, points out that retirement plans for physicians are continuously evolving, and many physicians are unaware that this is happening. “Most physician groups have a 401(k) plan that was created to benefit everyone but the physician,” Mitchell said. “Often, the physician is unable to contribute a significant amount of pre-tax dollars because of Actual Deferral Percentage/Actual Contribution Percent (ADP/ACP) testing issues. Some physician groups have adopted a profit-sharing plan that allows the doctors, with some safe harbor provisions, to contribute up to $46,000 a year, but these doctors need more flexibility in their 401(k) plans.”
To help address these issues, Mitchell recommends that physicians consider using a cash balance plan as part of a combination plan. “When a cash balance plan is placed as part of a combination plan, such plans allow physician groups to contribute larger dollar amounts to their retirement plans,” he said.
In a typical cash balance plan, an account is created for each participating physician and staff member. “Increases and decreases in the overall value of the plan’s accumulated investments will not affect the amounts promised to any single participant in his or her account under the plan. Consequently, the investment risks and rewards are borne solely by the physician group and not the individual participant,” Mitchell added. “Combination plans offer physicians the opportunity to save significant amounts for their retirement and provide additional benefits to their staff, if they have their own practice, for example, by allowing physicians to contribute amounts in excess of $100,000 to their 401(k), profit-sharing and cash balance plans in a given year. Combination plans, if structured correctly, can greatly increase pre-tax contributions and reduce taxable income.”
As part of the retirement planning process, Stroud encourages doctors to, first, get out of debt. “That’s one thing that many don’t do quickly enough,” he said. Next, they need to be sure they are working hard enough to make enough money to save for retirement. “Everything you do must be translated through practice overhead and then living expenses. Only then can you save,” Stroud said. “The work effort must result in enough money to allow savings. If you do these two things, you should have enough.”
March 2008
