Early retirement for physicians

Early retirement for physicians

Early retirement for physicians….As someone married to a physician and surrounded by many friends in the medical field, I know that early retirement is on the minds of many physicians. If you are reading this article, you have probably put some serious thoughts about it as well.

Retiring early is a very personal decision. And it is not an easy decision to make. It would be best if you considered many financial and personal factors before you make the final call. Retirement will change your lifestyle dramatically. Your salary and healthcare benefits will be different. You might experience an unexpected change of pace. You may lose touch with colleagues and friends. On the bright side, you can travel and do things that matter most to you. Your stress level will go down, and you will spend more time with your family and loved ones.

Physician Burnout

Many physicians decide to leave the profession due to physical and emotional stress. A 2019 study by the AMA, the Mayo Clinic and Stanford University School of Medicine found that 44% of U.S. physicians presented at least one symptom of burnout. For comparison, the overall burnout among US workers is 28%.

Among the specialties with the highest burnout rate are Urology (54%), Neurology (53%), Physical Medicine and Rehabilitation (52%), Internal Medicine (49%), and Emergency Medicine (48%).

The peer pressure for early retirement

Be prepared to encounter some resistance from colleagues and patients when you announce your early retirement. There is this unspoken public “belief” that doctors owe the society their skills and knowledge. Many patients don’t want to look for another doctor. And some of your colleagues may feel that you are abandoning the profession. You need to ignore the noise and focus on your personal goals.

I compiled a list of suggestions that will help you prepare on your journey to early retirement. Don’t wait until the last moment. Get ahead of the curve so that you can take the financial stress out of your retirement plans.

Study your benefits

The first step to early retirement for physicians is to know your employee benefits in full detail. Most public and private healthcare systems offer competitive benefits packages with a wide range of perks including pension, 401k match, profit sharing, healthcare coverage, life insurance, disability insurance, and loan repayment. Many employers even offer an early retirement option at 55.

These benefit packages vary significantly from one employer to the next. Take some time to learn and understand your options. If your goal is to retire early, consider an employer that will give you the highest chance to achieve this goal.

Become debt-free

The US student debt has skyrocketed to $1.6 trillion. Seventy-five percent of medical students graduated in their class of 2018 with student debt. The average loan per student is $196,520. Furthermore, many medical students graduate with more than $300,000 in debt. It’s not uncommon that some physician couples owe over half a million dollars in student debt.

A crucial step in your journey to early retirement for physicians is paying off ALL YOUR DEBT including student loans, credit cards, and mortgage. It might seem like an uphill battle, but it’s not impossible.

There are several options you can consider when tackling your student loans – loan forgiveness, refinancing with low-interest rates and income-driven repayment.

Maximize your retirement savings

When you retire early, assuming before the age of 66, you will not have full access to your social security benefits, pension, and Medicare benefits. In many cases, you may want to delay taking your pension and social security to maximize the amount you will receive annually.

One way to cover the gap while you are waiting is through your personal retirement savings. Most employers nowadays offer either a 401k, a 403b, or a 457-retirement plan. When you join your employer retirement plan, you can save up to $19,000 per year as of 2019. If you are 50 or older, you can save an additional $6,000 for a total of $25,000 per year. An additional benefit to you is that these contributions are tax-deductible and will lower your tax bill. Many employers also offer a match that can further boost your retirement savings. For more information about how to increase your 401k savings, read my article about “The Secret to becoming a 401k millionaire.

Save outside your retirement plan

if you plan to retire early, you need to make additional savings outside of your retirement plan.

First, you need an emergency fund. It would help if you had at least six months’ worth of living expenses in cash or a savings account. This emergency fund will serve you as a buffer in case of sudden and unexpected expenses.

Second, save in a taxable investment account. The main benefit of using an investment account is liquidity. You can access these funds at any point in time without any restrictions.

If you retire in your 40s or 50s, you may not be able to access your retirement accounts before reaching 59 ½. There are some legal exemptions, including poor health, disability and economic hardship that allow withdrawing your retirement savings without a penalty. However, these exceptions may not apply to you. And ideally, you should let your tax-deferred retirement savings grow for as long as possible.

Investing outside of your retirement accounts does not provide immediate tax benefits. All investments will be after-taxes. You may also incur taxes on dividends and capital gains. To make the most out of your investment account, make sure to use low cost, tax-efficient ETFs, and index funds.

Have an exit strategy if you own a medical practice

If you own a medical practice and want to retire early, you will need a sound exit and succession plan. You will have to find a suitable buyer or someone who will manage the day-to-operations on your behalf. Many business owners have a significant portion of their wealth, locked-in their business. If selling your practice is the primary source of your retirement income, then you will need to consider tax implications from any potential realized capital gains.

Consider moving to a low-cost location

If you currently work and live in an expensive area like San Francisco or New York City, you may want to consider retiring in a different state or even another country. The cost of living differential between Mississippi or Arkansas versus New York and California could make a big difference in your retirement lifestyle, especially if you are working on a tight budget.

Look for healthcare coverage

One of the main challenges, when you plan for early retirement for physicians, will be healthcare coverage. Depending on your employer, some doctors have excellent medical and dental benefits. In some cases, these benefits are completely free or heavily subsidized by your employer.  Some hospitals that offer an early retirement option could have healthcare benefits included. In other cases, when you retire early, you could lose these perks. Since you won’t have access to Medicare until you reach 65, you will need to find a reasonably priced healthcare insurance policy.

Do not underestimate healthcare costs. According to Fidelity, a 65-year old couple retiring in 2019 can expect to spend $285,000 in health care and medical expenses throughout retirement. For single retirees, the health care cost could reach $150,000 for women and $135,000 for men.

Consider working per diem

If you are short of retirement savings or bored of staying at home, you may consider working per diem or locum tenens. You can work on an hourly basis at your own pace. The extra work will boost your early retirement income and will keep your knowledge up to date.

Stick to a budget

You must adhere to a budget before and after your retirement. Before retirement, you need to pay off your debt and save for retirement aggressively. Depending on your income, these payments can cut through your family budget. You may have to make some tough choices to avoid or delay large purchases and curb discretionary spending.

Once you retire, your income may go down. True, you don’t have to drive to work, but some of your expenses might still be the same.

Here are some ideas about how to save money. Cook instead of going to a restaurant. Make your own coffee. Drive your old car instead of buying a new one. Travel off-season.

Have a plan

A happy retirement comes with a good plan. It may require some self-discovery but ultimately will lead to finding a purpose and fulfilling your life dreams. You can travel and volunteer. Write a book. Teach. Learn a new hobby or language. Find out what makes you happy outside of your daily routine and make the most out of your free time.

The bottom line on early retirement

Early retirement for physicians is not an illusion. It’s an achievable mission that requires a great deal of planning and some personal sacrifice. If you want to retire early, you need to start planning now. Some hospital systems offer early retirement packages. Unfortunately, your guaranteed retirement income or pension will be a lot less than what you would get if you retire ten years later.

Your family can be a big influencer for or against your decision to retire early.  You might have a partner who wants to stay active. Perhaps, you have children who are going to college soon. Every family is different, and every situation is unique. Do the number crunching and see what makes the most sense to you.

10 ways to grow your savings during medical residency

Grow your savings during medical residency

As someone married to a physician, I happen to have many friends in the medical field. Most doctors have to go through a brutal residency program. The medical residency takes between three and five years. Residents have a hectic working schedule, aggressive learning plan and spend long hours in the hospital. They shift every 3 to 6 months between different subjects and medical practices. Their salaries are usually in the 40-60k range, while their student loan balance is still growing with compounding interest. As a financial advisor, I would like to suggest ten ways to grow your savings during medical residency.  Naturally, I have to give credit to my wife for contributing to this article.

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1. Consider a location with low cost of living

When you apply for medical residency, one way to save money is to pick an area with a low cost of living. If you decide on a residency in New York City or San Francisco, you can expect your living expenses like rent and food to be much higher than if you are in Charlotte or Denver for example. $10 bucks don’t go a long way in the Big Apple but might fit your daily budget in a smaller town.

2. Find out if your hospital provides subsidized housing

Many hospitals offer subsidized housing. A lot of these apartments are conveniently located near your hospital, and you will save money on rent and transportation. Also, you might be able to get an extra 15-20 minutes of sleep just because you are right next door.

Often these spots are limited. Check if you qualify and apply early. Don’t wait until the last minute.

3. Get a roomy

If you spend six out of seven days in the hospital, you might as well have a roommate. You can split the bills. If you are on good terms with your roommate, you can even shop together at Costco or Sam’s club. They sell in bulk at very competitive prices. If you have a buddy to split the large packages, you can save a lot of money on your meals and other necessities.

4. Set up a budget

This is an important one. Medical residents get an average salary for the number of hours spent in the job.  Since you won’t have much time later on, before you start your residency, do your budget. Go over your salary from the hospital and your necessary expenses. Make sure that all numbers add up. Also, start setting up an emergency fund. You never know what life will present.

5. Manage your student loans

Do not ignore your student loans. If you are not required to pay them during residency the interest on the loan will still accrue and add to the amount you have to pay later. Try to refinance your high-interest loan with a lower rate one. If you can’t refinance it, try to pay the interest regularly.

Not paying your interest will have a huge compounding effect on your loan balance, which will substantially increase the amount you owe once you leave residency.

6. Manage your credit card debt

Now when you finally started making some money, you can look at your credit card debt. Credit cards are a convenient way to pay for things, but they often carry a huge interest. I hope you don’t carry any credit card debt, but if you do, now is an excellent opportunity to start refinancing or repaying the high-interest balances.

7. Maintain a good credit

A good FICO score will save you a lot of money in the long run. People with high credit score get lower interest on their personal, car loans, and mortgages. A lousy credit score can even hurt your job search. Yes, many employers check that.

8. Don’t splurge on expensive furniture. Go to Ikea or Craigslist

If you must buy new furniture, do not splurge on expensive ones. Remember, you will spend the next four years in the hospital. You don’t need expensive furniture to collect dust. If you want to have something decent go to Ikea, look on Craigslist or ask other senior residents, who are graduating soon.

9. Start retirement savings

This recommendation is critical. Doctors launch their career at least ten years after the average person. Therefore they start saving for retirement much later. The new physicians miss ten years of potential retirement savings. You don’t have to be that person.

401k / 403b

Most health systems offer some variation of a 401k or 403b plans. Take full advantage of them. Your contributions are tax deductible. You won’t owe any taxes on your savings until you start withdrawing money from the plan.

Roth IRA

If your hospital does not offer any retirement saving plans (very unlikely but possible), you can always open a Roth IRA account. Roth IRA allows you to invest up to $5,500 every year which will grow tax-free until retirement. You will never pay any taxes on your gains and dividends as long as you keep the money in the account until you retire. Roth IRA has one caveat. You can only contribute the maximum amount if you make less than $117,000 per year. The chances are high that you will make a lot more after leaving residency and starting your practice. Therefore, you won’t qualify for Roth IRA later in your career.

10. Find freebies

Look for free stuff. There is no shame in that. There are many local free concerts, free museum nights, restaurant specials and happy hours. Look for them in your area or local newspaper or website.

Your hospital will regularly offer sponsored programs with free lunches or dinners. Go to some of them. You may learn something new, meet interesting people and get a free meal.

Find out if your hospital has a gym. Regular workouts will keep you in shape and help you get through the long hours.

Final words

If you have any questions about how to grow your savings during medical residency or how to start investing for retirement and other financial goals, reach out to me at stoyan@babylonwealth.com or +925-448-9880.

You can also visit our Insights page where you can find helpful articles and resources on how to make better financial and investment decisions.

About the author:

Stoyan Panayotov, CFA is married to a physician. He is the founder and CEO of Babylon Wealth Management, a fee-only investment advisory firm based in Walnut Creek, CA. Babylon Wealth Management offers personalized wealth management and financial planning services to healthcare professionals and their families.  To learn more about our Private Client Services and how to grow your savings during medical residency visit out page here

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8 Financial planning tips for doctors

Introduction

Being married to a physician has allowed me to obtain a unique understanding of the costs and benefits of achieving a medical degree.   In this post, we will discuss several practices that can help physicians and other healthcare professionals achieve financial prosperity.

What sets physicians apart from other professions?

Doctors begin their careers and start earning an income much later than the average person.  If a physician is accepted to a medical school immediately following completion of an undergraduate degree, she will be in her mid-20s when she graduates medical school.   After medical school, physicians must continue clinical training in their chosen specialty.  The residency training period ranges from 3 to 7 years depending on the specialty.  During this time, new doctors make a modest salary, work long hours and cover overnight on-call shifts in exchange for clinical training.

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Once launching their career, doctors receive above average compensation and have almost zero risks of unemployment. These privileges, however, come with some serious caveats.

As of 2015, graduating physicians start their career with an average student loan of $183,000. This is equal to $1,897 of monthly payments over ten years or $927 over thirty years, at 4.5% interest. If I remove the lowest 20% of the medical students that come out of school with zero or small loan amount, the average debt figure jumps to $230,000. Which is a total of $286,000 due on principal and interest on a 10-year loan and 420,000 on a 30-year one. Student loans become repayable after medical school graduation.

1. Start saving for retirement early.

Doctors have a shorter working life than the average person. They start their careers ten years after most people. During these ten years, doctors don’t earn a significant salary and accumulate a large amount of education-related debt.

It is critical that young doctors start saving for retirement while they are in residency. During residency, the new doctors receive a salary between $40,000 and $60,000. Many employers offer both tax-deferred 401k and after-tax Roth accounts. Depending on their financial situation physicians should consider maximizing both plans with priority on their After Tax Roth contributions first before adding money to their 401k account. As of 2019, Roth IRA contributions are limited to $6,000 per year at $122,000 of income. The amount phases out as the income reaches $137,000. Almost certainly this option won’t be available once they start their career and move to higher income levels.

2. Maximize your retirement contributions.

Doctors have to maximize their retirement contributions to catch up for the extra ten years of school and residency.

Physicians working in hospitals and large healthcare systems will very likely have the option to open a tax-deferred 401k plan. As of 2019, these programs allow their participants to contribute up to $19,000 a year. Most employers offer matching contributions for up to a certain amount.

Some health systems offer pension plans, which guarantee a pension after certain years of service. These plans are a great addition to your retirement savings if you are willing to commit to your employer for 10 or 20 years.

Moreover, some government and state-run hospitals even over 457 plans in conjunction with a 401k plan, allowing participants to super save and defer a double

Doctors who are self-employed, own a corporation or run a private practice should consider investing in solo 401k plans. These plans allow for up to $56,000 of pretax contributions, $19,000 as an employee and $37,000 as profit sharing by an employer.

Doctors earning significant cash flow in a private practice should also consider adding a defined benefit plan to their 401k. This combination is a powerful saving tool. However, it requires the help of an accredited actuary. Contact your financial advisor if you want to learn about this option.

In addition to contributing to employer-sponsored retirement plans, doctors should consider setting aside a portion of their earnings to taxable (brokerage or saving) accounts. The contributions to these accounts are made on after taxes basis. Taxes are due on all dividends, interest, and capital gains.   The most significant benefit of these funds will be their liquidity and flexibility with no income restrictions.

 3. Manage your taxes.

High earning doctors need to consider managing their tax bill as one of their top priorities. Tax implication can vary depending on income level, family size, and property ownership. Hiring a CPA, a tax attorney or a financial planner may help you reduce or optimize some of your tax dues.

A successful tax planning strategy will include a combination of retirement savings, asset allocation, tax deductions, and estate planning.

Feel free to check some of my previous postings about tax optimized financial planning.

4. Balance your budget.

After ten years of vigorous study, sleepless nights and no personal life, doctors are thrown back in the normal life where they can enjoy the perks of freedom and money. As much you are excited about your new life, do not start it with buying a Lamborghini or an expensive condo on South Beach. In other words, do not overspend. Even if you got a great job with an excellent salary and benefits, you need to remain disciplined in your spending habits. Stay focused on your long-term financial goals. Leave enough money aside for retirement savings, rent or mortgage payments, loan payments, living expenses, college savings for your children and an emergency fund.

5. Manage your student loans. 

How to best manage your student debt depends on a combination of factors including your credit score, federal or private loan, loan maturity, interest rates, monthly payments, and current income. Stay on top of your student debt. Do not lose track of due dates and interest rates.

For those looking for help reducing their debt, here are some options:

  • Loan repayment options from employers. Many private, federal, state and city health care organizations offer loan repayment options as an incentive to retain their doctors. Those options are frequently dependent on years of service and commitment to work for a certain number of years. These programs vary from employer to employer.
  • Loan forgiveness. Under the Public service loan forgiveness program (PSLF) launched in 2007, full-time employees at federal, state or local government agencies, as well as nonprofit workers at an organization with a 501(c)(3) designation, are eligible for loan forgiveness after paying 120 monthly payments. The first applicants will be able to benefit from this program in 2017.
  • Working in underserved areas. Some states offer loans forgiveness for doctors working in underserved areas. The conditions and benefits vary state by state but in essence, works similar to the PLSF program.
  • Loan consolidation and refinancing. If you have two or more private student loans, you may want to consider loan consolidation. If you pay high interest on your current loans, think about refinancing it at a lower rate. Your new loan availability depends on your credit history, income, and general macroeconomic factors.

Under the current tax law, all forgiven loans are subject to taxes as ordinary income. Take it into consideration when applying for loan forgiveness.

6. Watch your credit score.

Physicians need to monitor and understand their credit score. Known also as the FICO score, it is a measure that goes between 300 and 850 points. Higher scores indicate lower credit risk. Each of the three national credit bureaus, Equifax, Experian, and TransUnion, has a proprietary database, methodology, and scoring system. It is not uncommon to find small or even substantial differences in credit scores issued by three agencies. Many times, creditors will use the average of the three value to assess your creditworthiness.

Your FICO score is a sum of 64 different measurements. And each agency calculates it slightly differently. As a general rule, your FICO score depends mostly on the actual dollar amount of your debt, the debt to credit ratio and your payment history. Being late on or missing your loan payments and maximizing your credit limits can negatively impact your credit score.

You can get your score for free from each one of the bureaus once a year. Additionally, many credit cards provide it for free. Keep in mind that their FICO score will come from one of these three agencies. Don’t be surprised if your second credit card shows a different value.  Your other bank is probably using a different credit agency.

7. Take calculated risks.

Doctors are notorious for their high-risk tolerance and attitude toward investing in very uncertain endeavors. While this is not always a bad thing, make sure that your investments fit into your overall long-term financial plan. Do not bet all your savings on one risky venture. Use your best judgment in evaluating any risky investments presented to you. High returns always come with high risk for a loss.

8. Get insurance.

Having insurance should be your top priority to take care of yourself and your family in case of unforeseen events. There is an extensive list of risks you have to consider,  for instance – health, disability, life, unemployment, personal umbrella, and malpractice insurance.

Fortunately, some of them might be covered by your employer. A lot of organizations offer a basic package at no cost and premium package at added subsidized price. Take advantage of these insurance packages to buy yourself protection in times of emergency.

For instance, if you are a surgeon or dentist and get a hand injury, you may not be able to work for a long time. Having disability insurance can help you have an additional income while you recover.

If you run your practice, having malpractice insurance will help cover the cost if you get sued by your patients.

Final words

If you have any questions about your existing investment portfolio or how to start investing for retirement and other financial goals, reach out to me at stoyan@babylonwealth.com or +925-448-9880.

You can also visit our Insights page where you can find helpful articles and resources on how to make better financial and investment decisions.

About the author:

Stoyan Panayotov, CFA is the founder and CEO of Babylon Wealth Management, a fee-only investment advisory firm based in Walnut Creek, CA. Babylon Wealth Management offers personalized wealth management and financial planning services to individuals and families.  To learn more visit our Private Client Services page here. Additionally, we offer Outsourced Chief Investment Officer services to professional advisors (RIAs) and other institutional clients. To find out more visit our OCIO page here.

Disclaimer: Past performance does not guarantee future performance. Nothing in this article should be construed as a solicitation or offer, or recommendation, to buy or sell any security. The content of this article is a sole opinion of the author and Babylon Wealth Management. The opinion and information provided are only valid at the time of publishing this article. Investing in these asset classes may not be appropriate for your investment portfolio. If you decide to invest in any of the instruments discussed in the posting, you have to consider your risk tolerance, investment objectives, asset allocation and overall financial situation. Different investors have different financial circumstances, and not all recommendations apply to everybody. Seek advice from your investment advisor before proceeding with any investment decisions. Various sources may provide different figures due to variations in methodology and timing,  Image copyright: 123RF.com