As a medical professional, you face plenty of challenges throughout your day. If you are a dentist, you may struggle to balance running the administrative side of your business with growing your patient list and continuing your education. As a physician, the health of your patients is a heavy burden, and you have to juggle countless cases while also developing relationships with those you provide care for. As a nurse, you work long hours and give of yourself day in and day out. The question, then, is who takes care of you and your future?
Your financial future cannot be ignored. Many healthcare professionals may be at a disadvantage when it comes to personal financial management because their training doesn’t equip them with the tools required for a lifetime of managing their family’s financial well-being. On that note, here are some common financial mistakes medical professionals make and some strategies to help you identify and avoid common pitfalls.
1. Getting A Late Start
The medical profession, unlike other professions, requires you to stay in school longer. This means you have a shorter time frame for saving. For this reason, most people in the medical industry don’t begin saving until they’re in their late 20s or early 30s, and this can have a negative impact on the success of retirement planning.
When asked about their progress in saving and planning for retirement, nearly 40% of physicians surveyed felt that they were behind, and only 11% felt that they were ahead of the curve. (1) This feeling of lagging behind has a lot to do with compound interest. The earlier you start saving, even in small amounts, the better. Compound interest helps the money you put away grow faster due to interest building upon itself. For every year you delay, you’ll have to contribute significantly more to reach your savings goals, as you not only miss out on the contributions but also the compound interest earnings. For example, if you start saving $400 per month at age 25, you would have $1 million saved by age 65 (assuming a 7% annual investment return). If you don’t start until age 35, you’ll have to save around twice as much to reach $1 million by age 65. This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.
The ideal way for medical professionals to make up for these lost investing years is to save more aggressively during their working years. Here are some ways to do just that.
Maximize Your Contributions
Many employers offer a 403(b) or 401(k) plan which allows employees to save up to $19,000 a year pre-tax ($25,000 for those over age 50). According to a Fidelity Investments report, 60% of female physicians and 45% of male doctors don’t save up to the limit. (2) Tax-advantaged accounts, including IRAs, are one of the most effective ways to save for retirement, and many doctors are not taking advantage of the opportunity. For doctors who find themselves in the 32% or higher tax brackets, being able to save for retirement prior to paying their high tax rate puts them in an incredible position to build wealth for a comfortable retirement. One of the first things anyone looking to bolster their retirement savings should do is take advantage of every benefit offered by the IRS and maximize their tax-advantaged accounts.
Convert Your IRA
Once you’ve maxed out your tax-advantaged savings vehicles, consider opening a Roth IRA. Not only do Roths offer tax-free growth, but you also don’t have to take required minimum distributions when you turn 70½. The only problem is that many doctors make too much money to qualify for a Roth IRA.
In 2019, single tax filers can only contribute to a Roth IRA if their modified adjusted gross income is under $137,000 and can only contribute the maximum if it is under $122,000. For those who are married filing jointly, you must make under $203,000 to contribute at all, and the phaseout begins at $193,000. But that doesn’t mean you are out of luck.
At the end of the year in which you contribute to your traditional IRA, you can submit a Roth Conversion Form to your brokerage, who then distributes the money from your traditional IRA into your Roth account. You must ensure that your tax preparer knows that the distribution went to the Roth so that you don’t deal with unnecessary taxes.
Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regard to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.
2. Not Having A Student Loan Payoff Strategy
You might be wondering how you can maximize your retirement plan contributions when you carry such a heavy student loan debt. According to the 2016 Report on U.S. Physicians’ Financial Preparedness, (3) the average physician after medical school in the United States has between $150,000 to $200,000 in student loan debt. While most medical professionals can pay off this debt quickly, you don’t want to put off your retirement savings even further. This is why it’s critical to have a strategy to balance savings and debt payoff. One option is to leverage your low-interest loans, which allows debt to be paid off over time and retirement assets to be built with more time to grow through compound interest.
3. Ignoring The Risks Of Liability And Asset Protection
Medical liability is an omnipresent concern for physicians, not only because of the potential effects of a settlement, but also the costs associated with fighting a prolonged and costly legal battle.
While medical liability insurance is designed to protect personal and business assets from malpractice claims, there are limits to your coverage, and many policies explicitly exclude coverage for suits arising from activities that are not directly related to the patient-physician relationship.
Unfortunately, if your liability coverage is exceeded, your personal assets can be put at risk if they are not adequately protected. Even when physicians attempt to shield their assets by putting them in the name of a child or spouse or hiding accounts, professional investigators are skilled at discovering sensitive financial information that can be used at trial.
You’ve worked hard for what you own, and you want to keep it safe. While no asset protection strategy can be right for everyone, there are many tools at your disposal to help protect yourself and your family from costly litigation. There are many options to protect yourself, and we would love to help you find the right ones.
4. Neglecting To Find A Financial Partner
You have a lot on your shoulders, and managing your finances probably just feels like yet another responsibility you don’t have time for. But you don’t want to gamble with your future. According to a report on physicians’ financial preparedness, 45% of physicians say they only feel somewhat or not very knowledgeable about their finances. (4)
Whether you are just starting out in the medical profession or have been working for decades, a financial professional who specializes in working with individuals in your position can walk you through each of the challenges you face and help you create a comprehensive plan that will allow you to focus on what you do best. If you want to worry less about your finances, Harbor Wealth Management can help. Reach out to us at firstname.lastname@example.org or 985-605-7185 or schedule your free introductory phone call now.
About Jeremy Smith
With nearly two decades of experience in the financial services industry, Jeremy Smith serves as a dedicated and knowledgeable financial advisor and the founder of Harbor Wealth Management. He specializes in serving retirees, pre-retirees, small business owners, and widows, providing a comprehensive array of investment management and financial planning services. Jeremy aims to serve his clients as a financial guide who is here for their every need, helping families find lasting plans so they can focus on what matters most to them. To learn more about Jeremy, visit www.myharborwm.com or connect with him on LinkedIn. You can reach Jeremy directly at email@example.com or by calling his office at 985-605-7185.
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The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. You should discuss your specific situation with the appropriate professional. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Investing involves risk including loss of principal. No strategy assures success or protects against loss.