When I started my career, a common refrain I heard was not to work with physicians. They were touted as difficult clients who asked too many questions and thought they knew everything. As I complete my 15th year in the wealth management business, I can attest to the fact that that couldn’t be further from the truth.
Due to their high income, financial planning needs, and lack of financial education right out of medical school, many doctors may be an easy target for unscrupulous salespeople looking to make a quick buck. Some physicians were pressured into making imprudent decisions regarding their personal finances and, consequently, have gotten burned and need to dig themselves out of a financial hole. That is often the reason that doctors ask a lot of questions at the start of a new financial planning relationship and may be hesitant before engaging with a financial advisor.
Fortunately, understanding a few simple principles can improve the financial trajectory for many in the medical field. Below is a short checklist that may help newly minted physicians make informed decisions regarding their money and, importantly, help avoid the major mistakes that have been financially devastating for many of their colleagues.
1) Continue to live like a student until your student loans are paid off: The medical field is one of the few professions where it may actually pay off to take out a large level of debt for education. Typically, doctors are highly compensated and will earn enough to, with proper planning, pay down a high level of debt within a few years. The key is keeping expenses low until the loans are paid in full.
Practically, this can mean deciding to continue to live like a student, even when you’re getting paid a high income, until you’ve paid off your loans. Many are accustomed to living modestly while in medical school, residency, and during fellowships. Maintaining that lifestyle for a few more years can make a huge difference to your financial future. Trying to change your lifestyle to reduce expenses after you’ve bought a nice house, luxury car, or have been on fancy vacations will be a lot more difficult.
Perspective: Keep in mind that becoming debt free is the first step to financial security. Making some sacrifices while you are young could be the best way to get there.
2) Get yourself a good disability policy: Disability insurance helps replace a portion of one’s income if they can’t perform their job. If someone were unable to work due to illness or injury, a disability policy can help pay for their expenses.
While disability insurance is important for everybody, it’s especially important for physicians who spent years, and lots of money, training to attain their current position. Being unable to continue earning their salary can be financially devastating to them and their loved ones.
More specifically, doctors should get a true own-occupation disability policy. With this coverage, if a doctor becomes disabled they will receive the full policy benefits if they can’t perform the specific duties of their specialty. For example, a trained neurosurgeon who can no longer perform surgery due to a disability, but can still practice as a neurologist or as a professor in a medical school, can receive benefits from this type of policy because they can’t continue to perform the job for which they were trained. In that example a regular disability policy wouldn’t kick in since the doctor was still capable of working.
It would be a shame to spend years training for a certain specialty only to get disabled and not be able to earn the income of your chosen profession. A proper disability policy can help protect against that risk.
Perspective: There are many insurance companies that offer disability insurance. It makes sense to take the time to evaluate multiple options to find the best policy, from a highly rated insurer, to meet your needs.
3) Buy appropriate life insurance coverage: After graduating medical school, one of the first financial products that many physicians purchase is life insurance. This is a reasonable decision if the doctor has family members depending on their income for financial stability or they anticipate starting a family in the near-term. What is not always reasonable is the type of life insurance the physician is sold. In fact, the top request I receive from physicians is to help them find a more suitable life insurance policy so they can drop the older one that was not appropriate for their needs.
For physicians right out of training, it’s common to have a mountain of debt and a young family. Maintaining a suitable cash flow to pay all their expenses may be challenging. In such a scenario, term life insurance tends to be the best solution. If you are young and healthy, you can obtain a high level of term life insurance coverage for an affordable price. Policies can cover the insured for three decades or more. Plus, the premiums can remain level over the life of the policy, which is helpful from a cash flow perspective.
Perspective: Permanent life insurance is a fine solution for those with estate planning, legacy, or tax considerations. Revisiting your policy over the years to determine if term is still the optimal solution for you is advisable. However, jumping into purchasing a permanent policy when you have limited financial resources and a tight budget is ill-advised.
4) Choose plain vanilla investments over exciting ones: Doctors typically fit the financial profile for many alternative investment professionals looking to raise funds for their latest deal. While these “opportunities” sound exotic and project high possible returns, they are often illiquid, non-transparent, and are unnecessary to reach your goals. Furthermore, there is no assurance that these vehicles will offer performance that will outpace boring stock index funds.
Perspective: The best way to steer clear of costly financial errors is to stick to simple and boring investments.
5) Max out your retirement accounts: One of the most powerful methods of ensuring your financial future is simply taking advantage of your employer’s corporate retirement account. Even with no company match, the ability to max out a 401(k) retirement account will be immensely beneficial. In 2022, the maximum amount that someone under the age of 50 can contribute is $20,500. If a physician contributes that max amount every year of a 40 year career, and the account grows at a 6% rate, they will have over $3.3 million dollars in savings upon retirement. This is a conservative assumption since many organizations offer some form of profit-sharing plan to employees which allows for an even larger annual contribution.
Perspective: There is no need to do anything fancy to build a substantial nest egg. Simply saving regularly in a tax efficient account and prudently managing your funds may be all that is necessary to achieve your long-term goals.
6) Become financially educated: One of the most important steps a young physician can take to position themselves for financial success is to become educated about personal finance. Granted, between a grueling work schedule and busy personal life, there’s not much time for recreational reading. The good news is that understanding the building blocks of financial and investment planning is not like studying neurosurgery. A few good books or reading some decent articles can provide you with the essentials to make good decisions.
Perspective: Given many doctors’ busy schedules, it oftentimes behooves them to engage a professional for help. The challenge is finding a financial advisor that is a true fiduciary and knowledgeable in the field. A helpful exercise will be to ask the advisor to spend a few hours educating you about the basics in financial planning. A fiduciary will gladly take the time to do this because it is part of their process, while those folks looking to make a quick sale will not. This exercise will make it obvious the preferred advisor with whom to engage.
There is a myriad of advanced planning strategies that may be beneficial to doctors. These include backdoor Roth IRA contributions, Roth conversions, asset location strategies, maxing out an HSA account, gifting techniques, philanthropic planning, estate tax minimization strategies, and many more. However, understanding the basics is a prerequisite for financial success. Hopefully, the above list will help young physicians get started in the right direction.
Disclaimer: This article authored by Jonathan Shenkman a financial advisor at Oppenheimer & Co. Inc. The information set forth herein has been derived from sources believed to be reliable and does not purport to be a complete analysis of market segments discussed. Opinions expressed herein are subject to change without notice. Oppenheimer & Co. Inc. does not provide legal or tax advice. Opinions expressed are not intended to be a forecast of future events, a guarantee of future results, and investment advice. Investing in securities is speculative and entails risk. This is not indicative of any particular policy or insurance carrier. Results will vary depending on individual circumstances and current market conditions. Any payment guarantees are based on the claims paying ability of the insurance company. Adtrax #: 4604271.1