Wealth management for doctors comes with several unique challenges. As a doctor, you typically spend your early years getting an expensive education, before dedicating the rest of your life to caring for others. In the process, financial planning can easily fall to the wayside.
In this article, we discuss why wealth management for doctors is so important, as well as six key areas to focus on during the actual planning process. From mounting student loan debt to high tax liabilities and the need for long-term retirement planning, building a healthy financial future can be difficult, but you don’t have to do it on your own.
Wealth Management for Doctors: Why Does It Matter?
1. High Income = High Tax Liability
As a physician, you are likely to enter a high-income tax bracket early in your career. This can expose you to significant federal and state tax obligations. Using a well-thought-out tax strategy, however, you could avoid unnecessary tax liability.
One option that could boost your tax savings is a Health Savings Account (HSA). Working in the medical field, you are likely aware of HSAs. However, did you know that HSAs come with a “triple tax advantage”? That’s because, with an HSA, 1) your contributions are tax-deductible, 2) your money increases tax-free, and 3) withdrawals for qualified medical expenses are tax-free as well.
2. Asset Diversification
As the old proverb says, “Don’t put all your eggs into one basket”. Practically speaking, that means using a variety of methods and accounts to work towards your personal financial goals. Doing this could keep you from losing a significant portion of your savings if something unfortunate were to happen to any one asset you own.
Consider the 1929 stock market crash: countless people held their wealth almost exclusively in the stock market and, as a result of the crash, they lost everything. While the idea of stock brokers jumping out of windows on Black Thursday has been proven to be a myth, it is true that, in the months following the crash, some investors were so distressed by the financial consequences that they took their own lives.
Sobering historical moments like these are important to remember. For the people who were hit hardest, diversifying into other asset classes could have lessened the financial blow that came with the crash, and saved more than just the numbers on their annual financial statement.
3. Retirement Planning
Given the extended training period at the start of your career, you might not have thought about saving for retirement until later in life. Strategic planning could help you make up for lost time through tax-advantaged accounts and compound growth. For specialized results, you may want to consider working with a Retirement Income Certified Professional: RICP®s can use their unique education, skills, and experience to make the most of what you have with whatever time you have.
To help you understand the importance of starting to save earlier rather than later for retirement, look at the following example of compound interest. If, at age 24, you were to invest $500 per month in a 401(k) with an average return of 7%, by age 65, you could have around $1.5 million saved. In contrast, if you were to wait until age 40 to start that same investment, your return would be closer to $380,000 by age 65. As you can see, the difference in savings could significant.
4. Investment Strategy
While putting your savings into employer-sponsored accounts could increase your net worth, it will only get you so far. As with asset diversification, you might be wise to invest in a number of different ways.
At Iron Point Financial, we recommend considering a combination of income-generating and non-income-generating investments to round out your savings plan. We will discuss a number of income generating-investments later in this article.
1. Wealth Management for Doctors: Managing Medical School Debt and Personal Debt
Budgeting and Emergency Fund
Whether you are just starting your medical career or you’re well into it, establishing a realistic budget can be extremely beneficial for your financial health. In addition to a budget, having a basic emergency fund of 3–6 months’ expenses could provide you with a financial cushion to last during job changes or emergencies.
Managing Student Loans
While you probably shouldn’t ignore your student loan debt, it does not have to hinder your investing and saving. To help you pursue your other wealth management goals, we would encourage you to explore options like income-driven repayment plans, Public Service Loan Forgiveness (PSLF), and, where appropriate, refinancing (for example through loan consolidation).
2. Wealth Management for Doctors: Tax Planning Strategies
Effective tax planning can maximize take-home pay and reduce liability. Key tax planning considerations include:
- Maximizing pre-tax contributions to 401(k), 403(b), 457(b), or traditional IRA accounts.
- Leveraging Health Savings Accounts (HSAs) for tax-free medical spending and long-term investing.
- Charitable giving and donor-advised funds if you want to support causes while also receiving deductions.
Partnering with a Certified Financial Planner (CFP®) at Iron Point Financial who understands physician finances could help you sidestep unnecessary taxes.
3. Wealth Management for Doctors: Retirement Planning
At the beginning of your journey, it can be difficult to imagine what it’s like to be retired. However, this is precisely when it is wise to start to plan for it. No matter what career stage you find yourself in, there is a wide range of opportunities available. If you begin to feel overwhelmed trying to sift through them, it may help you to consult with a RICP®.
Key Options for Retirement Savings:
- 401(k), 403(b), 457(b): These are some of the most common employer-sponsored retirement plans.
- Traditional and Roth IRAs, or a Back Door IRA if your income is too high.
- Health Savings Accounts (HSAs): Triple-tax advantaged accounts that can be used for your medical and retirement expenses.
- Defined benefit and cash balance plans: These can offer higher contribution limits if you are a late saver.
4. Wealth Management for Doctors: Income Generating-Investments
Income-generating investments can increase your financial footing through interest and dividends. Some of the more common opportunities within this category include:
- Bonds: These could provide you steady, predictable income.
- Dividend-paying stocks: May benefit you by combining growth with cash flow.
- Annuities: Offer you guaranteed income, though at the cost of liquidity.
- Real Estate Investment Trusts (REITs): Provide you real estate exposure without the need for you to manage the property.
- Certificates of Deposit (CDs): A safe bet but less liquid. They are suitable for income with minimal risk.
While these vehicles may sacrifice your liquidity, they can offer fixed future payments—which could be ideal for retirement income stability.
5. Wealth Management for Doctors: Risk Management and Insurance Planning
There are a number of ways doctors can protect their assets and earning potential. Most notably, various types of insurance could help you if you were to get injured, get sued, or have a home or auto accident.
- Disability insurance: Could replace your income if illness or injury prevents work.
- Life insurance: May help to support your family members financially in the event of your passing.
- Malpractice insurance: Can help cover costs due to litigation if a medical situation does not go as expected. It’s likely one of the first types of insurance you signed up for as a doctor.
- Umbrella liability policies: Could provide a layer of protection beyond home and auto coverage, depending on the plan you choose.
6. Wealth Management for Doctors: Preparing for Major Life Events
Life transitions such as marriage, having children, new home ownership, and practice ownership are well suited to proactive financial planning. Milestones can be important to consider when planning for your financial future.
To start, you might want to review the following at regular intervals:
- Your budget and savings goals;
- Insurance coverage;
- Estate planning;
- College savings plans (like 529s); and
- Mortgages.
Wealth Management for Doctors: Let’s Get You On Track
Iron Point Financial’s wealth management for doctors goes beyond standardized investing—we offer a personalized approach to working towards financial independence while taking care to manage risk. Meeting with one of our CFP®s could help you navigate your wealth management needs, goals, and interests, no matter what stage of life you’re in.
Why not schedule an appointment today to meet with an Iron Point Financial CFP® or RICP®? People come to you for your medical expertise, so why not bring your wealth management questions to us?
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Iron Point Financial is here to empower you to secure a brighter tomorrow. We operate physical offices in Grove City, PA and Greenville, PA.
We primarily serve residents of Pennsylvania, Ohio, West Virginia and Florida but we also have security registrations for 22 other states across the continental USA.
