Physicians
enter the workforce behind on retirement saving, and advisers can help triage
their financial priorities
August 26, 2020 By
Emile Hallez
Most physicians see their
first big paychecks many years after people in other fields, and that sets them
back considerably in terms of retirement planning.
That requires special
considerations for financial planning, advisers say.
By the time doctors finish
residency, they will have spent four years in medical school and as many as
four to six years in specialty training. During that time, they’ve seen many
college classmates enter professions and earn income.
Watching those former
classmates buy houses and take other major life steps involving money can make
it tempting to try to catch up, said Jude Boudreaux, senior financial planner
at The Planning Center. “They feel behind, financially,” Boudreaux said. “They
have friends who enter the workforce or went to law school for a few years, and
they see the life they’re living.”
Savings rates in
defined-contribution plans in health care lag those in other industries, on
average, according to data published
this month by Vanguard. The median deferral rate in plans in the industry was
5.3% in 2019, compared with 6% in all other plans in Vanguard’s record-keeping
business. Average contribution rates were 6.4% in health care industry plans,
compared with 7% in all other
industries, according to Vanguard. Overall participation rates were
also lower in health care businesses than others, the report found.
Health care workers,
including doctors, were also much less likely than other defined contribution
participants to be invested in managed accounts. In small health care
businesses, just 0.6% of participant assets were invested in managed accounts,
compared with 1.9% for health care businesses with more than 250 participants
and 5.6% among all Vanguard DC plans.
ALL IN ONE PLACE
Balancing financial priorities
takes some restraint, but it doesn’t mean that young physicians have to live on
a shoestring, Boudreaux said. Rather, they need to recognize the importance of
saving for retirement while also paying down massive student loans and saving
for other priorities, like buying a home.
Boudreaux, about 70% of
whose clients are doctors, tells them they can do everything they want
financially — just not all at once, he said.
“Most physicians I work
with didn’t pursue this path for the money,” he said. “They’re not in a breakneck
rush to retire. They might want to have more flexibility, have less [time on]
call … they’re not desperate to stop practicing as soon as possible.”
Having a flat-fee model is
helpful, as early-career doctors usually don’t have a large asset base, he
noted.
While physicians have
considerably higher income than most workers, their delayed earning potential
means that they need a budgeting plan when they start their careers, said Rose
Swanger, financial planner at Advise Finance, in an email. Swanger cited her
husband as an example.
“He didn’t come out to
practice until he was 32. A whopping 10-year delayed earning!” she wrote.
“Meanwhile, the minute he earned the income commensurate with his experience,
the higher income tax and non-deductible student loan set him behind again.
This is what all current young physicians are facing: ‘Do I need to save for my
retirement or pay down the student loan?’”
Post-residency doctors
make good
clients, as “they still remember the taste of ramen noodles and have
the financial discipline,” she said. “Together, we formulate a plan in
budgeting and saving that they can stick with.”
LATE LEARNERS
Doctors usually do not get
much financial education while in school, financial planner and CPA Laurette
Dearden wrote in an email. About 85% of Dearden’s tax practice involves recent
post-residency doctors, she said.
“They only know that they
are behind in saving for their retirement compared to their peers in other
occupations, but they don’t really know how far behind,” Dearden said. “I do
educate them on prioritizing contributing to their employer’s plan as well as
contributing to Roth IRAs if they are still eligible.”
A source of financial
advice that new doctors often have is other doctors, said Robert Schultz,
partner and wealth adviser at Rollins Financial, in an email.
“We have seen that other
doctors have acted as mentors trying to guide them from very early — and
potentially residency — to understand how to structure their financial lives,”
Schultz wrote. “We do try to push them to understand that they need to have
substantial savings for retirement.”
More than ever, doctors are
not self-employed, and they have access to workplace
retirement plans such as 403(b)s and 401(a)s — a result of
medical care systems acquiring practice groups, Boudreaux said. However, income
can vary significantly, and some doctors who work as contractors can benefit
from extra financial planning, he said.
Retirement account balances
are higher than average in health-care plans with 250 participants or fewer, at
an average of about $250,000, according to Vanguard. That is about twice the
average across all health-care plans, and higher than the average $107,000 in
all of the firms DC plans.
The small health-care plans
have much higher utilization of catch-up contributions — about 43% of
participants use them, compared with 15% of participants in other plans,
according to Vanguard. And 21% of participants in those small plans contribute
to Roth accounts, compared with 12% across other Vanguard plans.
BIG LOANS
Strategies to pay down
six-figure student loans are another matter.
“Young doctors with large
student loans should consider who they are working for, and if they are going
to be eligible for public service loan forgiveness programs,” said Aaron
Clarke, wealth adviser at Halpern Financial, in an email. “If so, they may
consider paying only the minimum required to meet the forgiveness provisions,
while investing alongside these payments to build an after-tax account, in the
event they change jobs or are no longer eligible.”
CPAs who specialize in tax
planning can help with strategies for doctors who are ineligible for loan
forgiveness, Clarke said. But getting doctors to work with just one financial
adviser can be a struggle.
“They tend to have multiple
SEP IRAs in different places. This affects the planning strategy in that most
of the doctors believe that different advisers means diversification,” Michael
Whitman, managing partner at Millennium Planning Group, said in an email. “What
they do not realize is that most of their investments are in the same
securities (not diversified enough). More education is needed.”
No comments:
Post a Comment