Physican Finance Bloopers

Physician's Money Digest, Nov30 2004, Volume 11, Issue 22

Physician's Money Digest

Some examples:

Doctors have plenty to worry about when it comesto making sound financial decisions. Are youproperly balancing your portfolio? Are you and yourpractice safe from the devastating effects of lawsuits—malpractice and otherwise? On the lighter side,would like to hear readers'confessions of their greatest financial bloopers in thehopes of learning from our mistakes.

  • Unknowingly investing in a scam
  • Purchasing money-pit real estate (eg, Mr. Blandings Builds His Dream House; 1948)
  • Paying for contractors' services never received
  • Putting too much money into a volatile stock

Physician's Money Digest

Upcoming prize:

The Road Less Traveled

We'll give you feedback from one of our columnistson steps you could take to remedy the situation.And, to reward those braveenough to admit and have published(under a pseudonym) their worst financialblunder, hasteamed up with the fixer-uppers at Black &Decker to offer the winner a handy tool from theirproduct line. 12-volt Impact Driver (seepage 25). Famed psychiatrist M. Scott Peck, MD,notes in his book (Touchstone;1998) that anyone, even an all-thumbs doctorlike himself, can learn to be handy—withpatience. Here's to hoping that some fix-itpatience will rub off on your finances.

Following is a sample story and solutionprovided by Thomas R. Kosky, MBA, aprincipal of the Asset Planning Group inMiami, Fla, and professor of MBA programsat the University of Miami.

Annuities Gone Wrong

During the last quarter of 1997, at age 60, IngridBarnes, MD, a Florida physician in a high-risk surgicalspecialty, endeavored to shield her assets ($1 million outsideof her home and qualified retirement plan) frompotential creditors. She invested in five variable annuities.Not having had proper guidance, she investedthese monies in aggressive subaccounts offered withinthe annuities and made no subsequent asset allocationchanges. She saw them reach nearly $2 million in valueat the height of the market bubble in the first half of2000. They later plummeted to $1 million at the end of2002. Currently, the annuities are worth about $1.2 million—not a very good return on investment. Her annuitieshad substantial surrender penalties that no longerapply. In addition, the ongoing mortality and expensecharges average 1.7% annually, and the subaccountcharges average just under 2% annually—expensive.

Fortunately, Dr. Barnes has no mortgage on herhome, has accumulated about $1.7 million in her quali-fied retirement and IRA plans, and has a modestlifestyle. She is still working, needs to continue to protectthese monies from potential creditors, and has noimmediate need to take money from these annuities.

She is now 67 years old and is seeking to retire. She isalso concerned with continued stock market volatility,excessive insurance and mortality charges, and theannuity's annual subaccount charges.

Physician's Money Digest

Restoration: Eventhough there are no IRS or annuity penalties for thewithdrawal of monies, surrendering the annuities doesnot make sense, since the assets might be exposed topotential creditors and there would be a taxable gain ofnearly $200,000. Therefore, Dr. Barnes should keep themonies in annuity vehicles, but consolidate and transferthose monies into annuities that have the following:

  • No loads or surrender charges
  • Cheaper annual subaccount charges
  • A greater selection of subaccounts
  • Lower annual mortality and expense fees

In addition, careful attention must be paid todeveloping a more balanced asset allocation strategyto reduce risk going forward as she nears retirementand begins to draw income from the annuities. By followingthese steps, Dr. Barnes will be able to make—and keep—needed returns on her money for herretirement days, while continuing to maintain herassets' protected status.

Physician's Money Digest

Note:

Send your name, address, and blooper story of 250words or less to Grace Henry at ghenry@mwc.com or, 241 Forsgate Drive, Jamesburg,NJ 08831. The advice given by columnists is generalinformation and is the opinion of the author. Seek professionaladvice for your specific financial needs beforemaking any decisions.