Retirement planning experts indicate that, as a general rule, physicians are less prepared for retirement than other professionals. One of the reasons is that their jobs are so stressful that when they do have time off, they choose not to spend it crunching numbers.
"Physicians are often like many other small business owners," explains Darlene Murphy, president of Wellesley Investment Advisors. "They are very good at what they do, work very hard, and spend a lot of time keeping up their professional skills. But they are often too busy to do much more than basic retirement plans."
That often means only saving in retirement accounts. According to Massachusetts-based advisors Rich Rubino and Sam Liang, that's both good and bad. The good part is that physicians do not pay income tax on money put away, nor do they pay tax on the growthâ€”assuming the account grows. The bad part, however, is that all of the money saved will be taxed when removed from the retirement account. If a physician needs $125,000 per year after taxes, they might have to withdraw $160,000 to $170,000 before taxes. Mapping out a retirement strategy takes time and consideration. There are some key steps to take when mapping such a strategy, and in the words of Martin Moll, Esq, director of the health care practice at AKT Services, "It's never too early to plan."
Moll explains that there are many points to cover when sitting down with a physician who is considering retirement. First and foremost is an understanding of how long the physician wishes to practice. "Many physicians only have a vague idea of how long they want to continue to stay in the practice of medicine," Moll says. "Once we have established a retirement dateâ€”whether it's a goal or just a placeholderâ€”we assess current assets, current liabilities, and ability to save for the future."
That question and answer process is a very important first step, Murphy acknowledges. "We ask a series of questions, including two that are critical," Murphy explains. "The first one has to do with goals: How much money would you expect to earn from your investments over time? The second question puts a fine point on risk tolerance. How much could your portfolio decline in a single year, without making you uncomfortable? We get a range of answers to those two questions, and that's fine." What's almost more important, she stresses, is that the answers be compatible, "For example, if a doctor seeks to earn 30% on their portfolio, yet answers the question about risk by saying they can tolerate no downward fluctuation, that is an impossible scenario that needs to be discussed."
The most difficult information to obtain, according to Rubino and Liang, is how much the physician spends and what they will do during retirement. This problem is compounded by the fact that physicians generally start saving late. Their education, including residency and any specialization, takes a long time, so they usually don't earn serious money until their mid-30s. "When they do start to make some money, most want and need the trappings of their professionâ€”nice car, nice house, vacation home, nice clothes, college education for the kids, etc," Rubino explains.
Murphy says she encourages physicians to start saving and planning even when they're starting out. She adds that savings doesn't always have to be tax-deferred. Just because a physician is maxed out on retirement contributions doesn't mean they can't put money away. "We encourage them to save and pay themselves first each and every year," Murphy notes.
When it comes to retirement planning, physicians often face unique issues that the average business executive doesn't encounter. According to Moll, these include buyouts and post-insurance needs. Moll explains that in his experience, many physicians have little or no understanding of what their buyout entails. Physicians who are partners in clinics should know what their buyout formula is and understand how the current performance of the clinic might affect the buyout. In larger clinics, it's reasonable for a physician to ask the administrator or finance officer to help project out what the buyout might be in the future. In smaller clinics, they can ask their own advisor to work with the clinic's books to answer that same question. In addition, the physician should understand whether their buyout includes appreciation in underlying assets, such as real estate or ancillaries.
"I have some clinic clients who allow retiring physicians to leave some money in their retirement plan, essentially allowing them to participate in the future growth of the clinic," Moll says. "For physicians who are in smaller practices or on their own, they should have a good understanding of how their practice might be valued. Also, do they intend to sell the practice outright or do they intend to bring in partners and have the new partners buy them out over time?"
Moll explains that one of the biggest surprises physicians face when they consider early retirement is insurance. If their present employer does not cover malpractice tail insurance, they may be very surprised to learn how expensive tail coverage is, and how many years they need it for. And because most clinics do not provide for retiree health insurance coverage, physicians who retire early are oftentimes very startled at the cost of covering themselves for health insurance. How can a physician put a value on their practice? According to Rubino, "A practice is a business like any other. Like any business, there is a profit after expenses, and valuation of a business is a multiple of that end-of-the-year profit number. In addition, there is equipment value, real estate or lease value, and affiliations."
Echoes Murphy, "Valuing a practice is a complex and often challenging transitionâ€”financially, legally, and emotionally. Sellers need to carefully consider factors such as structure of the sale, asset sale vs stock sale, tax impact of the sale, and security for any debt assumed. There are business valuation experts who specialize in this, and in many cases it's worth hiring one."
Kieran Shanahan, principal of the Shanahan Law Group, believes it is absolutely critical that an exit strategy be developed for the sole practitioner or physicians in partnerships. Small operations, he says, will generate income as long as the physician keeps working. "Surely there is value in a practice beyond the physician," Shanahan stresses. "The key, therefore, is to devise an exit strategy that allows the physicians to receive that value after their departure. Selling a practice outright by 'cashing out' sounds simple and attractive on its face, but it is not easily accomplished. Moreover, this usually is not the most tax-advantaged way to proceed. A transition sale of the practice, where the owner works together with a new owner over a period of time, has many more advantages, but creates a new set of issues to deal with, too."
Murphy notes that some of the most successful transitions she has seen involve physicians in practice together, where the junior associates can buy out a retiring practitioner. This process provides a fairly seamless transition for the entire practice. Solo practitioners, she says, would do well to align with another provider and develop a relationship that they can capitalize on one day. "Of course, the dynamics of many medical practices have changed with the advent of managed care," Murphy explains. "And more and more, there are laws regulating sales of practices and referral fees. All of this has to be considered. The most important thing is to develop a plan, and not to overestimate the value of the practice when planning for retirement."
Rubino and Liang point out that a properly executed exit strategy can greatly enhance a physician's financial security during retirement, and offer the following scenario. "Let's say you need $125,000 of net income to live on during retirement and your exit strategy includes a buyout from your practice of $50,000 per year for a 10-year period," Liang explains. "This does two things: One, you can spend more during your first 10 years in retirement; two, it gives your other investments more time to grow. We are always looking into exit strategies when planning retirement."
Transition into Retirement
Planning for retirement is an emotional proposition. It is especially hard for physicians and other professionals to think of retirement. Physicians work hard to get where they are, they provide a meaningful difference in peoples' lives while they are working, and they are generally held in high regard by society. To step away from all this can be a bit daunting, if not frightening. This makes the idea of transitioning to retirement, rather than retiring entirely on one given day, more palatable to physicians. "We are living longer and, by choice, many professionals are working longer as well," Shanahan points out. "There is also an admirable trend by physicians who volunteer the use of their skills in underprivileged areas of the United States and in undeveloped areas of the world. Thus, the line between working and retirement is becoming blurred, with the distinction being that as you go through the various stages of retirement, you do more and more of what you want to do, as opposed to what you have to do."
Along those lines, Rubino and Liang say they do not use the word "retirement," but opt instead for the phrase "financial independence." The difference, they explain, is that financial independence is your ability to stop working if you choose to. Retirement, on the other hand, means that you simply stopped. "Having the choice to continue working or not is important both mentally and physically to one's well-being," Rubino explains. "Therefore, we believe that gradually moving into retirement is very healthy. We have physician-clients who currently work about 25 hours per week. They have long weekends in addition to time off during the week. This has proved to be a healthier transition. Of course, there are those who cannot slow down; it is either full speed or park. But as long as you are financially independent, the choice is yours."
Retirement isn't what it used to be, Murphy explains. More and more practitioners are mixing it up by semiretiring, working part-time, consulting, or even fully retiring from practice, and getting involved in volunteer organizations, or another career entirely. It's different for every person. "The key to the financial aspects of retirement planning is reaching the day when, sure, you might still be working, but you won't have to," Murphy says. "It's a great position for a medical practitioner to be in, when you work only certain hours a week just to keep current, and perhaps work certain hours a week volunteering medical services, and spend the rest of the time doing whatever. The ultimate financial goal of all physicians should be to reach a day when those choices are available."
Of course, Shanahan adds, any retirement strategy must be revisited annually. Circumstances change, and assumptions do not prove to be accurate. It's good to go through the exercise of regularly reviewing a retirement strategy to see if the plan is viable, on track, and will accomplish its intended goals.