Growing Your Wealth, Stage by Stage

Financial planning should be unique to where a physician is in his or her live and career. Here's a breakdown of what physicians should be considering at various stages.

Physicians should consider their financial planning at different points in their lives and careers. However, many are often so preoccupied with treating patients and managing their practices that they do not give adequate thought to it.

At every stage of your personal and professional life you will benefit from a fully integrated financial plan — one that addresses such issues as investing and asset allocation, debt payment, business succession, estate planning and retirement. It’s imperative to keep your personal and business finances separate, but it’s equally important to stay focused on the big picture and ensure you are making the most of the money you earn.

To live a comfortable life and have an enjoyable retirement, it can be helpful to look at your financial planning in incremental stages.

In addition to working many hours, physicians in this age group juggle medical school debt, a mortgage and starting a family. Therefore, it is crucial to assemble a team consisting of a financial planner, an accountant and an attorney to ensure appropriate financial and tax planning, including investing and asset protection.

A lifetime cash-flow analysis will help you evaluate what you have, your expenses and your aspirations to help ensure that your personal spending is at an appropriate level given your debt. Make sure you are paying the lowest interest rate possible on your medical school and college loans. This is also the age when you should start building your nest egg to give yourself the best chance of achieving the retirement you want.

If you are an employee, make sure that you are taking advantage of any 401(k) opportunities — particularly if the employer is matching contributions since this is free money. Also, take advantage of all tax-saving benefits to the extent possible, including items such as flexible spending accounts, adoption support or dependent care accounts.

You should also identify and establish the level of insurance you will need for disability, malpractice and life.

Ages 30 to 40

Ages 40 to 50

Many physicians at this point have paid down most or all of their medical school debt, but cash-flow planning is still crucial to ensure lifetime financial success. Identify the ideal cash-flow scenario considering all outstanding debt, potential new debt, ordinary income and other variables that could affect your financial independence.

Are you considering upgrading your primary home or buying a second home? If you have chosen or are considering owning your own practice, you should weigh the consequences of additional business debt at this stage. How should you balance the new and impending debt? Are there children’s college costs on the horizon?

To develop your practice at this stage, you may consider these business-building options:

  • Consider if taking on a partner, or merging two practices, will help you financially or introduce complications.
  • If you’re part of a large practice, consider hiring a financial advisor to be the chief financial officer.
  • If you offer your employees a 401(k) plan, your financial planner can review it to ensure that the investment choices are not high-expense.
  • Evaluate your retirement plan third-party administrator (or hire one) to ensure your plans are giving you the most tax-efficient savings.
  • Make sure your malpractice and disability insurances are still appropriate.
  • Begin researching long-term care insurance if you haven’t already purchased it.

Now is the time to seriously consider long-term care insurance — it is least expensive and will ensure your wishes are appropriately transferred to someone who can execute them. Most important, if you or your spouse becomes ill and extended or long-term care is required, all the wealth you have built up could be drained rapidly.

Ages 50 to 65

The big question on many physicians’ minds should be: When can I safely retire while maintaining my lifestyle?

Physicians in this age group have reached the accumulation stage in their professional lives. This is the time when many can afford to purchase a second home, put their children through college, plan for the future and invest properly and safely.

Discuss with your financial planner what “retirement” means to you. Your financial planner can help you to plan and invest to maintain your current lifestyle while scaling back work.

In today’s complex times, to ensure your money is secure and growing, the old “buy and hold” approach doesn’t work. If you haven’t already, you need to take measures to proactively protect your assets. The best hedge against inflation is investing in equities, so now may not be the time to become too conservative.

Based on these decisions, work with your advisor to decide how your portfolio should be invested — aggressively, moderately or conservatively. Statistics tell us that at age 65 you have a 25% chance of living until 95; thus you have a 30-year investment horizon ahead of you.

If you have a private practice, you may consider how and when you want to begin the sale of your practice, either to a buyer or to a partner. A very large practice can be considered a significant asset.

Retirement

The overriding question for many retired physicians is how to manage their cash flow to maintain their lifestyles through the rest of their lives, while also helping their children and grandchildren with college and other expenses. This is something a financial planner can help with by providing a cash-flow analysis.

Ensure you have the proper documents in place in case you become disabled. This includes identifying a person to be your health care power of attorney, in addition to a traditional financial power of attorney. If you are single, and fail to designate someone, your assets will end up in the courts. You may decide your financial provider should hold all of your documents, including your safe deposit box key if you become ill. If this happens, then your spouse only has to make one call.

In addition, use your financial advisor to consult on estate planning to determine the most tax-savvy way of transferring assets to your children and grandchildren.

Consider:

  • 529 plans for grandchildren’s education expenses
  • Annual gifts to your children and grandchildren, staying within IRS guidelines of tax-free gifts.
  • Below-market loans to your children for purchasing cars or houses
  • Trusts to ensure your wishes are carried out
  • Discussing the benefits of becoming a resident in a state with lighter tax burdens.

Stay Focused on the Big Picture

Many physicians do pay attention to estate and tax planning, but often no one is looking at the big picture from a unified perspective. Today’s trend is to work from one holistic and universal plan. Physicians who do tend to sleep better at night.

Robert J. DiQuollo, CFP, CPA, is president of Brinton Eaton a wealth advisory firm in Madison, N.J., serving individuals and institutions throughout the U.S. He can be reached at diquollo@brintoneaton.com.