Medical professionals commit their lives to improving the health and well-being of others and deserve a financially secure retirement.
Medical practices contain a unique dynamic, one that poses a challenge to retirement preparedness.
A recent US Government Accountability Office report showed that most households approaching retirement have low savings, and about 29% have none. In my experience, this savings gap is especially pronounced within medical practices and is driven by financial and cultural factors. There is a common misconception that the retirement plan is intended for the physicians, likely because financial advisors often focus on the doctors, who tend to make significantly more money than staff. As a result, it’s common for many employees in the medical community to be vastly behind on their retirement savings.
Employees Can Generally Save More
I often meet with medical practices that face a frustrating challenge: they offer what looks like a generous employee retirement plan, but struggle with low participation rates. Most medical practices use “non-elective safe harbor retirement plans” where the practice contributes 3% of an individual’s pay regardless of employee contributions. That sounds generous, but consider this: I recommend most folks save 5% of pay early in their career, 10% in the middle, and aim to save 15% or more near retirement. Unless motivated to save more on their own, that 3% employer contribution won’t be enough. And this is why it’s so important that the financial adviser to the retirement plan offers help for everyone who can participate, not just the doctors.
Consider a typical mid-career team member, earning $50,000, who wants to make-up the 7% gap in annual savings between the 3% employer contribution and the 10% they probably should be saving. Covering that gap likely is not as hard as you might think. By saving an extra 7%, their taxable income declines by $3,500 and their tax bill is now smaller thanks to Uncle Sam. With this benefit, they might only need to come up with an extra $100 per paycheck to cover the increased savings. For reference, that would be about the same as drinking coffee from work instead of buying from a local store.
And while the tax benefits of increased savings might be obvious to business owners, they may not be obvious to all employees. In my experience, when the financial adviser focuses on the doctors, the rest of the employees receive little in the way of service and education — which is important for helping people set financial goals and understand how to reach them. Two-thirds of Americans do not know how to choose investments for their 401(k) plans.  Service and “just-in-time” education are therefore critical in getting staffers on the right path towards saving. This works best by using simple, jargon-free language to explain the benefits of saving more, and then immediately offering them the option to save more.
Physicians Often Need a Better Plan
I also often see physicians under-saving with a 401(k), where a different type of retirement plan could be a better fit. In 2018, a traditional 401(k) allows you to save $18,500 annually ($24,500 for those 50 or older). That means a mid-career physician earning less than $185,000 annually would only be able to save 10% of pre-tax income. Folks earning more might consider a profit sharing plan offering increased contributions to key employees, up to $55,000 per year ($61,000 for those 50 or older). For high earning physicians wanting to save more, it might make sense to add a “cash balance plan” on top of the existing 401(k) profit sharing plan. These plans allow potentially much higher contributions on behalf of key employees in exchange for lower wages. Medical practices with stable revenues and many high-income earners can sometimes achieve significantly enhanced tax benefits through these strategies.
The Key: Periodically Review Retirement Plan Options
Fisher 401(k) Solutions Wellness in the Workplace Study, pg. 14
The right employer-sponsored retirement plan can encourage everyone to participate and save more in the plan, better setting them up for a comfortable retirement. It’s critical to adopt a retirement plan that works for the entire practice — and it’s not that difficult to achieve. Select and empower a physician interested in reviewing options and improving the plan. Hold them accountable to an investment committee, typically comprised of the partners. I’ve seen this work wonders when it comes to attracting and retaining talent in the medical community. After all, medical professionals commit their lives to improving the health and well-being of others; they deserve a financially secure retirement.