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Physicians: Balancing High Income with Retirement Planning - The Double-Edged Sword

ATLANTA, GA – As of 2014, the average age of “actively licensed physicians” was 52 years—in 2012 it was 51 and in 2010, 50. These numbers come from a study by the Federation of State Medical Boards (FSMB), which further noted that the physician population generally is displaying “a gradual, significant and certain shift from younger to older.” 

This may not be earth-shattering news, but it is data to be reckoned with. Physicians are getting older, which means if you’re reading this article there’s a better than even chance you’re getting close to retirement age—for physicians this is an average age of slightly over 67. 

But even if you’re part of the far-left of the curve (i.e. a younger-skewing doctor), this article is still highly relevant to you and your future. Here, we intend to discuss the special circumstances that physicians must consider to achieve a successful retirement. And this success relies on truths that are material at 37 and 67 with age merely serving as a factor to determine urgency. 

Income—A Finite Resource 

Physicians are generally some of the best-paid professionals in the United States. Median salaries for medical doctors can range from more than $160,000 annually for family practitioners to more than $200,000 for specialists and surgeons. At the same time, per capita median income in the U.S. is approximately $27,000 and median household income is slightly more than $57,000. In short, physicians are at the top of the income scale.  Though they do generally start earning their more substantial salaries later in life—most attending physicians are in their early 30s. 

This gives us a 30-35 year window of peak earning power given physicians’ average retirement age. And while the money may be very good for these three decades, it takes careful planning to ensure a stress-free retirement. When income stops, the cash flow from social security and retirement savings is typically not enough to maintain lifestyle, so physicians face a major challenge in achieving financial security during retirement.

Social Security alone will replace only 45% of pre-retirement income for the median U.S. household earning $57,500.  For physicians with significantly higher income, social security will replace only 15% of pre-retirement income. The chart below shows a median U.S. household earning $57,600 and a median physician income of $200,000 per year.  A typical U.S. household will have to save less as an overall percentage of their income to replace the gap between social security and pre-retirement earnings.  Physicians face a greater challenge.

To solve this problem, physicians need to balance current financial obligations against future goals. The first step to achieving this is a psychological shift towards understanding the finite nature of income and taking the necessary steps to preparing for a post-peak income life. With life expectancies significantly longer than past decades and the cost of long-term care and eldercare increasing exponentially, planning for the future is more convoluted than ever.

As a finite resource, income must be allocated properly. This is not unlike flu shot allocation, which is triaged when supplies are short to those in greatest need. The elderly, children and others at higher-risk are allocated the first-available shots. So too must you allocate on a priority basis between current lifestyle, debt service (e.g. student loans, practice debt, mortgages, etc.) and retirement savings.

The Capital Allocation Triage 

Your first step is to create a short-term plan for high-interest debt (better not to have this debt in the first place) such as credit cards. Student loan debt, mortgages and certain kinds of business debt are treated differently from a credit perspective and generally have lower interest rates making them better to pay off over time, allowing you to put your cash towards other high-value uses. Strategically managing debt in the context of your financial goals can mean the difference between a comfortable retirement and financial stress.

Next, you must look to allocate resources for short and long-term savings goals, creating an emergency fund, nest egg, college savings and retirement plans. For self-employed physicians there are other retirement plan options aside from your practices’ 401(k) or SEP-IRA, including Cash Balance Plans, which must be considered.

Finally, comes the discretionary or long-term investment income, which is money beyond what is needed to pay off current debt and sustain lifestyle in retirement.

It’s important to note that as an older physician you may have certain “catch up” and other accelerated options that allow you to back-load more of your current income into retirement if your younger self wasn’t particularly well planned. Knowing what these options are and how to take advantage of them is not always a simple process.

For younger physicians, this allocation/triage of finances should occur early in a career with an eye towards long-term goals. How much cash flow will you need to sustain your current lifestyle when your practice is no longer your main source of income? For 30-somethings, the illusion that this question is too far away to be taken seriously often sharpens the double-edged sword of high-earners: high income also means high needs at retirement to sustain the life to which you have become accustomed.

Planning Your Future

Of course, there are several other major financial considerations for physicians of all ages, including questions around insurance (especially life insurance), estate planning and the succession/exit planning of their practice. The complexities of this last topic were covered in another recent article, “Physicians: Selling Your Practice is About More Than Money.”

The overwhelming options can sometimes paralyze even the most educated doctor into inaction.

Just as you encourage your patients to live a healthy lifestyle and schedule routine annual physicals, we encourage you to develop a plan for your financial health.

Whether you are looking for someone to serve as an informational resource or a financial quarterback to coordinate all your personal finances, we can help guide you through these important decisions. Through our wealth management process tailored for medical professionals, we will help you plan for retirement, assess and manage risks, address student loan debt and other liabilities, review unique investment opportunities, and leave a lasting legacy.

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