Retirement Planning for Physicians & Doctors: Our #1 Strategy

The majority of our clients are medical professionals. As such, we know a lot about retirement planning for physicians. But with so many options in the marketplace, how do you really know the best retirement strategy?

Based on our planning with over 1,000 physicians, we’re going to give you the #1 strategy!

But before we do that, we will discuss some retirement structures to consider. More importantly, we will point out the pros and cons. Let’s get started!

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Some background

Retirement planning is a crucial aspect of financial management for physicians. Medical professionals dedicate their careers to providing exceptional patient care, often working long hours and making significant personal sacrifices.

However, it is essential for physicians to also plan for their own financial future, ensuring a comfortable retirement that reflects their hard work and achievements. This post will explore physicians’ unique considerations and challenges regarding retirement planning, highlighting the importance of proactive financial strategies tailored to their specific needs and goals.

Retirement Planning for Physicians

Physicians encounter distinct financial circumstances throughout their careers, including high student loan debts, delayed entry into the workforce due to extensive education and training, and the potential for significant income fluctuations. These factors necessitate a thoughtful approach to retirement planning that considers these unique challenges.

Retirement options

Physicians typically start their careers with massive student loan debt and can often have the challenge of establishing a practice. But once they overcome these hurdles, they will have substantial earnings power.

Medical professionals must consider strategies to pay off their student loans efficiently while maximizing retirement savings, ensuring a balance between managing current financial obligations and securing a comfortable future. Additionally, physicians often have access to specialized retirement savings options, such as employer-sponsored retirement plans and unique tax-advantaged accounts, which require careful consideration and expert guidance to optimize their retirement funds.

Furthermore, retirement planning for physicians should encompass a comprehensive assessment of long-term financial goals, including lifestyle expectations, healthcare expenses, and legacy planning. Physicians often desire to maintain a comfortable lifestyle in retirement, which may involve considerations like travel, hobbies, and philanthropy. Healthcare costs, especially as individuals age, can pose significant challenges and should be factored into retirement savings goals.

Fringe BenefitsRetirement Plans
Health Savings Account (HSA)401(k) Plan
Section 105 PlanDefined Benefit Plan
Long-term care insuranceSEP
Contributions to accident or health insuranceCash Balance Plan

Estate planning is another critical aspect that physicians must address to protect their assets and ensure a smooth transfer of wealth to their heirs. Engaging with financial professionals specializing in physician retirement planning can provide valuable insights and guidance in navigating these complexities, helping physicians establish a solid financial foundation and achieve their retirement aspirations.

To make it even more confusing, take a look at all the retirement plans available to physicians:

  • Individual Retirement Arrangements (IRAs)
  • Roth IRAs
  • SIMPLE 401(k) Plans
  • 401(k) Plans
  • 457 Plans
  • SIMPLE IRA Plans (Savings Incentive Match Plans for Employees)
  • 403(b) Plans
  • SEP Plans (Simplified Employee Pension)
  • SARSEP Plans (Salary Reduction Simplified Employee Pension)
  • Defined Benefit Plans
  • Profit-Sharing Plans
  • Backdoor Roth IRAs
  • Employee Stock Ownership Plans (ESOPs)
  • Money Purchase Plans
  • Mega Backdoor Roths
  • Payroll Deduction IRAs
  • Governmental Plans
  • Multiple Employer Plans

Physicians also have various options when it comes to fringe benefits:

  • Health Savings Accounts (HSAs)
  • Section 105 plans
  • Health insurance
  • Out-of-pocket healthcare and medical expenses
  • Educational assistance
  • Long-term care insurance premiums
  • Disability, life and accidental death
  • Archer Medical Savings Accounts (MSAs)

Why is retirement planning so important for physicians?

Retirement planning for physicians is especially critical for several reasons:

  1. High-income but short career span: Physicians often have high earning potential compared to many other professions. However, their careers tend to be shorter due to the demanding nature of their work, including long hours, high stress, and physical demands.
  2. Extended education and delayed entry into the workforce: Physicians typically spend many years in education and training, accumulating substantial student loan debt. Retirement planning allows them to account for these financial obligations and develop a strategy to pay off debts while saving for retirement.
  3. Complexity of retirement plans: Physicians often face complex financial situations, including multiple income sources, employer-sponsored retirement plans, private practice considerations, and potentially higher tax liabilities.
  4. Maintaining a desired lifestyle: Many physicians have spent years dedicated to their profession, often sacrificing personal and family time. Retirement planning allows physicians to envision and work towards the lifestyle they desire in retirement, whether it involves traveling, pursuing hobbies, spending time with family, or engaging in philanthropic activities.
  5. Potential limitations on practice longevity: As physicians age, they may face physical or cognitive limitations that affect their ability to practice medicine at the same capacity.

Difference between defined benefit plans and defined contribution plans

Defined benefit plans and contribution plans are two standard retirement plans, each with distinct features and benefits. Defined benefit plans will provide employees with a guaranteed retirement income stream based on a formula that considers factors such as the employee’s years of service and salary.

The employer bears the investment risk and is responsible for funding the plan, and the benefit is typically paid out for the employee’s lifetime. Defined benefit plans (including cash balance plans) are generally more complex to administer than defined contribution plans, as they require actuarial calculations to determine the level of funding needed to meet future benefit obligations.

Defined benefit plans offer employees the advantage of a predictable retirement income stream that can be achieved. Still, they provide a different level of flexibility or control over investment decisions than defined contribution plans.

On the other hand, defined contribution plans are retirement plans in which both the employee and employer contribute funds to the plan, and the employee is responsible for making investment decisions with the funds. The retirement benefits an employee will receive from a defined contribution plan depend on the performance of the investments in the plan, and there is no guaranteed benefit amount.

What is the best retirement plan for a physician?

The most common defined contribution plan is the 401(k) plan, which will allow employees to contribute a portion of their pre-tax W2 income to the plan up to a specified limit. Employers may also provide matching contributions to the plan, up to a certain percentage of the employee’s salary. Defined contribution plans offer employees greater flexibility and control over their retirement savings and involve greater investment risk.

Defined Benefit PlanDefined Contribution Plan
Permanent Plan DesignOptional Funding
Mandatory ContributionsFlexible Contributions
High Administration CostsLower Admin Fees
Contributions up to $300k PlusContributions usually $20k to $60k

In summary, the main difference between defined benefit plans and defined contribution plans is the nature of the retirement benefit. Defined benefit plans offer a guaranteed retirement income stream based on a formula. In contrast, defined contribution plans provide retirement benefits determined by the performance of investments made by the employee.

Defined benefit plans are typically more complex to administer and involve greater investment risk for the employer. In contrast, defined contribution plans offer greater flexibility and control over retirement savings for the employee.

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How does a defined benefit plan work?

A defined benefit pension is a retirement structure/plan that promises a specific monthly benefit at retirement. The benefit is determined by a formula that considers the employee’s salary, years of service, and age.

Defined benefit plans are funded solely by the company, which regularly contributes to the plan. The plan assets are invested, and the benefit is paid from the plan assets at retirement.

Defined benefit plans are a popular option for employers because they offer some benefits, including:

Guaranteed incomeEmployees with defined benefit plans know precisely how much they will receive in retirement income.
Tax-deductible contributionsThe employer’s contributions to a defined benefit plan are tax-deductible, which can lower the employer’s tax liability.
FlexibilityDefined benefit plans can be customized to meet the employer’s needs.

However, defined benefit plans are also more complex and costly to administer than other retirement plans. They are also more susceptible to market fluctuations, which can affect the benefits employees receive.

Defined benefit plans are a good option for employers who want to provide a guaranteed retirement income for their employees. However, there are better options for employers looking for a low-maintenance retirement plan.

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What are the primary advantages of a defined benefit plan?

Defined benefit plans offer several advantages for both the employer and the employees:

  1. Guaranteed benefits: Defined benefit plans guarantee a specific benefit to employees upon retirement, which can provide employees with a sense of security and financial stability in retirement.
  2. Higher contribution limits: Defined benefit plans have higher contribution limits compared to defined contribution plans, such as 401(k)s. This means employers can make more significant contributions to the plan on behalf of their employees.
  3. Favorable treatment of highly compensated employees: Defined benefit plans are subject to specific nondiscrimination tests, making it easier for highly compensated employees to participate in the plan and receive larger benefits than they would with a defined contribution plan.
  4. Employer funding: The employer is responsible for funding the plan and ensuring enough money to pay the promised benefits.
  5. Professional management: Defined benefit plans are typically professionally managed, which can take the burden of investment decision-making off of the employees.
  6. Portability: The benefits earned by an employee in a defined benefit plan are portable, which means that the employee can take the benefits with them if they leave the company.

It is important to note that defined benefit plans can be complex and expensive to administer. They may expose the employer to greater liability and investment risk than defined contribution plans.

Additionally, since the employer is responsible for funding the plan and ensuring enough money to pay the promised benefits, defined benefit plans often need to be more suitable for small business owners.

What is a cash balance plan?

A cash balance plan is a defined contribution retirement plan that allows participants to build retirement savings through employer contributions. These contributions are invested in various retirement portfolios designed to generate a return that can be used to fund your retirement. 

Retirement Planning for Physicians

The main difference between a cash balance plan and a defined contribution plan is the formula for determining retirement savings. In a cash balance plan, an employee’s final savings amount is often determined by a combination of employee contributions and employer contributions. 

What is the ideal retirement plan investment mix?

Determining the ideal retirement plan investment mix depends on several factors, including an individual’s risk tolerance, time horizon, financial goals, and overall financial situation. However, a commonly recommended approach is to create a diversified portfolio that balances risk and return potential. Here are some general guidelines for constructing an investment mix for retirement plans:

  1. Asset Allocation: Asset allocation refers to dividing investments among different asset classes, such as stocks, bonds, and cash equivalents. The ideal allocation depends on factors such as risk tolerance and time horizon. A common strategy is to allocate a higher percentage to stocks during the early stages of retirement planning when there is a longer time horizon and a higher risk tolerance. As retirement approaches, a gradual shift towards more conservative investments like bonds and cash equivalents may be advisable to protect capital.
  2. Stocks: Stocks have historically provided higher returns but also come with greater volatility and risk. A suitable allocation to stocks depends on an individual’s risk tolerance and time horizon. A diversified portfolio of domestic and international stocks can help spread risk. Younger individuals with a longer time horizon may have a higher allocation to stocks to benefit from long-term growth potential, while older individuals may opt for a lower allocation to reduce volatility.
  3. Bonds: Bonds are generally considered lower risk compared to stocks and provide a steady income stream. They can help reduce overall portfolio volatility. The allocation to bonds depends on factors such as income needs, risk tolerance, and interest rate environment. Government bonds, corporate bonds, and municipal bonds are common options. Younger individuals may have a smaller bond allocation, while older individuals approaching retirement may opt for a higher allocation to preserve capital.
  4. Cash Equivalents: Cash equivalents, such as money market funds and short-term certificates of deposit (CDs), offer stability and liquidity. They provide a safe haven during market downturns but generally offer lower returns. The allocation to cash equivalents is usually smaller but serves as a buffer for emergencies and short-term expenses.
  5. Diversification: Diversification is essential to reduce the impact of any single investment’s performance on the overall portfolio. It involves spreading investments across various sectors, geographies, and asset classes. Diversification helps mitigate risk and potentially increase returns by not relying on the performance of a single investment or market segment.

It’s crucial to note that these guidelines are general recommendations, and individual circumstances and goals may require adjustments. It is advisable to consult with a financial advisor who can assess personal circumstances, risk tolerance, and long-term goals to create a customized investment mix that aligns with one’s retirement objectives. Regular monitoring and rebalancing of the portfolio are also necessary to maintain the desired asset allocation as market conditions and personal circumstances evolve over time.

How physicians can effectively plan for retirement

Retirement planning for physicians, like any other profession, involves careful consideration of financial goals, investments, and risk management. While there may be variations based on individual circumstances, here is a general five-step process for retirement planning for physicians.

Here is the 5 step process:

  1. Set Financial Goals

    Start by identifying your retirement goals, such as the desired age of retirement, lifestyle expectations, and the amount of income you would like to have during retirement. Consider factors such as healthcare expenses, travel plans, and any specific financial milestones you want to achieve.

  2. Assess Current Financial Situation

    Evaluate your current financial status, including your income, expenses, and existing assets. Take stock of your investments, retirement accounts, and any other savings or debts you have. Determine how much you are saving towards retirement and how well it aligns with your goals.

  3. Develop a Savings and Investment Strategy

    Based on your financial goals and current situation, create a savings and investment strategy that will help you accumulate the necessary funds for retirement. Consider the different retirement accounts available to you, such as 401(k)s, IRAs (Traditional or Roth), and any employer-sponsored plans. Determine how much you should contribute to these accounts and explore other investment options that align with your risk tolerance and time horizon.

  4. Manage and Diversify Investments

    Once you have a savings plan in place, focus on managing and diversifying your investments. Consider working with a financial advisor who specializes in retirement planning for physicians. They can help you make informed investment decisions, diversify your portfolio across different asset classes (stocks, bonds, real estate, etc.), and adjust your investments based on your risk tolerance and changing market conditions.

  5. Monitor and Adjust

    Regularly review and monitor your retirement plan. Assess the progress you are making towards your goals and make adjustments as needed. Life circumstances, financial markets, and personal objectives can change over time, so it’s important to periodically reassess and adapt your retirement plan accordingly.

Final thoughts

It is essential for physicians to carefully consider their options and choose a retirement plan that meets their needs and those of their employees. Consult with a qualified retirement plan provider to determine the best plan for your business.

At Emparion, we help physicians in all different fields. This includes anesthesiologists, cardiologists, radiologists, dermatologists, ER physicians, family and internal medicine, internists, neurologists, oncologists, psychiatrists, plastic surgeons, and urologists.

Paul Sundin

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