The Guide to Financial Planning for Physicians

April 12, 2023

Many doctors spend their careers prioritizing the care of others. Whether you’re completing residency or ready to retire, it’s important to remember to care for your own health and well-being – and that includes your finances. 

In this blog, we share the essential building blocks of every doctor’s financial plan. This includes:

1. Loan Management
2. Insurance
3. Retirement Planning
4. College Savings Plans
5. Estate Planning

Loan Management for Physicians

Student loans can feel like an overwhelming burden, but it doesn’t have to be that way. Setting up a debt management plan helps you attack your debt and offers peace of mind as you take steps to debt freedom.  

Follow these steps to propel yourself toward freedom from student loan debt:

1. Get clear about your debt: Knowledge is power! If you haven’t already, make a list that includes the name of your loan provider, the interest rate on the loan, and the current balance. 
2. Consider refinancing private loans: If you consolidate and refinance your loans, you’re more likely to secure a lower interest rate and shift your private loans into one monthly payment. This makes loan repayment less overwhelming and less costly. 
3. Establish a federal loan repayment plan: These programs allow you to pay a chunk of your salary without depleting your income. The three most common income-based repayment plans are:
   • a. Income-Based Repayment (Old IBR) – capped at 15% of your discretionary income
   • b. Pay As You Earn (PAYE) – capped at 10% of your discretionary income
   • c. Revised Pay As You Earn (REPAYE) – capped at 10% of your discretionary income After 25 years of Old IBR, or 20 years of PAYE & REPAYE (25 years with graduate debt for REPAYE), your remaining federal student debt is forgiven.
4. Evaluate loan forgiveness options: Loan forgiveness options abound, particularly for those interested in providing care as a public service. For more details on alternative options for debt loan forgiveness.
5. Attack your debt: Direct a portion of your income to reduce your debt. Any extra income sources can help lighten the load as well. Annual bonuses and signing bonuses can be directed to your debt, granting you greater peace of mind.

For more details on managing your student loan debt, check out this detailed blog on loan repayments.

Insurance for Physicians

In types of hardship, our insurance policies can make or break us. Along with standard insurance packages, like auto insurance, home insurance, health insurance, and dental insurance, doctors will usually purchase:

• Disability insurance, which covers you in the event of short- or long-term disability
• Medical malpractice insurance, which covers you in case you are sued for claims of injury or death
• Life insurance, which protects your family from economic hardship in the event of your death 

Given that 1 in 8 working Americans will experience a long-term disability that lasts more than five years, disability insurance is particularly important for doctors seeking to reduce the risk of losing their income. Losing access to the human capital that you spent a decade developing is hard enough. Purchasing disability insurance creates a financial safety net that will help protect you and your loved ones. For more information, check out this guide to physician disability insurance.

Wondering if you can tap into your disability insurance benefits? Reach out to Alicia and the SWM Team to discuss how you can make the most of your disability insurance plan.

Retirement Planning for Physicians

Whether you plan for a long career or intend to retire early, it’s essential to make a retirement plan. This will allow your work to remain a choice rather than a burden. Retirement plans are also an important piece of optimizing taxes and preserving your wealth.

Retirement plans for doctors usually fall into 2 categories: plans for employees and plans for independent contractors or self-employed individuals. Your selection will depend on your goals, line of work, the plan(s) available to you, and how much you wish to contribute to your plan.

Standard retirement account options for hospital employees:

• 403(b) or 401(k) – The 403(b) and 401(k) allow your income to be withheld from your paycheck and deposited directly into your retirement account. The main difference between these plans is that a 403(b) is offered to non-profit organization employees and a 401(k) is offered to for-profit company employees. The contribution limit for both the 403(b) and 401(k) in 2023 was $22,500.
• 401(a) – In this account, your employer sets the contribution rules, and contribution is mandatory. Your employer could make all the deposits into this account, or they can mandate that the employee deposit a percentage of their paycheck. If you have access to a 401(a), it’s very important to review the rules set by your employer.
• 457(b) –  If you’re dedicated to early retirement and have already maxed out your 403(b), you may consider contributing to a 457(b) plan if it is available to you. The 457(b) has some special features, like catch up contributions (double-the-limit contributions within three years of the normal retirement age), but it also comes with some unique risks. If you change jobs, it can be tricky to move your plan, which can leave you with a hefty tax bill. Speak with a financial professional before proceeding with a 457(b).

Standard retirement account options for self-employed doctors:

• SEP IRA – Thisaccount allows a self-employed physician to contribute more than they would to a Traditional IRA. Contributions are capped at the lesser of: A) $66,000 in 2023 or B) 25% of compensation (as adjusted for self-employment tax). Like other Traditional IRAs, account balances can grow tax-deferred, are taxable when distributed, and may be rolled over to other plans.
• Individual 401(k) –  For self-employed people, an individual 401(k)’s biggest perks are its Roth option and high contribution limits.
  • About the Roth option: Opting into a Roth can significantly reduce your overall total tax burden since you will pay income tax now instead of on your retirement withdrawals.
  • About the contribution limits: The individual 401(k) owner acts as both employer and employee, which means both types of contributions can be made. As an employee, you can contribute up to $22,500 in 2023. As an employer, you can add onto that up to 25% of your adjusted income for a maximum total contribution of $66,000 in 2023. Additionally, if you’re over the age of 50, you can make bonus “catch-up” contributions of $7,500 in 2023. 

To compare self-employed plans, start with this primer on the SEP IRA vs. Individual 401(k).

For more details on retirement planning for doctors, reach out to our team to optimize your retirement plan strategy.

College Savings Plans for Physician’s Kids

As with most investment plans, the earlier you start contributing, the better. Saving for your child’s college plan is no different.

The most popular type of college savings plan is a 529 plan. Thanks to their high contribution rates, beneficiary flexibility, and tax-free growth, 529 plans offer parents a way to efficiently save for their kid’s education.

The 529 plan comes in 2 flavors:

1. Education Savings Plans:
   • This is the most common type of 529 plan. Contributions are invested in a pre-set selection of investment options, like mutual funds and ETFs. Your contributions grow tax-free, meaning you pay taxes later – or not at all. When you make withdrawals to pay for qualified educational expenses, like tuition, you will not have to pay taxes on your 529 withdrawals.
2. Prepaid Tuition Plans:
   • Prepaid tuition plans are offered by some states and higher education institutions. Prepaid tuition plans allow you to secure tuition at current rates. As with the Education Savings Plan, you won’t need to pay tax on the withdrawals that are used on qualified expenses, or pay tax on your plan’s growth.

Each plan has its own benefits and limitations, so families will need to decide what matches their goals. An education savings plan offers the most flexibility, while a prepaid tuition plan secures today’s tuition rates. The bottom line: saving for college is likely to be more effective when you set up a tax-advantaged plan.

Estate Planning for Physicians

Estate planning offers an excellent opportunity to reflect on your family values and what you wish for your family legacy. Discussing inheritance with your heirs can help strengthen family bonds, as well as avoid squandered money and family distress.

While every family will find their own way to preserve and transfer wealth, here are some typical estate plan components to consider as you build your own plan:

• Incapacitation plan – This documents your family’s decision-making protocol, including how legal, financial, and medical issues will be managed if you’re unable to make decisions for yourself.
• Living will – This is a legal document that explains which medical treatments you would and would not want to be used to keep you alive.
• Health care proxy – This document names someone who you trust to be your agent. This person will express your wishes and make health care decisions on your behalf.
• Advance directive – This refers to a combination of the living will and health care proxy documents.
• Power of attorney – A document that names someone you trust as your agent to make property, financial, and other legal decisions on your behalf.
• Estate distribution planning – This plan details how your assets are handled and distributed after death.
• Transfer tax planning – This plan outlines the various gift, estate, and other taxes that may be triggered under state and federal law when transferring wealth during life or at death.

While the estate planning process may appear daunting, it’s an opportunity to reconnect with the family purpose behind your financial plan. 

A holistic financial plan is a healthy financial plan

You’re not just a physician. You’re a person with a unique set of goals and values. At SWM, we believe that a holistic approach to financial planning empowers our clients to connect with their true goals and achieve genuine well-being.

Revisit your financial plan with clear eyes and an open heart. Connect with Alicia and the SWM team for your complimentary meeting.