Financial Planning for Physicians: Your Roadmap to Mastering Cash Flow, Taxes and Retirement

Calling all doctors — this one’s for you!

Physicians present a lot of unique planning opportunities due to complexities in tax law, earning and wealth building potential, the possibility of getting sued, side hustle opportunities and much more.

I recently joined the Student Loan Planner team after working for a financial planning firm that specializes in physicians and their families. Here, I’m sharing some tips and best practices that could save you a few bucks (and a headache!).

Where to start?

I once heard a speaker take Maslow’s Hierarchy of Needs and apply it to a financial planning perspective. In the original pyramid, your basic needs are food and water. But you start with cash flow and income when looking at it from a wealth management viewpoint.

For many new physicians, your contract is the building block of your income, so let’s start there.

Physician contracts

The best time to negotiate your income and benefits is before you’ve accepted the offer. It’s especially important for women who still only earned 84% of what their male counterparts earned, according to a study by the Pew Research Center.  In addition to your salary, read your contract with an eye on the following:

• Is there a non-compete agreement? The intent behind non-compete agreements (NCAs) is to prevent physicians from leaving their employers and taking their patients with them to the new practice. These usually have limits based on time, geography and specific fields of practice. But some states and jurisdictions refuse to enforce NCAs. President Biden issued an executive order aimed to restrict the use of NCAs, though it is unclear how it will be applied.
• If there is an NCA, does it also include locum tenens side hustles?
• Does the employer offer any malpractice insurance coverage? One of the biggest threats to your career is a lawsuit. You can get tail insurance (or claims made), which covers you for events that happened even after you’ve already left your job while the policy is active. The other option is occurrence insurance, which covers events that occur but claims may be brought even after the policy is no longer active. It is not unusual to ask your employer to cover 100% of your tail insurance from your first day of employment.
• If you decide to leave, how much notice are you required to provide and do you have to repay any sign-on bonuses?
• What is the bonus structure?
• Does your employer cover any CMEs, relocation, or student loan repayment?
• What is your work schedule and how much PTO do you get?

Sometimes we do not receive because we do not ask. Consider working with an attorney or contract review company to make sure you get the best compensation package and flexibility possible. Don’t be afraid to negotiate!

Cash flow allocation

Once your contract is in place, you need to figure out how you’ll allocate your hard-earned dollars. Be mindful of lifestyle creep and the temptation to spend more to keep up with your colleagues. In my own experience working with physicians, I’ve seen many who have gotten themselves into trouble with debt.

Emergency savings fund

Your first priority should be to build a three-to-six-month emergency savings fund. It can cover unexpected expenses so you aren’t tempted to reach for your credit card (which can rack up debt). Consider keeping your savings in a high-yield savings account to maximize interest earned.

Know what you spend

Yes, even high-earners need to keep tabs on their spending. This doesn’t mean you can’t enjoy the fruit of your labor, but you want to make sure that your spending lines up with your values.

There are lots of great budget trackers out there, though I’m personally partial to an old-fashioned spreadsheet. Once you know where your money is going, decide what you want to keep, and what you want to cut.

If you need some help in this area and find yourself disagreeing with your spouse about spending and debt, Rob Bertman from the Student Loan Planner team actually works with families to help take the stress out of budgeting and resolve what is important for your family.

Related: How to Turn the Typical Physician Budget into a Path to Financial Independence

Tackle high-interest debt

Some schools of thought say you should tackle all of your debt first. I’m okay with people holding on to some lower-interest debt, like a mortgage, if that means you are using your free cash flow to invest, save or meet other goals.

Credit cards in particular have some of the highest interest rates of consumer debt. If you use a credit card, make sure to pay it in full every month.

Related: 14 Best Physician Home Loans for Medical Professionals

Make a plan for your student loans

While not all student loans have high interest rates, most physicians have a good six figures of medical school debt that can impact your debt-to-income ratio if you ever need to borrow money.

If you’re working for a 501(c)(3) non-profit, government or military entity, see if Public Service Loan Forgiveness is right for you. Sometimes it makes sense to refinance and pay off your loans aggressively, other times you may want to go for Income-Driven Repayment forgiveness. If you need some help, book a consult with us.

Asset protection

This is such a biggie for physicians! Not just because of the possibility of a lawsuit, but also because your high earning potential makes you a target of unscrupulous insurance agents who may try to sell you expensive policies you don’t need. Remember though, asset protection goes beyond insurance coverage.

Disability insurance

We already said that your income is the most basic financial need you have. A good disability insurance policy can protect your income if something should happen to your ability to work. SLP Insurance LLC works with agents who specialize in disability insurance for high income earners.

When evaluating policies, you want one that has an Own-Occupation definition of disability. This means you are unable to work in your specific area of practice, as opposed to the Any-Occupation definition which means as long as you can take any available job out there, you are not disabled.

The elimination period is sort of like a deductible. It refers to how many days you have to wait until the policy will begin to pay benefits to you. Ninety days is pretty standard, but some people choose longer periods to lower their premiums.

Not all policy riders are necessary, but a couple to consider are a cost-of-living-adjustment rider and a future increase option rider if you think your income will increase. Some companies are even offering a student loan rider, where they will pay your student loans (up to a certain amount and length of time) if you are disabled.

Term life insurance

If you have anyone who is dependent on your income, such as a spouse and children, you may want to get some term life insurance. Some physicians are told that they need an expensive whole life or universal life policy to build wealth while protecting a loved one. In my five years as a financial planner, I have told exactly one client that they could hang onto such a policy.

How much term life you need depends on how you want the funds to be used:

• Some people want it to pay for their children’s college and pay off the mortgage so the surviving spouse doesn’t have to deal with that.
• Others want it to serve solely as an income replacement.
• If you aren’t sure, a policy for 6x to 10x your income is a common rule of thumb.

You can also get multiple policies and ladder them. Say, for example, you need $2M in coverage because you want to send your kids to college. Some people buy a $1M for 30 years (especially if you are young and healthy, so you can lock in a low premium), and a second $1M policy for 20 years. The second policy expires when your kids are in school and you no longer need the coverage.

Malpractice insurance

If your employer doesn’t offer tail malpractice insurance, get it! You want to go with a company that has a rating of A or better, one that writes a lot of policies, has a good reputation and has been in business for a while.

Umbrella insurance

Umbrella insurance, or personal liability insurance, is often overlooked but also important to have. Let’s face it, we live in a litigious society. This policy covers you after you have exceeded the coverages under your auto and home insurance policies. If you bundle this policy with your current home and auto carrier, you can usually get a discount. For most people, a $1M policy isn’t more than $20 or so per month.

Business structure

For practice owners, consider a business structure that can provide some liability protection. An LLC or S Corp, for example, can provide a barrier between you and your business if you become a party to a lawsuit.

Related: Tax Planning for Physicians: What Are the Benefits of Using S-Corp Tax Strategies?

Titling of assets

If you live in a state that offers the ability to title your assets as Tenants by the Entirety, consider doing so. This protects the asset from the creditors of a single spouse.

For some of my previous clients who worked in high-risk specialties, they titled their taxable account solely in their spouse’s name, so that assets would not be available in case of a lawsuit. Don’t do this though without speaking to a financial planner and an attorney, since asset protection laws and medical malpractice laws vary by state.

Prenuptial agreement

Getting remarried? Consider a prenuptial agreement. It can be especially important in a blended family scenario.

Retirement planning

If you’re still with me, we’re getting to one of my favorite topics in financial planning, and that’s retirement planning! While you may think to yourself that you love your job and can’t see yourself retiring, the truth is that at some point, you might not be able to physically or mentally work anymore.

If you’re at the beginning of your career, you have a long time to build up a nice savings cushion for yourself. It’s like my method for cooking scrambled eggs, you have to keep the heat “low and slow.”

My favorite retirement account

If we were at a cocktail party, and you asked me what my favorite retirement account is, I would emphatically tell you it’s the Health Savings Account (HSA). You only have access to this account if you have a High Deductible Health Plan, which is not appropriate for everyone.

The HSA offers you a triple tax benefit. The money you contribute ($7,300 max for 2022 for a family, or $3,650 if you’re single) is deductible. Then it grows tax-free, and qualified withdrawals for medical expenses are also tax-free.

If you have an HSA, consider paying for your medical expenses out-of-pocket and letting the account grow. Once you are 65, you can use the account for anything, not just medical expenses, without paying a penalty but you would still pay ordinary income tax.

401(k) vs. 403(b) vs. 457 plans

If you’re not self-employed, chances are you have access to a 401(k) or 403(b). For this blog post, I’ll spare you the reasons why I like 401(k)s better.

Ask your employer for a copy of the Summary Plan Description (SPD) if you have not received one at hire. The SPD tells you the “rules” of the plan, like when you are eligible to participate, when you are fully vested, what happens to the funds at separation of service, if plan loans are allowed, employer contribution info and/or if it’s a safe harbor plan, if non-Roth after tax contributions are permitted, and whether rollovers from another plan are allowed.

If you are working with a financial planner or have investment savvy, you can see if your employer offers a Self-Directed Brokerage Account (SDBA) within the plan.

Since your plan sponsor has a fiduciary responsibility, they usually limit your investment options in the 401(k)/403(b). An SDBA is usually listed along with the other investment options in the plan, and there are usually rules as to how much can go into it, but once you open it, you can usually invest in whatever you want. The SPD should tell you what the rules are and what fees, if any, you will incur.

In addition to 401(k)s and 403(b)s, some employers offer a 457 plan. There are different rules depending on whether you work for the government or not but the gist is that it is another bucket where you can contribute $20,500 (for 2022).

In some of these plans (read the rules!), your employer is allowed to use those funds to satisfy the demands of their creditors. So, if you work for a hospital system that doesn’t seem particularly strong, you may want to limit how much you put into this account.

Self-employed retirement options

If you do any moonlighting or are otherwise self-employed, you may be able to contribute to a Solo 401(k) or SEP IRA.

• A Solo 401(k) lets you set aside $20,500 as the employee, and 25% of your net business income as the employer, up to $61,000 for 2022.
• The SEP IRA max is 25% of your net income up to $61,000. But if you have employees, then you have to treat them the same as yourself.

You cannot have a Solo 401(k) if you have employees (except for your spouse). If you have a 401k and a Solo 401(k), then the $20,500 contribution is across both accounts, meaning if you contribute $10,000 into your 401(k), you can only contribute $10,500 in your Solo 401(k) as the employee.

Roth and traditional IRAs

Roth and Traditional IRAs are not employer-sponsored accounts, but Individual Retirement Accounts. Both have an aggregate limit of $6k in 2022 ($7k if you are 50+ years old). That means if you contribute $2k into the Traditional IRA, you can only do $4k into the Roth.

Traditional IRAs are usually pre-tax, though most physicians out-earn the AGI limits to be able to take the deduction. The exception is if you are not considered an active participant in a retirement plan.

Roth IRA contributions are made on an after-tax basis. But when you start withdrawing the funds during retirement, you do so tax free. Roth IRAs have AGI limits as well, but you can always contribute via the backdoor Roth maneuver, which I will explain in the next section.

Tax considerations

I’ve met exactly one person who feels good about the taxes they pay because they value what the taxes are used for. But for most of us, it’s something we pay begrudgingly. Yet there are some ways to lower your tax bill, while also using your money towards your goals.

Contributing to pre-tax retirement accounts

Contributing to pre-tax retirement accounts, like the ones mentioned above, can lower your tax bill. The more you contribute, the lower your Adjusted Gross Income (AGI). Plus, if you are on an Income-Driven Repayment Plan for your student loans, then you know that the lower your AGI, the lower your calculated student loan payment. Win-win!

Donor Advised Funds

If you are charitably minded, you may consider opening a DAF, which is an investment account for charitable giving. You can contribute cash, securities and other assets to a DAF, and get a tax deduction if you itemize (the amount depends on what you contribute).

Backdoor Roth IRA

If your AGI is too high to contribute directly into a Roth IRA, you can still do so via the backdoor Roth method.

With this method, you have two accounts, the Traditional IRA and the Roth. You make your contribution into the Traditional IRA and wait for it to clear (usually in three to five business days.) Then you complete a Roth conversion form, though many custodians have modernized their websites and you can usually do this as a transfer without completing the form.

However, you should be aware of the pro-rata rule. This rule applies if you do this conversion while you have money sitting in other pre-tax IRA accounts, like a SIMPLE or SEP IRA. It treats all of your IRAs as one balance and says that the converted funds contain a portion of deductible and non-deductible funds.

For example, say that you have $54k in an old SIMPLE IRA, and you make a non-deductible contribution of $6k (for 2022) into your Traditional IRA to do the backdoor Roth. Then divide your after-tax contributions by your total IRA balance, in this case $6k divided by $60k, which is 10%. You would pay 10% of the conversion amount, or 10% of $6k which is $600. This gets added to the basis in your SIMPLE IRA, it is not a double tax.

You can avoid the issue altogether if you are allowed to roll your IRA into your 401(k) at work, or if you have a Solo 401(k) and can roll it there. You can also convert the IRA to a Roth and pay tax on the whole thing. This could be a good idea if the account is small or if you are in a low tax bracket.

Just make sure that if you do a backdoor Roth, you file form 8606 at tax time.

College savings for kids

Got kids? You can save for college and potentially save money on your state income taxes if you live in a state that offers tax advantages for using a 529. For example, in Virginia where I live, you can get a $4k deduction on your VA taxes per beneficiary. So, if I have 3 children, I could potentially get a $12k deduction on my state taxes.

Virginia, like some other states, also offers an unlimited carryforward. If I contribute $5k for one child, I can deduct $4k this year, and the other $1k next year.

Under the SECURE Act, you are allowed to use $10k per year for private school for K-12 (though doing so means you aren’t giving the funds time to grow for college unless you contribute a lot.)

If you own your own practice

If you own your own practice, be aware of some potential tax deductions that you could qualify for including home office, qualified business income deduction, travel, and profit-sharing contributions into a Solo(k) or SEP IRA.

Estate planning

If taxes are one certainty of life, the other is death. With estate planning sometimes you have to deal with both.

• In 2016, 5,467 estate tax returns were filed out of a total of 2,700,727 deaths.  This only represents 0.2%, yet dual doctor households may find themselves in this group. In 2022 the estate tax exemption amount is $12.06M, but there is constant debate in Congress about lowering this amount.
• 529 plans can be a great tool to transfer wealth to your heirs, while also removing those funds from your estate. Many 529 plans have high total plan contribution limits ($400k-$500k) and still allow you to control the funds.
• If you are charitably minded, you can set up a Charitable Remainder Trust while you are alive, or donate some of your assets to charity at death.
• Revocable living trusts are a way to avoid probate, but they do not remove your assets from your estate.

Even if the estate tax is not on your radar, make sure you have the following documents in place:

1. A last will and testament to dictate how you want your assets distributed and to whom. Keep in mind that the beneficiary designations on your retirement accounts override anything you put in your Will.

For example, if you list your ex-spouse as your 401(k) beneficiary, then get remarried and leave everything to your new spouse, your ex will still get your 401(k) if you don’t update the beneficiary. Make sure to review those periodically (and add a contingent beneficiary as well.)

2. An advance medical directive (aka a living will). I was a young, impressionable pre-teen when the Terri Schiavo case made waves in the news. Schiavo, at age 26, had a cardiac arrest and was left in a comatose state after suffering brain damage due to lack of oxygen.

A major legal battle broke out between Schiavo’s husband, who maintained that Terri would not want to live in a prolonged vegetative state, and her parents, who wanted her kept alive regardless. Without having any written wishes, the decision was ultimately left to a judge.

“But Sim, our families get along, they can come to a decision,” I’ve heard a few clients tell me. Sure, everyone gets along when things are fine. But when stuff hits the fan, written instructions can prevent a lot of drama.

You can designate who gets to make decisions, and what decisions you would like for them to make.

3. A financial power of attorney designates someone who can make financial decisions for you when you are unable to.

4. Guardianship provisions spell out who you want to raise your children if you and your partner die (for example, in a car crash). This provision is usually part of your will, but it deserves a special mention here.

5. Business succession planning helps in the event of your death or mental capacity. It says what happens to the practice that you built.

Once you have these documents in place, you should review them every few years to make sure they still reflect your wishes and circumstances. If you move to another state, consider having an attorney review your documents since laws vary by state.

One step at a time

Remember, Usain Bolt wasn’t sprinting the moment he came into this world. He had to learn to walk, one step at a time.

Pick one financial planning goal and work on it until you are ready to move on to the next one. A solid financial plan can help you decide what your goals are, and what steps to take to get there.

If you decide to work with a financial planner, make sure they are a fee-only fiduciary. Fee-only means they don’t charge you commissions, and the pay structure is very transparent. Fiduciary means they must put your interests above their own.

And finally, remember that “a goal without a plan is only a dream.” Financial planning can turn your dreams into reality.