Retirement Planning for Doctors: Unlocking the Golden Egg of Early Retirement

A strategic approach to saving and investing can mean the difference between working well into your 60s and 70s versus living life on your own terms. Whether you want to hang up your white coat early or just want to comfortably cut back hours, doctors have more retirement planning options than you might think.

How much is enough to retire as a physician?

If you’re looking for guidance on how much to save to retire as a physician, most people say around 25 times your annual spending. But who's to say what your spending will realistically be during retirement? After all, physicians tend to choose more expensive lifestyles than the average Joe. Plus, retirement can look completely different depending on your goals.

Rethinking the norm: A different approach to retirement planning for doctors

No matter your career stage, it always seems like we need more — to achieve more, to buy more, to earn more. It’s clear that money is one of life’s greatest stressors. But what if we stop focusing on what money can buy us and start recognizing what it can give us.

Money gives you the chance to go after your dreams. It gives you the opportunity to give back to charity, family and other worthwhile interests. Most importantly, money gives you more control over your time. It lets you control what you do, when you do it and who you do it with.

Smart financial planning includes redefining retirement based on your individual goals and needs. That’s one of the reasons there are so many variations within the Financial Independence, Retire Early (FI/RE) movement. Grinding away full-time until you’re 65 or older might not be your only path.

For example, if you really love being a physician but also want room in your life for other pursuits, maybe you reduce your work to two days a week and finally start that nonprofit organization you’ve always dreamed of.

Maybe you want more time at home with your spouse and children or a more flexible schedule to be involved with grandkids. Or maybe you want to spend your remaining healthy years traveling and living life by a different definition of success.

Whatever your passion and true purpose might be, your overall goals for retirement matter when deciding how much you need to save for retirement.

Is this retirement path the doctor's new secret?

As a physician in a high tax bracket, a comfortable retirement might seem like a distant dream. But if you’re burned out or on track for a future breakdown, perhaps traditional retirement isn’t your end goal. Instead, you might be at a stage where, instead of waiting to fully retire, you could cut back on hours now without sacrificing a lot.

Let’s say you’re a California surgeon making $600,000 a year. You’re in a 37% federal and 10% state tax bracket. Your student loan “tax” on the SAVE plan is 10%, and then you’ve got 1.5% Medicare taxes. Overall, you’re only keeping around 40% of what you earn as is.

If you drop your 5th day in the office every week, maybe your pay falls to $500,000. That’s a $100,000 income difference. But you’re only losing 40% of it because that’s your take-home equivalent. You’d only be losing $40,000 to work less and pursue other interests. You could potentially reduce your work schedule even faster if you’re willing to trim some non-deductible expenses from your budget.

Decoding the “alphabet soup” of retirement accounts for physicians

Physicians generally have access to more retirement account options than most professions, giving you the opportunity to maximize savings in multiple ways. This includes potentially reducing your tax burden and student loan payments.

Common retirement savings plans: 401(k) and 403(b)

If you work for a private entity, your employer might offer a 401(k), whereas if you work within a nonprofit hospital system, you might have a 403(b). These types of plans allow you to contribute up to $23,000 toward retirement for 2024, with a catch-up contribution limit of $7,500 for those aged 50 and over. 

Most physicians are familiar with 401(k) and 403(b) retirement options. But you might be missing out on one of the biggest benefits: employer matching.

With employer matching, your work will contribute a percentage of your personal contributions up to a specific portion of your salary or dollar amount. But as a hidden benefit, it allows you to exceed the $23,000 IRS contribution limit since it only applies to employee contributions, not the employer.

Additionally, 403(b) plans can allow for some additional catch-up opportunities closer to retirement that many physicians aren’t aware of. So, if you work for a public or nonprofit hospital, you’ll want to explore additional catch-up contribution provisions for your 403(b).

Related: What Physicians Should Do With Retirement Accounts From an Old Employer

Mandatory pension plan: 401(a)

Not all employers offer a 401(a) plan, but many hospital systems do. While a 401(a) functions similarly to a 401(k), there are some distinct differences — specifically, your employer can require mandatory contributions. 

A 401(a) plan serves as a mandatory pension plan for government and nonprofit organizations.  If you have access to a 401(a), your employer might require mandatory withholdings, such as 6% of your pay.

Note the total contribution limit for defined contribution plans, including 401(a), 403(b) and 401(k) plans, is $69,000 for 2024 for both employee and employer contributions.

457(b) plan: Governmental vs. non-governmental

A 457(b) plan might be available in addition to a 403(b). This is typically the case for academic medical centers. 457 plans act as a second retirement account, allowing you to max out both options separately.

However, it’s important to note there are some big distinctions between governmental and non-governmental 457(b) plans. Primarily, non-governmental 457s are subject to the employer’s creditors. If the employer goes bankrupt, your retirement funds could be at risk as they can be claimed by those creditors.

Next-level physician retirement planning options

If you own a small medical practice, you have additional retirement planning options that are underutilized since many physicians simply aren’t aware of them. But they aren’t necessarily the best fit for every practice owner.

More advanced tax planning strategies include:

• Profit-sharing plans. With a profit-sharing plan, retirement contributions are made based on a share of the practice’s profits. This can be a very powerful tool for practice owners since you can contribute up to $69,000 as an employer-employee. 
• Defined benefit plan. If you’re a small-practice owner and consider the full range of plan rules and other expenses, a defined benefit plan can be a powerful tool for some physicians. It allows you to put substantially more toward retirement than other plans.

Although these are great retirement saving strategies, it’s best to work with a financial advisor or retirement plan advisor before implementing as there are many requirements and nuances. For example, if you’re contributing a substantial amount to your account as the practice owner, you also need to contribute a lot to your employees’, as well. In this situation, it doesn’t typically make sense for big practices.

Clever tax strategies and retirement savings options for smart physicians

Here are some additional ways to maximize retirement planning for doctors:

• Taxable brokerage account. If you want to retire early or go part-time by age 50, a brokerage account can give you the flexibility to access funds before traditional retirement age.
• Health Savings Account (HSA). An HSA can help you save for healthcare expenses in retirement.
• Backdoor Roth. This strategy can be used if your household income exceeds the IRS limits to contribute to a Roth IRA. Rather than contributing directly to a Roth IRA, you contribute to a Traditional IRA and then convert it to a Roth.

These are great ways to boost your retirement savings if you’ve already maxed out other types of retirement accounts.

What is the best retirement plan for doctors?

There are a lot of different options for medical providers when it comes to saving for retirement. Fortunately, you have the flexibility to tailor a retirement strategy based on your individual goals.

For example, if you’re in a lower-paying field — such as primary care — and want to retire in your 50s, you might choose to focus on:

1. Maxing out your retirement accounts.
2. Strategically using a backdoor Roth IRA tax strategy.
3. Putting at least $1,000 per month in a taxable brokerage account.

Whereas if you’re a surgical sub-specialist who really enjoys fine wines, expensive cars and exotic vacations, then you’ll want to utilize all the different retirement account and investment options you can. In which case, working with a financial planner who specializes in retirement planning for doctors will serve you best.

Retire sooner, not later

Whether you’re finishing residency or have been a practicing physician for years, you can’t afford to put off retirement savings. Even small amounts invested over a long period of time can result in significant returns thanks to the power of compound interest. 

At a minimum, we recommend contributing at least 15% of your income to retirement savings. But saving 20% or more and using all of your retirement options available might mean you can retire in your 50s or choose an alternative retirement path much earlier.

Additionally, plan for other retirement decisions, such as whether to delay Social Security payments for yourself or your spouse. Most physicians will qualify for the maximum benefit, so delaying payment until 70 could be a smart move if you’ll have adequate retirement income from other sources.

Physicians have access to far more retirement account options than most professions. Choosing the right strategy and professional guidance can truly dictate what retirement will look like for you and when.

By working with a physician-specific fiduciary financial advisor with SLP Wealth, you can make your retirement goals a reality much faster. Reach out today.